Mexico: The frustrated expectations of free trade
The lights and shadows of NAFTA on its 10th anniversary
By Jorge Coarasa
jorgecoarasa@hotmail.com.
Services of Adital
Jan. 1 marked the 10th anniversary of the North American Free Trade Agreement (NAFTA), an accord between Canada, the United States and Mexico that enabled the creation of the world’s largest zone for the free exchange of goods and services.
To Mexico, the NAFTA represented the crown jewel of a process of reform intended to modernize the nation’s economy and open it to the outside world. The treaty generated great expectations, not only of economic benefits but also of social benefits. Inside and outside the country, politicians, entrepreneurs and economists predicted that the increase in exports and the inflow of foreign investment would create jobs in a massive way and would boost wages, achieving a reduction of poverty, a more equitable distribution of income, and a decrease in the migratory flow toward the United States.
In the 1990s, the case of Mexico was broadly used as an example of the success of economic aperture, because – despite the 1994-95 crisis – exports and the inflow of direct foreign investment experienced spectacular growth. In 2000, Mexico became the United States’ second trade partner and the first recipient of direct foreign investment in Latin America.
However, with the fall of the American economy, the situation in the past three years has been very different. In 2003, Mexico recorded a drop in its gross domestic product for the third consecutive year, something unheard of in the past two decades. Direct foreign investment shrank drastically, to such a degree that the remittances from Mexican laborers in the United States have become the principal source of hard currency for the country. Added to this is a halt in the growth of exports and Mexico’s replacement by China as the United States’ second trade partner.
On the social scene, the balance is grim, because the impressive economic benefits attained until 2000 did not translate into a significant improvement in the living conditions of a majority of the population. According to the most conservative figures of the Economic Commission for Latin America and the Caribbean (ECLAC), the percentage of homes in conditions of poverty nationwide was technically the same as in 1994, and had even increased in rural areas. Poverty is such a complex phenomenon, affected by so many factors, that one couldn’t say that the NAFTA had increased it – but one could say that it didn’t help reduce it.
As to the distribution of income, it suffered a significant deterioration. Between 1994 and 2000, the participation of 80 percent of the population in the total income fell to 16.6 percent; the opposite occurred with the 20 percent of the population with the largest income. In 2000, the 10 percent wealthiest people controlled almost one half of the total income.
The flow of emigrants spiraled during the 1990s to such a degree that the Mexican population of the United States, according to the U.S. census, grew from 4.5 million in 1990 to 8.5 million in 2000.
The decline in the economic success of the NAFTA is due, in addition to the deceleration of the American economy, to the emergence of China as a competitor, in terms both of the U.S. market and foreign investment. Also, the macroeconomic policy adopted by the Bank of Mexico has generated a type of overvalued exchange that robs Mexican exports of their competitiveness.
It could be said that, after the 1994-95 devaluation, Mexico benefited from the reduction in the prices of its export products, but the country did not seize the opportunity to develop the capabilities needed to offer more than cheap “maquiladoras” at low wages. For this reason, and despite the anticipated recovery in the U.S.economy, the Mexican economy could remain stagnant.
The social failure could be explained a priori by saying that the jobs generated by the increase in exports and direct foreign investment did not make up for the jobs lost by the increase in imports and the dismantling of many local productive chains. On the other hand, the new exports came from sectors that required little unskilled labor, so the real wages of a majority of the population fell, while the wages of the skilled laborers rose, which explains the stagnation of poverty and the increase in the inequality of income.
At a point in international relations when the failure of the latest round of negotiations at the World Trade Organization and the impasse in the Free Trade Area of the Americas negotiations are forcing an increase in the number of bilateral accords between regional countries and groups and the United States, Mexico’s 10 years of experience should be taken into account so as not to commit the same mistakes or generate excessive expectations within our society.
Jorge Coarasa is a Mexican economist.
