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Economic Integration, Environment, and Development: Mexico Before and After NAFTA

Economic Integration, Environment, and Development: Mexico Before and After NAFTA. Kevin P. Gallagher Global Development and Environment Institute Tufts University www.ase.tufts.edu/gdae. Overview of Presentation.

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Economic Integration, Environment, and Development: Mexico Before and After NAFTA

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  1. Economic Integration, Environment, and Development:Mexico Before and After NAFTA Kevin P. Gallagher Global Development and Environment Institute Tufts University www.ase.tufts.edu/gdae

  2. 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

  3. Environmental Kuznets Curve

  4. 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

  5. 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

  6. Is Mexico a Pollution Haven?

  7. Yit=β1+β2Pit+… • 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

  8. 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

  9. 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

  10. Potential Economic Costs of Waiting for Kuznets in Mexico

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. P=S+C+T • P = level of pollution • S=Scale Sit=Pib(Ymt/Ymb -1) • C=Composition Cit=Pib((Yit/Yib) – (Ymt/Ymb)) • T=Technology?

  17. Orders of magnitude Cleaner than in US

  18. Criteria Air Pollution in Mexican Manufacturing

  19. Is Mexico a Pollution Haven?

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