Lessons from NAFTA for Latin American and Caribbean Countries World Bank January 2004 www.worldbank.org/laceconmist
The Facts Demand Objective Analysis: Mexico Before and After NAFTA 1985-93 1994-2001 Trade over GDP 37.0% 75.7% FDI net of Privatizations over GDP 1.2% 2.9% FDI over GDP 1.2% 3.0% Real GDP Growth per capita in local currency 1.1% 1.2% Real Wages in local currency 3.5% -1.0% Real Wages in dollars 9.5% -0.5% Poverty Rate - SEDESOL* 22.5% 24.2% Poverty Rate - ECLAC 47.8% 41.1%
The Big-Events-Little Time Problem How to identify the NAFTA effect given, for example: Tequila Crisis and 1995 recession Unilateral reforms 1986-1993 anticipated NAFTA effect and delayed reform effects FDI boom to emerging economies, not just Mexico Ongoing decline in commodity prices (agriculture) and ongoing employment trends Our multifaceted approach: History before and after NAFTA structural change? Impact of trade/fdi across sectors/regions within Mexico International comparisons Mexico versus other Latin economies
Is an FTA with the U.S. worth it? The Mexican experience: Yes. Effect on trade and foreign direct investment Exports by 25-30% (residual of gravity model); FDI by 40% (econometric model of FDI with FTA*X), but transitory (econometric trend decomposition for LAC) Source of opportunities for development GDP per capita by 4-5% (AR coeff change in US/MEX gap) Industrial productivity time for technological adoption was cut in half (panel data estimate of change in AR of TFP gap) Challenges before, during, and after the negotiations Benefits are not necessarily automatic; they depend on complementary policies
The Closing of the Development Gap between the U.S. and Mexico [ convergence of GDP per capita]
Results: Convergence of income per capita (ppp) between U.S. and Mexico after NAFTA Faster than for other LCR countries? 0.60 0.50 0.40 0.30 Mexico Brazil Puerto Rico Costa Rica Chile Argentina Colombia 0.20 0.10 0.00 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 GDP per Capita (ppp) over US GDP per Captia
The Development Gap (ratio of GDP per capita US/Mexico) between the U.S. and Mexico since 1960: What s Limiting Progress? 5.5 5.0 4.5 Debt Crisis Tequila 4.0 3.5 3.0 2.5 2.0 1.5 1.0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000
Institutional gaps limit the reduction of the income per capita gap of Mexico with respect to the U.S. 2.50 Variable ranges from -2 to +2 for all countries 2.00 1.50 1.00 0.50 0.00-0.50 1.33 1.24 0.12 1.24 1.18 0.06 CAN USA MEX 1.71 1.58 1.19 1.07 0.58 0.28 1.70 1.58-0.41 2.05 1.45-0.28-1.00 Voice and Accountability Political Stability Government Effectivenes s Regulatory Quality Rule of Law Control of Corruption
R&D Level in Mexico and other LCR Countries below median or typical cases and far below superstars R & D = β1 GDP GDP CAP 2 GDP + β 2 CAP 5.0% 4.5% Predicted & Observed R&D/GDP 4.0% Israel 3.5% Finland 3.0% 2.5% Korea 2.0% 1.5% China 1.0% India 0.5% Argentina Mexico 0.0% 4 5 6 7 8 9 10 11 Log GDP per Capita
R&D gap in Mexico, modest post- NAFTA recovery 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000-20% -40% -60% NAFTA -80% -100% -120% -140% -160% Mexico's R&D Percent Deviation from the Median
The Development Gap within Mexico [Regional Divergence ]
The Development Gap within Mexico: State GDP per Capita since 1940 45,000 40,000 Chiapas Chihuahua Guerrero Nuevo León Oaxaca Sonora Distrito Federal 35,000 GDP per Capita (1993 pesos) 30,000 25,000 20,000 15,000 10,000 5,000-1940 1950 1960 1970 1980 1988 1990 1993 1995 2000
What Explains the Different Performance of of Mexican States during the 1990s? (econometric evidence) Initial education (illiteracy and years of education of adult population) Infrastructure: access to telecommunications Possibly political instability and institutions If poor States had had the same education, and infrastructure in 1990, they would have grown more than the rich ones ( conditional convergence ) and possibly better institutions
Labor Markets
Did NAFTA Hurt Mexican Workers?: Rapid recovery of real wages (non-maquila manuf for Mex) relative to US wages after crises; lowest unemployment since 1987 (after 98) 2.5 2.3 NAFTA and Tequila Manufacturing Real Wages and Unemployment Evolution Crisis 7 6.5 Relative wages=mex/us 2.1 1.9 1.7 1.5 1.3 1.1 Unemployment 6 5.5 5 4.5 4 3.5 3 Unemployment rate (% 0.9 2.5 0.7 2 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Did NAFTA hurt Mexican workers? Higher wages paid by firms with international competition; wages recovered faster after 1995 in export sectors; & limited effect on rural employment % above non-tradables 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% More Imports/Worker Human Capital Adjusted Wages Non Trad. Note: Non agr icultur al wor ker s. Conditional on human capital More Exports/Worker
Influence trade liberalization on wages across States (econometric evidence) Real wages increased more in States with higher: Labor force education FDI/GDP Imports/GDP Percentage of population that migrated to the U.S.A.
Is there an Inequality Story?: Yes in Wages, but Not in Household Income Year 1992 1996 2000 2002 World Bank Gini 55.9 54.4 54.6 n.a. SEDESOL Gini 47.5 45.6 48.1 45.4
550 500 Thousands 450 Medium-Term Trends in Employment Agriculture (IMSS Data) versus Maquilas 400 1,100 1,000 900 800 700 600 500 400 300 350 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Thousands Maquilas (left axis) Agriculture (right axis)
Negotiation Issue: Agriculture
Mexican Agriculture: Imports & Production of of Sensitive Agricultural Products since 1983 1983 30,000 25,000 20,000 15,000 10,000 5,000 0 1983-90 1991-93 1994-2000 Imports (000s of Mt. Tons) Production (000s of Mt. Tons) Irrigated Rainfed
Did NAFTA significantly change trends in agricultural trade? (econometric evidence) EXPORTS STRUCTURAL CHANGE Agricultural products December 1994 Tomato December 1994 Fresh vegetables November 1994 Melon and watermelon September 1994 Other fruits June 1995 IMPORTS Agriculture products Corn Other oleaginous Sorghum Soy Wheat None None None None None None Source: Yúnez-Naude (2003)
Surprise: Why Didn t Mexican Agriculture Suffer as Much as Expected? Demand growth in Mexico & U.S. during 1995-2000 combined with productivity growth in Mexican agriculture with irrigation Innovative agricultural support programs (PROCAMPO) But challenge is to help reduce rural poverty without protectionism, which condemns generations of rural poor to dependence on low quality jobs and government favors towards the transformation of the Mexican rural economy
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