Albert Fishlow
"Mexican Development in the Long Term:
Is NAFTA Sufficient?"

March 13 , 2003


Albert Fishlow spoke about the future prospects for development in Mexico, given its recent history under NAFTA, and the problems created by the weak U.S. economy since 2001. He outlined two visions of the future, contrasting the possibility of tighter integration with the United States with a more broadly based integration with other Latin American, Asian and European markets.

Mexican Development in the Long-term: Is NAFTA Sufficient?
Ralph Espach, Department of Political Science

While the U.S. economy was strong in the late 1990’s, NAFTA boosted Mexico’s exports and generated tremendous investment, as well as providing a welcome market for its surplus labor. In the last two years, however, the negative effects of Mexico’s increasing dependence on the U.S. market have become more apparent, as sluggish growth in the U.S. has hit Mexico hard. Looking forward, NAFTA’s long-term effects may lead Mexico to reconsider regionalism as its primary strategy for economic development. On March 13, 2003 Professor Albert Fishlow reviewed the effects of NAFTA on Mexico’s economy and politics and outlined two alternative paths toward more sustainable growth. The objective of both paths is to boost exports in higher value, industrial manufactures, a critical step toward improved economic and social development. One involves a deeper, more binding integration with the U.S., centered on monetary coordination. The other demands a strategic retreat from NAFTA as the core of Mexico’s foreign relations and in its place a broader, more multilateral strategy toward more diverse trade relations with partners in Latin America and East Asia.

NAFTA has had enormous beneficial effects on Mexico’s growth and export profile. Since 1994, exports have grown at an average rate of around 20 percent per year and have changed in type from a concentration in petroleum-based products to manufactures. Contrary to expectations, the economic growth stimulated by NAFTA did not reduce the migration of Mexican labor to the U.S. Instead, during the 1990’s, this labor pool was a boon to U.S. production as well as an important release for Mexico from the pressures generated by a persistently high unemployment rate, the dislocation of rural economies and a growing population. While the U.S. economy was booming, this pattern helped to keep down inflation and wages in the U.S. and boosted Mexico’s economy with a massive inflow of dollars. Currently, for the first time in over a century, Mexico enjoys Latin America’s highest level of per capita income.

NAFTA’s success contributed to the election of Vicente Fox in 2000, which marked the end of the PRI’s monopoly of the presidency. Emphasizing the prospects for further export-led growth and closer institutional ties with the U.S., Fox promised a 6 percent rate of growth. However, U.S. economic malaise, aggravated by the terrorist attack in September 2001, stymied these optimistic forecasts. As a result of NAFTA, Mexico’s economic cycle is now synchronized with that of the U.S., and this turbulence has hit Mexico hard. The actual growth rate of Mexican GDP in 2001–02 was near zero, and Mexico’s exports have diminished significantly.

The general truth of NAFTA is that as long as the U.S. prospers, Mexico will benefit richly — much more than it would without the accord. On the whole, NAFTA remains a more productive economic strategy for Mexico than a reliance on multilateralism alone. Especially considering the prolonged stagnation in Japan and economic weakness in the European Union, it is unrealistic that Mexico could seek significant export growth by deepening these relations. However, Mexico must consider more carefully than it has thus far the negative effects of this linkage and a wider range of strategic relations.

Mexico currently faces a troubling situation. Because of the slump in manufactures, its export income is again largely supported by high oil prices, a circumstance it had worked hard to overcome since the mid-1980’s. Although not threatened with financial collapse (it has around US$50 billion in foreign reserves), Mexico’s long-term growth and development depend on a series of fundamental, politically difficult reforms. Thus far, Fox has not fulfilled his promises regarding revisions to the tax code and judiciary. The inability of many agricultural industries to compete has shifted resources dramatically to the north of the country and from rural to urban areas. If it were not for massive migration to the U.S., Mexico would likely face overwhelming unemployment and burdens on various social services.

Professor Fishlow suggested that Mexico must carefully consider two basic options in its future foreign economic policy. One option entails a deeper, more proactive commitment to integration with the United States. Three reforms in particular would improve the benefits of NAFTA: monetary unification through a fixed exchange rate, the liberalization of the energy sector and decentralization of the national financial system. Each of these would have profound implications for the NAFTA partnership and would have to be carefully negotiated with Mexico’s partners. Plans for the liberalization of the oil industry, for example, could provide an attractive basis for discussions about a more flexible U.S. migration policy.

A second option involves a strategic retreat from Mexico’s commitment to NAFTA as its top foreign policy priority. Instead, Mexico could direct its attention toward tightening its trade and investment ties with the rest of Latin America and with potentially powerful partners in East Asia. Liberalized trade with the European Union has yielded important, albeit limited, benefits. However, the addition of free trade partnerships with fast growing markets in Asia and Latin America would significantly contribute to these gains. NAFTA would, in effect, return to its original role as one element of a worldwide push by Mexico for increased export markets, enhanced trade diversity, and deeper ties with Europe, Asia and South America. Increased trade and investment ties with China, in particular, offer Mexico enormous potential gains that stretch far into the future.

Professor Fishlow takes questions from the audience following his talk.

 

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