Thursday, December 10, 2009

Re-examining NAFTA

. Thursday, December 10, 2009

Did the free trade agreement live up to expectations? Not for Mexico:

In one key way, Nafta did deliver as expected: Exports and foreign direct investment tripled from the early 1990s as Mexico became a leading supplier of cars, electronics and a broad variety of industrial parts to the United States. Productivity in Mexican manufacturing rose 80 percent.

But annual economic growth averaged only 1.6 percent per capita between 1992 and 2007 — low even by Mexican standards until the 1980s. ...

The oversupply of labor, along with government policies that succeeded in keeping wages low, has led to a slight increase in the gap between average wages in the United States and Mexico — precisely the opposite of what Nafta was expected to do.

Two things. First, it's not clear what the counterfactual here is. Would Mexico's growth rate have been higher or lower without NAFTA? How about wages? Just because the country's economic performance has not been as good as hoped does not mean that things would be better without NAFTA. Since NAFTA poverty in Mexico has decreased, and there has been some growth. Second, NAFTA isn't the only thing that's happened in Mexico in the past 16 years. There was the Tequila crisis in 1994 and significant political upheaval, and new competition in manufacturing from China and other countries. Moreover, Mexico has not made investments in education and skills development that would help them move into high-value-added industries, nor has the expected political reform -- especially purging of corruption -- ever materialized. Is NAFTA to blame for any of that? Perhaps. But I can't see how.

Nevertheless, despite the non-existence of a "giant sucking sound", NAFTA cannot be considered much more than a qualified success. If that. Which is the conclusion that Brad DeLong came to a few years back:


Re-examining NAFTA

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