TWN Info Service on WTO and Trade Issues (Apr17/03)
4 April 2017
Third World Network

Mexico fared poorly over past 23 years under NAFTA, says study
Published in SUNS #8435 dated 3 April 2017

Geneva, 31 Mar (Kanaga Raja) - Mexico performed poorly over the past 23 years that it has been a party to the North American Free Trade Agreement (NAFTA), with its poverty rate going up, while its per capita GDP growth was significantly lower than that of the rest of Latin America during this period.

This is one of the main conclusions highlighted by the Washington DC-based Center for Economic and Policy Research (CEPR) in an updated report titled "Did NAFTA Help Mexico?: An Update After 23 Years."

The report, released on 29 March, updates an earlier version released in February 2014 and is co-authored by Mark Weisbrot, Co-Director at CEPR; Lara Merling, Research Assistant at CEPR; Vitor Mello, International Program Intern at CEPR; Stephan Lefebvre, a former Research Assistant at CEPR; and Joseph Sammut, a former International Program Intern at CEPR.

"If NAFTA had been successful in restoring Mexico's pre-1980 growth rate - when developmentalist economic policies were the norm - Mexico today would be a high income country, with income per person significantly higher than that of Portugal or Greece," said the report.

It is unlikely that immigration reform would have become a major political issue in the United States, since relatively few Mexicans would seek to cross the border, it added.

"Many people think that since American workers lost out from NAFTA, Mexicans must have benefited, but the data show that this is not true," said Mark Weisbrot, Co-Director at CEPR, in a press release.

"The Mexican economy has performed poorly since NAFTA went into effect, as compared with the rest of Latin America or with its own past; and more than 20 million additional people are below the poverty line," he added.

"As the US and Mexico consider renegotiating NAFTA, there should be a serious discussion of what went wrong for Mexico, as well as for the United States," Weisbrot stressed.

The CEPR report said that as was well known at the time of NAFTA's passage, the main purpose of NAFTA was to lock in a set of economic policies, some of which were already well underway in the decade prior, including the liberalization of manufacturing, of foreign investment and of ownership, and other changes.

The idea was that the continuation and expansion of these policies would allow Mexico to achieve efficiencies and economic progress that was not possible under the developmentalist, protectionist economic model that had prevailed in the decades before 1980.

"While some of the policy changes were undoubtedly necessary and/or positive, the end result has been decades of economic failure by almost any economic or social indicator," it said.

The report compared the performance of the Mexican economy with that of the rest of the region since 1994 on the available economic and social indicators, and with its own past economic performance.

On the growth of income per capita in Mexico, the most basic measure of economic progress, the report found that per capita GDP has grown by just 28.7 percent, cumulatively, from 1994 through 2016.

This is an average annual growth rate of just 1.2 percent, which is quite low compared with other countries in the region during this period. Mexico's growth ranks 15th of 20 countries in Latin America (South America and Central America).

"From these numbers, and in the absence of any natural disaster or war in Mexico during the past decades that could account for such poor economic performance, it would be difficult to argue that Mexico would have done much worse in the absence of NAFTA," said the report.

In comparing Mexico's growth rate since NAFTA to that of its past, again in the context of the rest of the region, the report found that from 1960 to 1980, Mexico almost doubled its income per person, a growth rate that was higher than that of Latin America as a whole.

If this growth had continued, Mexico would be a high-income country today. However, both Mexico and the region suffered a sharp slowdown in the growth of income per capita over the following 20 years, 1980-2000, a period that coincided with first a badly handled debt crisis in the early 1980s and then a number of neoliberal policy changes.

Regional growth of GDP per capita dropped from 87 percent for the prior two decades, to just 9 percent for 1980-2000, or just 0.4 percent annually. Mexico's per capita growth fell from 97 percent to 13 percent, or 0.6 percent annually.

In the twenty-first century, there was something of a rebound in the region, with per capita GDP growth averaging 1.5 percent annually for 2000-16, despite two recessions and a slowdown since 2011.

Looking just at the years since NAFTA, Mexico did not do as well as the region as a whole, averaging 1 percent in per capita GDP growth for these years.

