Transcript Is Mexico Converging after NAFTA?

Lessons from NAFTA
William Maloney, Luis Serven
World Bank
Canadian Standing Senate Committee on
Foreign Affairs
www.worldbank.org/laceconomist
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%
How to evaluate the
impact of NAFTA?
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Only ten years have elapsed.
Other major events occurred simultaneously:
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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:
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History – before and after NAFTA – structural change?
Differences across sectors and states
International comparisons – Mexico versus other Latin
economies
Did Mexico benefit from NAFTA?
Yes, but could have been better.

On the whole, yes
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But not so much as proponents promised. Not as bad as
critics claimed either.
Gave a modest impulse to economic convergence in N.A.
Notable impact on trade and FDI
Benefits were not equally shared by all sectors and
regions
The benefits are not automatic
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
They depend on complementary domestic reforms
Institutions, education, technology, infrastructure
Plan of the presentation
Trade
 FDI
 Income convergence with N.A.
 Divergence across regions
 Productivity and innovation
 Labor Markets
 Agriculture
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Trade
Nafta spurs trade

But the FTA was not the only factor:
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rapid US growth in late 1990s
Real depreciation of the peso
Lagged effect of unilateral reforms of the 1980s
No evidence of trade diversion in the aggregate
NAFTA estimated to be responsible for a 25-30% increase in
exports
Big increase in trade
Trade/GDP
Figure 4. Latin America: Imports plus Exports over GDP
120
100
80
60
40
20
0
1990
1991
1992
ARG
1993
BRA
1994
CHL
1995
1996
COL
1997
CRI
1998
MEX
1999
ALC
2000
Foreign Direct Investment
FDI rose, but not only in Mexico: Only a
temporary effect?
Net FDI inflows as a % of GDP
Entradas Netas de Inversión Extranjera Directa
(porcentaje del PIB)
7%
6%
5%
4%
3%
2%
1%
México
Sources: WIR and IMF.
América Central y el Caribe
América del Sur
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
Convergence of
GDP/Capita
The development gap between the
U.S. and Mexico
5 .5
5 .0
4 .5
Tequila
Ratio of GDP per
Debt
capita US/Mexico Crisis
4 .0
3 .5
3 .0
2 .5
2 .0
1 .5
1 .0
1 9 60
1 9 64
1 9 68
1 9 72
1 9 76
1 9 80
1 9 84
1 9 88
1 9 92
1 9 96
2 0 00
Institutional gaps limit the reduction
of the income per capita gap
Variable ranges from -2 to +2 for all countries
2.50
CAN
USA
2.05
MEX
2.00
1.70
1.71
1.58
1.50
1.58
1.45
1.33
1.24
1.24
1.19
1.18
1.07
1.00
0.58
0.50
0.28
0.12
0.06
0.00
-0.28
-0.50
-0.41
-1.00
Voice and
Accountability
Political
Stability
Government
Effectivenes
s
Regulatory
Quality
Rule of Law
Control of
Corruption
Divergence across
Regions
The development gap within
Mexico: state GDP/capita
45,000
Chiapas
Oaxaca
Chihuahua
Sonora
Guerrero
Distrito Federal
Nuevo León
40,000
GDP per Capita (1993 pesos)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
1940
1950
1960
1970
1980
1988
1990
1993
1995
2000
Why Different Performance of
Mexican States during the 1990s?
Initial education (literacy,education level)
 Infrastructure
 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”)
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Productivity and
Innovation
R&D effort in Mexico below average
and far below superstars
R&D
GDP
 GDP
 1
 2 
GDP
CAP
 CAP 
2
5.0%
Predicted & Observed R&D/GDP
4.5%
4.0%
Israel
Finland
3.5%
3.0%
2.5%
Korea
2.0%
1.5%
China
1.0%
India
0.5%
Argentina
Mexico
0.0%
4
5
6
7
8
Log GDP per Capita
9
10
11
Percent Deviation from the Median
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
R&D gap in Mexico, modest postNAFTA recovery …
0%
-20%
-40%
-60%
NAFTA
-80%
-100%
-120%
-140%
-160%
Mexico's R&D
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
7
NAFTA and Tequila
Manufacturing Real Wages and Unemployment
Crisis
Evolution
6.5
6
2.1
Unemployment
1.9
5.5
5
1.7
4.5
1.5
4
1.3
3.5
1.1
3
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
2
19
84
0.7
19
82
2.5
19
80
0.9
Unemployment rate (%)
Relative wages=Mex/US
2.3
Did NAFTA hurt Mexican workers?
% above non-tradables
Higher wages paid by firms with international competition; wages
recovered faster after 1995 in export sectors; & limited effect on
rural employment
Human Capital
Adjusted Wages
35. 0%
30. 0%
25. 0%
20. 0%
15. 0%
Non
Trad.
10. 0%
5. 0%
0. 0%
Not e: Non agr i cul t ur al wor ker s. Condi t i onal on human capi t al
NAFTA and on wages across
states
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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.
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Is there an inequality story?: yes in
wages, but not in household income
Year
SEDESOL Gini
1992
World Bank
Gini
55.9
1996
54.4
45.6
2000
54.6
48.1
2002
n.a.
45.4
47.5
Trends in employment:agriculture
(IMSS Data) and maquilas
1,100
550
1,000
500
800
700
450
600
500
400
400
Maquilas (left axis)
Agriculture (right axis)
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
350
1983
300
Thousands
Thousands
900
Agriculture
Mexican Agriculture: Imports & Production of
Sensitive Agricultural Products since 1983
30,000
25,000
20,000
15,000
10,000
5,000
0
1983-90
Imports (000s of Mt. Tons)
1991-93
Production (000s of Mt. Tons)
1994-2000
Irrigated
Rainfed
Did NAFTA significantly change trends in
agricultural trade? (econometric evidence)
EXPORTS
Agricultural products
Tomato
Fresh vegetables
Melon and watermelon
Other fruits
STRUCTURAL CHANGE
December 1994
December 1994
November 1994
September 1994
June 1995
IMPORTS
Agriculture products
Corn
Other oleaginous
Sorghum
Soy
Wheat
None
None
None
None
None
None
Source:
Yúnez-Naude (2003)
Why didn’t Mexican agriculture
suffer as much as some feared?
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Demand growth in Mexico & U.S. during 19952000 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
End