Mexico's experience with NAFTA provides a cautionary tale. The goal of economic integration should be to raise living standards, but it is clear that trade liberalization by itself is not sufficient to achieve this. There is no doubt that trade and development are vitally important for economic growth but the real challenge is to pursue liberalization in a manner which promotes sustainable development, in which those at the bottom and middle see incomes rising.
Joseph Stiglitz and Andrew Charlton, 2005164
Wal-Mart, which opened its first Mexican store in 1991, is emblematic of economic change in Mexico. In 2002, the company became the largest private employer in Mexico, and in 2004 it became the largest private corporation in Mexico as measured by sales. As with many other new investments, Wal-Mart displaces existing businesses. Since retailing until recently has been in the hands of small shops and street vendors, its impact has been even greater than the impact Wal-Mart had in small U. S. towns. For example, prior to its 2005 arrival in Juchitan, Oaxaca, population
86,000, there were 4,100 merchants, 98 percent of whom were considered small. At the same time that it devastates small retailers, Wal-Mart raises the standard of living of millions who take advantage of its everyday low prices to stretch their incomes further.165
As the 2006 presidential election indicated, there is no consensus concerning the course of Mexican economic development. Those favoring the current course share the views laid out in Thomas L. Friedman’s book The Earth is Flat. They see Mexico successfully plunging into a global marketplace and benefiting from the opportunity to develop specialized niches and to achieve economies of scale in manufacturing. Advocates of NAFTA and globalization cite a wealth of data to support their position:
¦ During the eight-year period before NAFTA went into effect, FDI averaged only $3.47 billion a year, while during the following eight-year period it exceeded $13 billion a year. During the Fox administration, FDI averaged $17 billion annually.166
¦ Between 1995 and 2005, Mexican GDP increased from $310 billion to $700 billion and average per capita income rose from $3,100 to $7,000. Mexico moved from seventh place in Latin American per capita income in 1995 to first by 2005, ahead of Brazil and Argentina.167
Figure 25.1 NAFTA traffic on International Bridge at Laredo Source: J. Michael Short
¦ Between 1993 and 2004, U. S. exports to Mexico increased by 166 percent, while Mexican exports to the United States rose by 290 percent.168
In 1994, Mexicans put aside their reservations about U. S. domination and accepted NAFTA as a stepping-stone to developed-world standards in wages, health, and education.169 While NAFTA delivered the anticipated benefits to a minority of Mexicans, such benefits failed to reach broad swaths of the population. Critics of NAFTA seized on this to condemn the treaty and call for its repeal or modification. These are some of the NAFTA shortcomings they cited:
¦ Between 1994 and 2003, the buying power of manufacturing wages declined by 5.2 percent, while those in maquiladora plants declined by 3.5 percent.170
¦ NAFTA has exacerbated existing regional disparities since most foreign investment goes to the wealthier states. Mexico’s five poorest states received only 0.34 percent of direct foreign investment during NAFTA’s first nine years and much of that went to already developed tourist spots such as Acapulco.
¦ Rather than creating new jobs, foreign investment has simply bought out existing enterprises, such as banks and supermarket chains.
¦ NAFTA supporters claim that those who benefit from NAFTA-induced growth can provide compensation to those who fail to benefit or are harmed by it. Critics note that such compensation has seldom occurred.171
¦ Even though NAFTA was billed as a promoter of exports, between 1994 and 2002 Mexico accumulated a $43.7 billion trade deficit. Negative trade balances continued after 2002.172
¦ Between 1983 and 2009, Mexican gross domestic increased at an annual rate of 2.1 percent a year. Per capita GDP rose by only 0.4 per cent a year.173
¦ NAFTA supporters promised that exports would become the engine of growth, but this has not happened, since exporting firms, by and large, are not connected to national production. They remain as enclaves with few linkages to the rest of the economy. Companies that export bring in components, assemble them in Mexico, and then export them. As the import of components and worker productivity have increased, relatively few manufacturing jobs have been created even though the volume of exports has risen. Between 1993 and 2003, Mexico gained roughly
450,000 new manufacturing jobs.174
¦ Job creation in the economy as a whole has also lagged behind. Between 1994 and 2004, almost 13 million entered the workforce, but only 2.7 million jobs were created. Furthermore, the rate of job creation has been declining. New, permanent jobs covered by social security increased by 1.75 million during Salinas’s term (1988—1994), by 390,000 during Zedillo’s (1994—2000), and by only 62,000 during Fox’s (2000—2006).175
¦ Since wages declined from 37.5 percent of GDP in 1980 to 18.7 percent in 2000, there have not been enough buyers to sustain the domestic economy.176
¦ Productivity per worker between 1981 and 2005 declined by 0.7 percent a year, while between 1940 and 1981 it increased by 3.1 percent.177
¦ Among the world’s nations, in 1982 Mexico ranked forty-third in terms of per capita GDP. By 2007, it had fallen to sixty-first place.178
While NAFTA opponents want to tinker with (if not abolish) the treaty itself, NAFTA’s backers seek to tinker with Mexican society so that NAFTA can deliver its full potential. Between 1980 and 2001, even though it grew faster than the Brazilian and Argentine economies, the Mexican economy lagged behind that of regional star performer, Chile. During these years, Mexico’s economy increased by 67.2 percent, while that of Chile grew by 140.8 percent. In 1980, South Korea’s per capita income was less than a third of Mexico’s, while by 2001 its per capita income was more than double Mexico’s. NAFTA backers cite both of these nations as examples of Mexico’s potential, were change to be instituted.179
Trade policy is important for developing countries, but is not a substitute for reform and investment within the country. There is a general consensus that needed reforms include increasing competition within Mexico, combating corruption, and improving schools, roads, sanitation, and housing. Lowering Mexico’s high energy and telecommunications costs would also stimulate investment. There is much less agreement on how to raise the money to carry out these reforms and on how to confront vested interests supporting the status quo.180
