"Afta Thoughts on NAFTA"
DeLong shares some his reflections on NAFTA,
which he helped to craft during his tenure as Deputy
Assistant Secretary of the Treasury for Economic
a podcast of this event here (requires iTunes)
on the talk by Lauge Skovgaard Poulsen
DeLong's article in the Berkeley Review of Latin American Studies
was a true believer in NAFTA--the North American Free Trade
Agreement. Now my faith is not gone but shaken.” So
states Brad DeLong, economist and creator of one of the net’s
most popular weblogs on economics, at www.j-bradford-delong.net.
"Afta Thoughts on NAFTA"
By J. Bradford Delong
Mexican Revolution of the early 20th century created a Mexico
where peasants had nearly inalienable control over their
land; where large-scale industry was heavily regulated; and
where the country was ruled by a single, corrupt, patronage-based
party — the Institutional Revolutionary Party (PRI).
By the late 1980s, it was clear that this was not a very successful
politico-economic framework with which to support Mexican economic
development. Urban and industrial productivity remained far
below world standards with little sign of catch-up or convergence.
Rural agriculture remained backward. Successful development
fueled by the transfer of labor from the countryside to the
cities had come to an end in the late-1970s with the general
slowdown of growth in the industrial core, even though oil-rich
Mexico benefited enormously from the OPEC-driven tripling of
world oil prices in that decade.
stealing the presidency of Mexico from the true choice of
the voters — Cuauhtémoc Cárdenas — Carlos
Salinas de Gortari decided at the start of the 1990s to pursue
policies of “neoliberal reform.” He worked to open
up the economy to trade; encourage rather than punish foreign
investment; dismantle regulations and special privileges; and
generally to rely on the market in the hope that any market
failures that emerged to slow development would be less destructive
and dangerous than the government failures — stagnation,
corruption, entrenched interests — that many agreed were
blocking Mexican prosperity.
in the early 1990s, Salinas de Gortari sought and won a free
trade agreement with the United States (and Canada): NAFTA — the North American Free Trade Agreement. NAFTA
guaranteed Mexican producers tariff- and quota-free access
to the U.S. market, the largest consumer market in the world.
Once the United States was committed to allowing quota- and
tariff-free imports from Mexico, the future twists and turns
of U.S. politics would be unlikely to disrupt U.S.–Mexican
trade. Industrialists could build their factories in Mexico
to serve the American market without fearing the consequences
of a political retreat from free trade by the United States.
important, perhaps, NAFTA committed Mexico to following the
rules of the international capitalist game in its domestic
economic policies. Overregulation, nationalization, confiscation — all
the ways that governments can take wealth, especially wealth
invested by foreigners, and redistribute it — were to
be ruled out, or at least made more difficult, as a result
hope was that this two-fold binding of national governments — the
U.S. government committing not to let a wave of protectionism
affect imports from Mexico and the Mexican government committing
not to let a wave of populism affect the wealth that foreign
investors would place in Mexico — would set off a giant
investment and export-industrialization boom in Mexico and
so perhaps cut a generation off the time it would take for
full Mexican economic development.
Indeed, six years ago I was ready to conclude that NAFTA had
been a major success. It looked as if NAFTA had been the most,
or at least a very promising, road for Mexico. Given that the
United States has both a neighborly duty and a selfish interest
to do whatever it can to raise the chances for Mexico to become
democratic and prosperous, it appeared that the pushing-forward
of NAFTA by the George H.W. Bush and Bill Clinton administrations
had been one of the lamentably few good calls by the U.S. government
in its management of relations with Mexico.
years ago I would have said that NAFTA was a success because
I would have looked at Mexico’s exports and seen that
they had boomed. Indeed, they have continued to boom. Mexico’s
exports have gone from 10 percent of GDP in 1990 to 17 percent
in 1999 to 28 percent today. In 2007, Mexico’s real exports — overwhelmingly
to the United States — will be fully five times as great
as they were at the beginning of the 1990s. Here, in the rapid
development of export industries and the dramatic rise in export
volumes, it is clear that NAFTA has made a big difference.
the dual guarantees of free imports into the United States
and respect for foreigners’ property
in Mexico, fewer investments would have been made in Mexico
in capacity to satisfy American demand. And to those of us
advocating NAFTA in the early 1990s, such an expansion of
exports as we have in fact seen would have been confidently
predicted to generate enormous dividends for Mexico as a
whole. Increasing trade between the United States and Mexico
moves both countries toward a greater degree of specialization
and a finer division of labor. Mexico and the United States
can both raise productivity in important sectors like autos,
where labor-intensive portions are increasingly accomplished
in Mexico, and textiles, where high-tech spinning and weaving
is increasingly done in the United States, 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 United States would close factories in
Mexico. This is the gospel of free trade and the division of
labor that we economists have preached since Adam Smith. And
we have powerful evidence around the world and across the past
three centuries that this gospel is a true one.
key words here are “should have.”
