Economic Integration, Environment, and Development: Mexico Before and After NAFTA Kevin P. Gallagher Global Development and Environment Institute Tufts University

Overview of Presentation To what extent has economic integration affected levels of environmental degradation in Mexico? –Is there an Environmental Kuznets Curve for Mexico? –Is Mexico a Pollution Haven? Implications for assessments, theory and policy Suggestions for further research

Environmental Kuznets Curve

Scale Effects: if pollution per unit of output is constant but the scale of output increases then pollution will increase as well Composition Effects : if pollution per unit of output remains unchanged but the sectoral composition of the economy shifts toward cleaner or dirtier economic activity Technique Effects: reductions in pollution per unit of output due to technological change and transfer and/or rising incomes

Problems with the EKC Empirical evidence is relatively weak –Limited to criteria air pollutants in developed countries –Turning points much higher than original estimates –Doesn’t hold for single country trajectories Damage leading to turning point could be irreversible or too costly to clean up Drawing single-country development lessons from cross-sectional evidence is questionable

Is Mexico a Pollution Haven?

Y variables (84-99 and post-NAFTA) –Growth in Mexican exports –Growth in Mexican production –Growth in Mexican export share of US consumption P variables –Marginal abatements costs in the US –Gap in Mexico/US pollution intensity Y it =β 1 +β 2 P it +…

Mexican environmental policy has been inadequate Established key environmental laws and institutions Spending on environmental policy shrinking Plant-level environmental inspections declining “Side-agreement” institutions extremely limited

Side Agreement Limited $3 million budgeted for Mexico dwarfed by economic costs of environmental degradation Serves as interesting “pilot project” for serious effort –Citizen submissions –Research –Technical cooperation (PRTR) –Funds for clean development (FIPREV, NAFEC) Environmental components of trade agreements post- NAFTA are weaker than NAFTA”S

Potential Economic Costs of Waiting for Kuznets in Mexico

Summary of Findings No EKC-like relationship in Mexico (at least for now) Mexico is not a pollution haven for pollution-intensive US manufacturing firms Mexican government is not adequately addressing the market failures resulting from economic transformation International institutions not filling gap made by integration process

Implications for Assessment Ex-post analyses have ex-ante lessons: liberalization won’t automatically improve or worsen the environment. Need to move beyond asking whether economic integration is “good” or “bad” for environment Need more sector-based analyses to pinpoint environmental effects

Implications for Theory The role of the nation-state in the economic integration process Need for a pro-active state in addressing negative environmental externalities that coincide with the integration process

Implications for Policy Without the proper environmental institutions and policies in place, liberalization may worsen environmental conditions Strong environmental policy is justified on economic grounds Strong environmental policy will not deter foreign investment flows to developing countries Strong environmental policy will not cause developed country firms to flee their countries (nor shed jobs) Substantial international financing can supplement developing country environmental goals

Need for Further Research Need for time series data on levels of pollution Complement “top down” analysis with a “bottom up” approach that examines individual firms and sectors Firm-level case studies on location decisions, technology use and transfer, and environmental compliance

P=S+C+T P = level of pollution S=Scale S it =P ib (Y mt /Y mb -1) C=Composition C it =P ib ( (Y it /Y ib ) – (Y mt /Y mb ) ) T=Technology?

Orders of magnitude Cleaner than in US

Criteria Air Pollution in Mexican Manufacturing

Is Mexico a Pollution Haven?