NAFTA 10 years After Darryl McLeod, Economics, Fordham University March 2004
Initial goals for NAFTA: 1. Extract Mexico and its Wall Street creditors from a long painful debt crisis while reducing Mexico s dependence on volatile oil exports. 2. Save the American Auto Industry from Asian imports (NAFTA was modeled on the 1989 U.S Canada Auto Agreement ) 3. Be a model for trade not aid development strategies reduce poverty, reliance ondebt, increase growth make Mexico the next Korea or Chile set the table for the WTO-FTAA
10 years after two cheers for Nafta initial goals met but, NAFTA euphoria contributed to the 1994 peso bubble devastating Mexico private banks, (financial reform a silver-lining here). Slower than expected growth in Mexico, plus fast 1990s growth in the U.S. led to a trade deficit with Mexico but capital flows into Mexico make this inevitable. Real wages stagnate in Mexico but this is more due to demographics and lack of education than NAFTA except in Textiles and Apparel.
Nafta s indirect integration vs. trade liberalization effects also important... Institutional integration progress toward a free press and a multi-party democracy in Mexico thank you Ernesto Zedillio, PhD. Intellectual property reform and financial market opening relatively successful, albeit after a few bumps in the road Labor rights and Environment side agreements.. limited success. Reduce immigration? perhaps in the future.
Fig MX-1 Mexico Diversifies away from oil.. Mexico Exports ($ billions) $160 $140 $120 $100 $80 $60 $40 $20 $0 Oil Exports Manufactures 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Figure MX-2 Mexico diversifies, Venezuela and Ecuador do not Fuel Exports as a % of Merchandise Exports 100% 80% Venezuela 60% Ecuador 40% 20% Argentina Mexico 0% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Fig MX-3 Mexico & Chile head North, as Venezuela and Ecuador succumb to the Natural Resource Curse Average Income per Person $PPP $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Penn World Tables 6.1 Chile Mexico Venezuela Ecuador
Figure MX-4 U.S Auto industry employment and exports rise U.S. Auto Industry Employment (thousands) 300 290 280 270 260 250 240 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Fig MX-5 Poverty high Mexico, especially in rural areas, but falling Source: United Nations, FAO
Fig M-6 2000 Poverty higher in the South where Nafta has less impact
Mexico s Poverty lines are less than $2 per day.. even the lowest paying manufacturing job pays $1-2 per hour
Figure M-7 Employment rose sharply in Textiles & Apparel 300,000 250,000 Personal ocupado: Textiles y Prendas de vestir 200,000 150,000 100,000 50,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
But too a large extent, this was quota jumping & trade diversion) Low wage apparel industries moving to Mexico to avoid MFA quotas and Wages and productivity fell as these new firms entered. Then with the Caribbean initiative in 2000 and China entering the WTO in 2001 these jobs began to head South the Central America and East to China.
Fig M-8 and electronics assembly Personal ocupado: Industria 500000 electronica 450000 400000 Estimated w/ U.S. Industrial Production 350000 300000 250000 200000 150000 100000 50000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Fig M-9 And transport equipment, Pers. ocupado: Equipo de transporte 300000 250000 200000 150000 100000 50000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Fig. M-9 But real wages rose only modestly and not at all in textiles. Mexico Hourly Wages in $US and U.S. Prices $4.0 $3.5 Machinery & Equipment $3.0 $2.5 $2.0 Textiles & Garments $1.5 $1.0 Average Hourly Manufacturing Wages 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source INEGI $dollar U.S. wage data converted to U.S. prices using World Bank $PPP exchange rates and deflated using the U.S. CPI.
Fig M-10 productivity growth rose but not in Apparel MEXICO Overall Productivity Growth 1993-2000 (López Córdova) 8 Elect-Computers 6 4 2 Garments 0-2 -4 Auto-Transport Overall- Manufacturing -6 PRENDAS DE VEST IR EQUIPO DE T RANSPORT E SECT OR MANUFACT URERO EN TOTAL
Figure M-11 Wage held down by a long baby boom just now ending Fertility Rate (births per woman) 8 7 6 5 4 Mexico's long baby Boom Argentina In 2005 Mexico's supply of 20 year olds shrinks finally 3 2 1 0 1950s U.S. Baby Boom 1950-55 1955-60 1960-65 1970s: High U.S. Crime and Unemployment 1965-70 1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-05
Figure M-12 School enrollments started low compared to Asia but should also boost wages over time.. Mexico Gross Secondary Enrollment 75.3 48.6 56.5 53.3 61.2 35.5 1975 1980 1985 1990 1995 2000
Figure M-13 Finally, Nafta and the 1995 peso crisis led to financial reforms and much lower interest rates & inflation, despite a floating peso.. 153 107 118 Inflation has fallen to under 5% even with the peso weakening from 9 to 11 69 58 74 42 41 28 24 25 25 24 23 17 10 7 15 18 10 7 5 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
Figure M-14 Interest rates have fallen dramatically making credit much more widely available in Mexico (mortgages!!)
Summary Nafta delivered on its major goals, without living up to its full potential. Outside of a few sectors, such as apparel and agriculture there few negative side effects (trade diversion or rising inequality ) Liberalization and competition always create adjustment costs and hardship for some groups even as they benefit the nation as a whole What about compensation programs? Mexico & the WB implemented Progesa (now Oportunidades)
NAFTA Compensation schemes Mexico implemented Progresa, one reason rural poverty has fallen.. Pays poor rural families to keep their children in school and take them to health clinics. The U.S. has a trade adjustment assistance program, but its benefits are inadequate. Wage and medical insurance schemes are need (see Kletzer & Litan).
NAFTA Scorecard: a mixed picture Mexico Trade growth & diversification A+ Economic and employment growth C+ Poverty reduction B Political reform A- (became a democracy) legal reforms/ property rights/ barriers to entry C Compensation schemes for farmers & rural poor A- Education, environment B- United States Regional efficiency gains A- Trade-not-aid model growth strategy: B+ Environmental and labor standards C+ Model for Chile, COL Jordan, CAFTA, etc. B+ Trade Adjustment Assistance C- major failure
References DeJanvry, A., E. Sadolet and B. Davis (1997) Nafta and Agriculture an Early Assessment (U.C. Berkeley, ARE working paper #87) Gruben, William (2003) México, el Tratado de Libre Comercio, y las Maquiladoras, El Paso TX. Lopez-Cordova (2003) NAFTA and Manufacturing Productivity in Mexico, Economia, Vol 4 #1, Fall Brookings Institute Press. Lederman, Daniel, W. Maloney, Lois Serven (2003) Lessons from Nafta, World Bank, advanced copy. United Nations, FAO (2003) Poverty in Mexico Module, Agriculture and Development Division (ESA)