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Saturday, September 30, 2006

The Neo-Liberal Road to NAFTA

Brad DeLong reconsiders the neo-liberal foundations of his support for the North American Free Trade Agreement:

Neo-liberalism has a patchy Mexican record, by J. Bradford DeLong, Project Syndicate: Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the US could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.

Since NAFTA, Mexican real GDP has grown at 3.6 percent per year, and exports have boomed, going from 10 percent of GDP in 1990 and 17 percent of GDP in 1999 to 28 percent of GDP today. Next year, Mexico's real exports will be five times what they were in 1990.

It is here -- in the rapid development of export industries and the dramatic rise in export volumes -- that NAFTA made the difference. ... Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.

Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation...

The key word here is "should." ...[T]he 3.6 percent rate of growth of GDP, coupled with a 2.5 percent per year rate of population and increase, means that Mexicans' mean income is barely 15 percent above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago (indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico).

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade.

We see great strengths in the Mexican economy -- a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next 12 years.

To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico's powerful geographic advantages and the potent benefits of neo-liberal policies, should they?

Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico's slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

    Posted by on Saturday, September 30, 2006 at 09:25 AM in Economics, International Trade | Permalink  TrackBack (1)  Comments (83)

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    [Source: Economist's View] quoted: But [T]he 3.6 percent rate of growth of GDP, coupled with a 2.5 percent per year rate of population and increase, means that Mexicans' mean income is barely 15 percent above that of the pre-NAFTA days, and that the ga... [Read More]

    Tracked on Saturday, September 30, 2006 at 09:58 PM


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