Has NeoLiberalism Failed Mexico?
J. Bradford DeLong
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 United States 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% per year, and exports have
boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP
today. Next year, Mexicos 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. NAFTA guarantees
Mexican producers tariff and quota-free access to the US market, the largest
consumer market in the world.
Without this guarantee, fewer would have invested in the capacity to satisfy
the US market. 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, which should have accompanied the guarantee that no future wave of
protectionism in the US would shut factories in Mexico.
The key word here is should. Todays 100 million Mexicans have real incomes
at purchasing power parity of roughly $10,000 per year, a quarter of the
current US level. They are investing perhaps a fifth of GDP in gross fixed
capital formation a healthy amount and have greatly expanded their
integration into the world (i.e., the North American) economy since NAFTA.
But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of
population and increase, means that Mexicans mean income is barely 15% 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 twelve 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 Mexicos 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 wose 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 Mexicos 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.
J. Bradford DeLong, Professor of Economics at the University of California at
Berkeley, was Assistant US Treasury Secretary during the Clinton
administration.
Copyright: Project Syndicate, 2006.
http://www.project-syndicate.org/commentary/delong51
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