Doing business in Mexico as compared to Singapore is the equivalent of having a 20 percent tax increase due to higher levels of corruption. Mexican officials estimate that as much as 9 percent of Mexico’s GDP is siphoned off due to corruption. In 2005, that amounted to $69 billion—more than the nation spent on defense and education combined. Transparency International, a non-profit organization measuring levels of corruption, found that in 2001, Mexico ranked fifty-first in level of corruption. By 2007—2008, Mexico had slid to seventy-second (out of 180 nations) in its level of corruption. In other words, when it comes to attracting foreign investment, there are seventy-one countries where less of the investment will be consumed by corruption. Ironically, the PAN came to power in 2000 promising to fight corruption.181
Another area to be improved is business competitiveness, which measures the ease of conducting business. Factors lowering competitiveness include the failure to enforce contracts, a high crime rate, a poor judicial system, and a mind-numbing bureaucracy. One indicator of competitiveness is the time required to establish a business. In 2001, establishing a new business in Mexico required 112 days, while in Canada it required only one. Between 2004 and 2008—2009, the World
Economic Forum’s Global Competitiveness Report lowered Mexico’s competitiveness rating from fifty-second to sixtieth (among 134 nations) due to corruption, inefficient government bureaucracy, and the lack of credit. The report found only seven nations in the world that had worse problems with organized crime than Mexico.182
Mexico needs a fiscal reform since the current rate of tax collection is so low that the government is unable to adequately carry out such basic tasks as providing good education and infrastructure. In Mexico, tax collection is only 12 percent of GDP, compared to 34 percent in the United States and 37 percent in Brazil.183
During the twenty-first century, China has exercised a strong influence on Mexico. The world’s most populous nation attracts investment that might otherwise have gone to Mexico by guaranteeing manufacturers the absence of militant unions and providing workers who will work for wages that are only a quarter of Mexican wages. A large, fast-growing market and well-developed infrastructure (roads, ports, etc.) also attract investment. China’s prodigious growth in recent decades has been based on gradually implementing and carefully sequencing its development strategy. China began to grow rapidly in the late 1970s, but trade liberalization did not start until the late 1980s.184
China impacts the Mexican economy since it competes with Mexico for FDI. Between 2001 and 2003, Mexico lost an estimated 400,000 jobs to China. China also competes with Mexico in the U. S. market. In 1990, China exported only $3.08 billion to United States, while Mexico exported $6.09 billion. In 2008, U. S. imports from China totaled $356 billion, while Mexican imports totaled only $218 billion. Finally, China’s highly efficient, low-wage industries are successfully competing for Mexico’s domestic market. Between 2000 and 2008, Mexico’s trade deficit with China rose from $2.6 billion to $32.7 billion, as China exported to Mexico a wide range of clothing, toys, and housewares, not to mention Mexican flags and porcelain figurines of the Virgin of Guadalupe.185
Nobel-prize winning economist Joseph Stiglitz commented that even though globalization has led to economic crisis and hurt the environment and the poor, the answer is not to abandon it, noting that is “neither feasible nor desirable.” Felipe Calderon indicated during his 2006 presidential campaign that he would follow Stiglitz’s advice and continue to globalize. However, those advocating a shift away from globalization to an emphasis on the domestic economy may yet prevail due to some of the inherent contradictions in neoliberalism. The current model has too many nations attempting to export, while ignoring the impossibility of the whole world running a trade surplus. These exporters currently are trying to sell in a global economy where too few workers can afford to buy what they make. Neoliberalism is based on cheap energy to move goods long distances for assembly and final sales. Finally, Mexico’s neoliberal model has even more closely linked Mexico to the market provided by the United States—a nation that even before the 2008—2009 economic crisis was experiencing unsustainable trade and budget deficits.186
Neoliberal economic policies led to exports increasing by 11.1 percent a year between 1993 and 2005. Nevertheless, between 1981 and 2005, the Mexican economy grew at a lower rate than that of Latin America and the Caribbean, that of the developed world, or that of the world as a whole.187
As a result of neoliberal economic policies, Mexico finds itself trapped between nations offering low-cost labor—a market in which it can no longer compete—and those offering high-tech manufacturing, which it has yet to develop. The economy has been unable to absorb the large number of workers entering the labor force—those born in the 1980s and 1990s—in high-productivity sectors. Rather, the majority of new entrants find employment in low-productivity, informal jobs. Had there been more investment, sufficient jobs might have been created in the relatively high-productivity export sector. Factors limiting investment since 1980 include: 1) an overvalued peso, 2) the low level of bank lending, 3) the lack of a government industrial policy to stimulate investment in specific sectors, and, 4) in keeping with neoliberal ideology, a low level of government investment.188
The foreign investment that occurred did not have the transformative effect that investment in East Asia had. In China and the nations often referred to as the Asian Tigers, governments deliberately nurtured the capacities of domestic firms to learn and innovate. They did so through a variety of policy and institutional interventions, including targeted-industry policies and investment in education, research and development, and science and technical training. In the absence of such explicit policies, technical, financial, and human-capital transfers are largely kept within foreign companies, and local firms do not move up the value chain. In such cases, as economists Kevin Gallagher and Lyuba Zarsky observed, “The benefits of FDI [foreign direct investment] are captured primarily within the foreign enclave rather than diffused through the economy.” After studying how neoliberal policies decimated Guadalajara’s once promising computer industry, they concluded, “The Guadalajara experience confirms the finding of other studies, supportive public policies are needed to nurture domestic industries and capture the benefits from FDI.”189
World History