In examining where Mexico would be today if its income per person had continued to grow at the rate that it did over the two decades prior to 1980, the report said that Mexico in 2016 would have an income per person of more than $39,000 in 2011 international purchasing power parity dollars, which would make its living standards comparable to, or even above, a number of Western European countries.

It also said that as would be expected during such a period of very little economic growth, the poverty rate was not reduced in Mexico; in fact it increased.

In 2014, Mexico's national poverty rate was 55.1 percent, compared to the 52.4 percent rate in 1994. As a result, there were about 20.5 million more Mexicans living below the poverty line as of 2014 than in 1994.

Measures of more extreme poverty - "unable to afford health care, education and food," and "unable to afford food" - improved very little since 1994, falling by just 0.6 and 0.9 percentage points, respectively.

For the region as a whole, there was no progress in reducing the poverty rate for more than two decades, from 1980 to 2002. The poverty rate for the region then fell substantially, from 43.9 percent in 2002 to 28.2 percent in 2014.

By the measure of the UN Economic Commission for Latin America and the Caribbean (ECLAC), Mexico's poverty rate fell from 45.1 percent in 1994 to 41.2 percent in 2014 (3.9 percentage points).

However, excluding Mexico, poverty in the region fell more than five times as much, from 46 percent to 25 percent (21 percentage points).

As for real (inflation-adjusted) wages in Mexico from 1994 to 2014, the report found that there was a fall in real wages of 21.2 percent from 1994-96, associated with the peso crisis and recession.

Wages did not recover to their pre-crisis (1994) level until 2006, 11 years later. By 2014, they were only 4.1 percent above the 1994 level, and barely above their level of 1980. The minimum wage, adjusted for inflation, fared even worse. From 1994 to 2015, it fell by 19.3 percent.

Although the unemployment rate jumped during the peso crisis and then fell steadily until 2000, it then increased again until 2014. Unemployment has averaged 4.0 percent during NAFTA (1994-2016), compared to an average of 3.1 percent for 1990-94 and a low of 2.2 percent in 2000.

The report pointed out that NAFTA removed tariffs (but not subsidies) on agricultural goods, with a transition period in which there was a steadily increasing import quota for certain commodities.

The transition period was longest for corn, the most important crop for Mexican producers, only ending in 2008.

"Not surprisingly, US production, which is not only subsidized but had higher average productivity levels than that of Mexico, displaced millions of Mexican farmers," it said.

Examining agricultural employment in Mexico in 1991 and 2007, it found that there was a 19 percent drop in agricultural employment, or about 2 million jobs.

The loss was in family labour employed in the family farm sector. Seasonal (less than six months employment) gained about 3 million jobs, but it was not nearly enough to compensate for the 4.9 million jobs lost in the family farm sector.

The CEPR report said: "Proponents of NAFTA of course knew that family farms in Mexico would not be able to compete with subsidized US production but argued that displaced workers would shift to higher productivity agriculture (mainly vegetables and fruits for export), as well as industrial jobs."

Although vegetable and fruit production did expand considerably (from 17.3 million tons in 1994 to 28.2 million in 2012), and presumably accounted for many of the 3 million seasonal jobs created, it was clearly not enough in terms of employment.

According to the report, from 1994 to 2000, the estimated annual number of immigrants from Mexico to the United States soared by 79 percent, with the annual flow of migrants rising from 430,000 in 1994 to 770,000 in 2000.

The number of Mexican-born residents living in the United States more than doubled from 4.5 million in 1990 to 9.4 million in 2000, and peaked at 12.6 million in 2009.

The report said that if the Mexican economy had continued growing at its 1960-80 rate, Mexico would be a high- income country today; and that it would also have become a high-income country even if its pre-1980 growth rate had been restored after NAFTA.

There would still be a significant income and wage differential between Mexico and the United States, but the incentive to emigrate to the United States would have been tiny as compared with what actually materialized.

"It is questionable whether immigration would have become a political issue in the United States, as it did especially in the 2016 election and now under the Trump administration, if not for the poor performance of the Mexican economy in the post-NAFTA years."

