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In the first half of the 1990s the North American Free Trade Agreement among Canada, Mexico and the United States (NAFTA) was widely discussed and received significant public attention in all three countries. Government officials, NGOs, firms, chambers of commerce, trade unions, and the academy, particularly economists, opined widely on the pros and cons of NAFTA. The intensity and breadth of the initial debate has since declined substantially.
The main objective of this Perspective is to discuss the impact of NAFTA on Mexico’s economy. Whereas most of the debate to date has centered on generalities along polarized extremes – either for free trade or against neoliberalism, this Perspective analyzes the increasing process of integration between Mexico and the U.S., as well as specific economic issues concerning Mexico’s economic development in recent years. The first part analyzes the general context of Mexico’s economy before NAFTA, as it is not possible to examine the impact of NAFTA without understanding the significant socioeconomic and structural changes of Mexico’s economy since 1988. The second part examines some of the more salient effects of NAFTA on Mexico’s economy.
It is necessary to remember that at the end of the 1980s, the Mexican government began a new development strategy–a policy related to export-oriented industrialization, often referred to as economic liberalization strategy - which to date has been followed consistently. This liberalization strategy in place since 1988 assumes that the export-oriented private manufacturing sector will allow for growth and development. Concurrently, the state was to reduce significantly its socioeconomic activities (“lean state”) and opted to concentrate on macroeconomic policies: the control of inflation and the fiscal deficit, as well as the attraction of foreign investments as the main financing source for the new strategy. In general, the new socioeconomic policy should be of “horizontal or neutral” character, i.e. affecting all households, firms, sectors and regions equally (Aspe Armella 1993; Dussel Peters 2000).
Consistent with its prior notion of development, the government of Mexico has changed substantially its socioeconomic policy since the end of the 1980s, particularly as compared to policies during 1940-1982: state-owned enterprises were massively sold to the private sector, foreign investment laws were almost completely liberalized, communal land-property was allowed to be sold, and import tariffs fell from levels above 200% to a maximum of 20%. Adding to these quick and profound changes, development banking and sector financing were relegated to the commercial financial sector. Those prior policies are consistent with the objective of reducing the fiscal deficit, as well as with generating “horizontal” policies.
What are some of the main effects of this strategy since its implementation? It is important, first, to recognize that the strategy has been successful in its own terms . As a result, inflation rates have fallen, with the exception of 1995-1996, to levels below 20% during the 1990s –considering inflation rates above 160% during the 1980s-, whereas the fiscal deficit has been reduced substantially and has even generated a surplus in some years. Finally, foreign direct investment (FDI) has accounted annually on average for more than 9.5 billion pesos during 1994-2000. However, the main structural change of Mexico’s economy was reflected in the impressive export growth in absolute and relative terms in respect to GDP. For the period 1988-2000, exports increased from 20.6 billion to 166 billion pesos, with an average annual growth rate (AAGR) of 19%. Further, exports as a share of GDP increased from levels below 15% to levels of around 30% at the end of the 1990s. From this perspective, manufacturing exports –which account for 90% of total exports at the end of the 1990s- have become the only engine of growth of the Mexican economy since 1988.
In spite of the prior effects, Mexico’s economy has reflected several structural limitations, including2
The Impact of NAFTA on Mexico’s Economy
From this perspective, NAFTA has become an important instrument of the Mexican government and its implemented strategy since 1988: if the private export-oriented manufacturing sector was to be the main growth engine, the sector required a relatively secure export market. Otherwise, and even assuming that Mexico would have been able to increase its exports, the strategy would have failed.
From the Mexican government’s perspective, expectations were very high regarding NAFTA: it was to produce new jobs, higher wages, higher economic efficiency through free trade, as well as better growth and development opportunities, added to an increasing economic and political stability. It has to be stressed that, at the same day NAFTA was implemented, January 1, 1994, the Ejército Zapatista de Liberación Nacional (EZLN) began its upraising in Chiapas, which reflects the highly socioeconomically polarized context of Mexico.
What has been the main impact of NAFTA in Mexico?3 Strictly in its own terms –as an agreement between three countries regarding trade and investment issues- NAFTA has been relatively successful, and accomplished much more than expected. In general terms:
Probably the most relevant success of NAFTA (and a process that began in the early 1990s and prior to NAFTA in cases such as the automobile industry) was the integration of several Mexican and U.S. sectors. This process has not been sufficiently studied. Generally, a few segments of Mexico’s economy have become of critical importance to increasing the competitiveness of the U.S. manufacturing sector, particularly against Asian and Japanese competition. Sectors such as electronics, automobiles and auto parts, as well as garments and textiles, which represent 70% of total Mexican exports, have become an integral part of the U.S. economy. These export-oriented Mexican activities in the new North American industrial organization account of the lowest segments of the global value-added chain: the assembly of parts and components as a result of cheap labor force and geographical proximity.4 Thus, integration globally and in the case of NAFTA, has resulted in an important growth of intrafirm and intrasectoral trade, while the specific activities represent low value-added transactions with very low technological and learning processes. Nevertheless, these activities are of critical importance to the U.S.-industry, since they include the last labor-intensive segments of the respective products: assembling parts and components and, in some cases, final distribution and shipping from Mexico directly to clients.
Independently of the former results, NAFTA has also generated contradictions and unresolved issues:
Generally, acknowledging that NAFTA has allowed for the integration of a small segment of its economy, NAFTA has had little positive effects on Mexico’s overall development; it might have even been responsible for increasing overall polarization in Mexico. NAFTA has allowed Mexican exports to target mainly the U.S., which might have been politically controversial or even impossible without NAFTA. However, it has not produced a significant positive impact on Mexico’s development process.
The latter is a result of the specific activities that characterize Mexican exports: low value-added activities, dependent on low tariffs and low wages with a generally minimal diffusion process; FDI and exports in Mexico are highly linked to each other and produce few linkages with the rest of the economy. The level of “territorial endogeneity”, that is, the possibility of a learning process regarding technological development and the option of upgrading the value-added chain to better jobs and higher wages, is minimal. In 1999, 84% of Mexican exports depended on programs which allowed importation and subsequent export of products (for example, maquiladoras), i.e. at least 84% of Mexican exports depended on low value-added activities that were not subject to tariffs nor taxes in Mexico.
From this perspective, a small segment of Mexico’s economy has integrated since 1988, more profoundly in some sectors through NAFTA in 1994, the U.S. economy. Moreover, Mexico has benefited substantially from the booming U.S. economy in the 1990s. However, NAFTA has not allowed for improving basic socioeconomic indicators in Mexico, such as GDP per capita, employment, income distribution, and wages. Even further, NAFTA has allowed for deepening of the overall socioeconomic polarization at the firm, sectoral, household and regional level in Mexico. Issues such as the structural lack of employment generation, with around 800,000 persons annually having to search for a job in the informal sector or in the U.S., as well the structural instability of Mexico’s balance of payments (reflected in massive chronic trade deficits of the manufacturing sector) should also be of interest and concern for other nations, including its main neighbor, the U.S.
Some of these issues go beyond NAFTA and represent the “core values” of liberalization strategy in Mexico, as well as in most of Latin America. The question is, what are the priorities of Mexico’s development strategy: inflation or employment and wages, among many other variables? Is such a strategy, strictly in economic terms, feasible in the long run, in which a small export-oriented sector is highly dynamic and successful, while the rest of the domestic economy and its population does not “reap” the results of this performance? And, finally, how much further can such a strategy go? Is this continuous socioeconomic polarization sustainable in the medium and long run?