Today’s roughly 100 million Mexicans have real incomes,
at purchasing power parity, of roughly $10,000 per year, a
quarter of the current U.S. 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 economy, especially that of North America, since
GDP has grown at an average rate of 3.6 percent per year
since the coming of NAFTA. But this rate of growth, when
coupled with Mexico’s 2.2 percent per year rate of population
increase, means that Mexicans’ mean market income from
production in Mexico is barely 15 percent above that of pre-NAFTA
days. That means that the gap between their mean income and
that of the United States has widened. And there is worse news:
Because of rising inequality the gap between mean and median
incomes has risen. The overwhelming majority of Mexicans are
no more productive in a domestic market income sense than their
counterparts of 15 years ago, although some segments of the
population have benefited. Exporters (but not necessarily workers
in export industries) have gotten rich. The north of Mexico
has done relatively well. And Mexican families with members
in the United States are living better because of a greatly
increased flow of remittances.
Intellectually, this is a great puzzle for us economists.
We believe in market forces. We believe in the benefits of
trade, specialization and the international division of labor.
We see the enormous increase in Mexican exports to the United
States over the past decade. We see great strengths in the
Mexican economy: macroeconomic stability, balanced budgets
and low inflation, low 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 success at what neoliberal policymakers like me thought
would be the key links for Mexican development has had disappointing
results. Success at creating a stable, property-respecting
domestic environment has not delivered the rapid increases
in productivity and working-class wages that neoliberals like
me would have confidently predicted when NAFTA was ratified.
Had we been told back in 1995 that Mexican exports would multiply
fivefold in the next 12 years we would have had no doubts that
NAFTA was going to be, and would be perceived as, an extraordinary
success. We would have been convinced that Salinas de Gortari
was right to focus his energies on free trade and NAFTA rather
than on, say, education and infrastructure.
be sure, economic deficiencies still abound in Mexico. According
to the Organization for Economic Cooperation and Development
(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 neoliberal policies,
DeLong pointed out NAFTA's successes (the growth of
the export sector of the Mexican economy, e.g.) but
also its shortcomings, including capital outflows from
Mexico to the U.S. and its failure to foresee the explosive
growth of China and its effect on the Mexican economy.
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 crime, official
corruption and inadequate infrastructure also take their toll.
Reinforcing these deficiencies is an important additional factor:
the rise of China. The extraordinary expansion of exports from
China over the past decade has meant that it has been the worst
time since the 1930s to follow a strategy of export-led industrialization
(unless, of course, you are China). Mexico has succeeded at
exporting to the United States. But because of the rising economic
weight of China, it has not succeeded in exporting at prices
that generate enough surplus to boost Mexican development.
addition, there is a great deal of anecdotal evidence that
attempts by businesses to locate production for the U.S.
market in Mexico are running into labor shortages. It is
not that labor in Mexico is scarce, and it is not at all
expensive. But labor with the skills needed to operate machines
that could otherwise be located in Kuala Lumpur or Lisbon
or, indeed, Cleveland, does seem to be hard to find. The
logic of comparative advantage and the division of labor
requires that the productive resources to divide the labor
be present. The low level — and
near stagnation over time — of education in Mexico may
be a critical deficiency.
there is the problem of Iowa: a gigantic and heavily subsidized
corn and pork producing machine. The way NAFTA has worked
out, the biggest single change in cross-border shipments
has been that Iowa’s agricultural produce is now sold in Mexico
City. The impact on standards of living for Mexico’s
near-subsistence, rural farmers is frightening to contemplate.
Imports from Iowa have been an extraordinary boon to Mexico’s
urban poor and urban working class. But have they been a good
thing for the country as a whole?
neoliberals 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.
We neoliberals point out that we could not have predicted
the rapid rise of China: from the perspective of 1991, China’s
future looked likely to be riddled with political turmoil,
repression and perhaps economic stagnation as the Communist
Party feared too-rapid change, rather than the greatest economic
miracle we have ever seen.
neoliberal story may be true, but, then again, it may not.
Having witnessed Mexico’s slow growth
over the past 15 years, we can no longer repeat the old mantra
that the neoliberal road of NAFTA and associated reforms
is clearly and obviously the right one. Would some other,
alternative, non-neoliberal development strategy have been
better for Mexico in the late 1990s and early 2000s? Would
it have been better to have urged President Carlos Salinas
de Gortari to focus his efforts on investments in education
and infrastructure and on trying to clean up corruption rather
than on free trade? Perhaps.
stakes are high. Our current systems of politics and economics,
around the world, are legitimized not because they are just
or optimal but because they deliver a modicum of peace coupled
with rapid economic growth and increases in living standards.
problems are not large when compared to those of many other
countries. We as a species ought to be able to help Mexico
to do much better than it has in the years since 1990.
Brad DeLong is Professor of Economics at UC Berkeley,
Chair of the Political Economy of Industrial Societies major,
and a research associate at the National Bureau of Economic
DeLong took questions from the audience on such issues
Latin American support for a Free Trade
Agreement for the Americas.