NAFTA JUST ONE VARIABLE IN MEXICO'S POOR PERFORMANCE

The report pointed out that NAFTA was just one variable among others that could account for Mexico's poor economic performance since 1994. However, it appears to be related to other economic policy choices that have negatively affected the Mexican economy during this period.

It said that today, China accounts for 21 percent of US imports while Mexico accounts for 13.5 percent.

This is a very tough competition for Mexico for a number of reasons. First, Mexico has been throughout the vast majority of the post-NAFTA period a much higher-wage country than China, although the gap has narrowed and there is no definitive data for China in recent years.

In 1996, labour compensation costs in Mexico, in US dollars, were $3.05 per hour, and rose to $5.59 by 2002. For China, in 2002, hourly compensation costs in US dollars was $0.73.

Although these data are not exactly comparable because of differences in their construction, they indicate a huge gap in dollar terms - which is what matters for export or import-competing industries.

By 2009, the gap was still very large: $1.74 for China, versus $6.36 for Mexico. So it was difficult to compete on the basis of wages.

Second, China maintained a commitment to a competitive exchange rate throughout the 2000s, in effect fixing this exchange rate against the dollar or (since 2005) a basket of currencies.

The Mexican Central Bank by contrast has had, as the International Monetary Fund notes, "a firm commitment to exchange rate flexibility."

In other words, the Mexican Central Bank would typically raise or lower interest rates as necessary to reach its target inflation rate (3 percent), and let the exchange rate go where it may.

This means that Mexico's exchange rate was for most of the past two decades unlikely to be competitive with China's, which further worsens Mexico's cost disadvantage.

In the past few years, said the report, the Mexican peso has significantly depreciated against the US dollar, while China's currency has seen an overall slight appreciation since 2007.

The combination of a rapidly depreciating peso (with relatively little wage growth) in Mexico and rising labour costs in China has narrowed the gap in labour costs between the two countries.

"However, it is not yet clear how much difference these changes will make going forward in the competition between Mexico and China in US markets."

CEPR said the Mexican peso is difficult to predict, since its value depends on monetary policy decisions by both the Mexican Central Bank that are unrelated to exchange rate policy; and by decisions of the US Federal Reserve, as well as by speculation on international markets.

It noted that China has other advantages that make it a formidable competitor for Mexico in the US market: the Chinese government controls most of the banking system in China, and can therefore ensure that its most important exporting firms have sufficient access to credit. In Mexico, by contrast, the banking system is not only private, but 70 percent of it is foreign owned.

The Chinese government also has an active industrial policy that enables it to help its exporting firms in various ways. China also spends over 2 percent of its 10-times-larger GDP on research and development, as compared to Mexico's 0.54 percent.

For all of these reasons, said the report, it is an uphill battle for Mexico to compete with China in the US market.

Although Mexico has done better than other countries in the US market in terms of this competition since China joined the World Trade Organization and achieved "permanent normal trade relations" with the US in 2001, its share of US imports is still only about half that of China's.

NAFTA also increasingly tied Mexico to the US economy. Much of this synchronization is because over two- thirds of Mexico's exports now go to the United States.

Unfortunately, 1994 was a particularly bad time for Mexico to hitch its wagon to the United States. First came the peso crisis, which was brought on by the US Federal Reserve's increases in US monetary policy rates beginning in 1994. Mexico lost 9.5 percent of GDP in two quarters during the resulting crisis and recession, which started in December 1994 and continued into the first half of 1995.

The fall in the peso helped boost exports for a while, but the peso appreciated as capital flowed back into the country and the advantage of a competitive exchange rate was soon lost.

Perhaps more importantly over the longer run, the US economy was just beginning a period in which its growth would be driven by enormous asset bubbles. First there was the stock market bubble, which burst in 2000-02, causing a recession in both the Unites States and Mexico.

The stock market bubble was then immediately replaced by what would then become the biggest asset bubble in world history, the United States' real estate bubble. This bubble burst in 2006-07, causing the Great Recession.

Mexico's loss of output from the US Great Recession (and world recession) was the worst in Latin America, with a decline in real GDP of 6.7 percent from the second quarter of 2008, to the second quarter of 2009, said the report.

(The report can be found at: http://cepr.net/publications/reports/did-nafta-help-mexico-an-update-after-23-years)