Lessons from NAFTA William Maloney, Luis Serven World Bank Canadian Standing Senate Committee on Foreign Affairs

Mexico Before and After NAFTA

How to evaluate the impact of NAFTA? Only ten years have elapsed. Other major events occurred simultaneously: Tequila Crisis and 1995 recession Unilateral reforms – anticipated NAFTA effect and delayed reform effects FDI boom to “ emerging ” economies, not just Mexico Ongoing decline in commodity prices (agriculture) and ongoing employment trends Our multifaceted approach: History – before and after NAFTA – structural change? Differences across sectors and states International comparisons – Mexico versus other Latin economies

Did Mexico benefit from NAFTA? Yes, but could have been better. On the whole, yes But not so much as proponents promised. Not as bad as critics claimed either. Gave a modest impulse to economic convergence in N.A. Notable impact on trade and FDI Benefits were not equally shared by all sectors and regions The benefits are not automatic They depend on complementary domestic reforms Institutions, education, technology, infrastructure

Plan of the presentation Trade FDI Income convergence with N.A. Divergence across regions Productivity and innovation Labor Markets Agriculture

Trade

Nafta spurs trade But the FTA was not the only factor: rapid US growth in late 1990s Real depreciation of the peso Lagged effect of unilateral reforms of the 1980s No evidence of trade diversion in the aggregate NAFTA estimated to be responsible for a 25-30% increase in exports

Big increase in trade Trade/GDP

Foreign Direct Investment

FDI rose, but not only in Mexico: Only a temporary effect? Net FDI inflows as a % of GDP

Convergence of GDP/Capita

The development gap between the U.S. and Mexico Debt Crisis Tequila Ratio of GDP per capita US/Mexico

Institutional gaps limit the reduction of the income per capita gap

Divergence across Regions

The development gap within Mexico: state GDP/capita

Why Different Performance of Mexican States during the 1990s? Initial education (literacy,education level) Infrastructure Political instability and institutions If poor States had had the same education, and infrastructure in 1990, they would have grown more than the rich ones (“conditional convergence”)

Productivity and Innovation

R&D effort in Mexico below average and far below superstars

R&D gap in Mexico, modest post- NAFTA recovery … NAFTA

Labor Markets

Did NAFTA Hurt Mexican Workers?: Rapid recovery of real wages (non-maquila manuf for Mex) relative to US wages after crises; lowest unemployment since 1987 (after ’ 98) Manufacturing Real Wages and Unemployment Evolution

Non Trad. More Exports/Worker More Imports/Worker Human Capital Adjusted Wages Did NAFTA hurt Mexican workers? Higher wages paid by firms with international competition; wages recovered faster after 1995 in export sectors; & limited effect on rural employment

NAFTA and on wages across states Real wages increased more in States with higher: Labor force education FDI/GDP Imports/GDP Percentage of population that migrated to the U.S.A.

Is there an inequality story?: yes in wages, but not in household income YearWorld Bank Gini SEDESOL Gini n.a.45.4

Trends in employment:agriculture (IMSS Data) and maquilas

Agriculture

Mexican Agriculture: Imports & Production of Sensitive Agricultural Products since 1983

Did NAFTA significantly change trends in agricultural trade? (econometric evidence) EXPORTS STRUCTURAL CHANGE Agricultural productsDecember 1994 TomatoDecember 1994 Fresh vegetables November 1994 Melon and watermelonSeptember 1994 Other fruitsJune 1995 IMPORTS Agriculture products None CornNone Other oleaginousNone Sorghum None Soy None WheatNone Source: Yúnez-Naude (2003)

Why didn’t Mexican agriculture suffer as much as some feared? Demand growth in Mexico & U.S. during combined with … … productivity growth in Mexican agriculture with irrigation Innovative agricultural support programs (PROCAMPO) But challenge is to help reduce rural poverty without protectionism, which condemns generations of rural poor to dependence on low quality jobs and government favors  … towards the transformation of the Mexican rural economy

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