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Lessons from NAFTA

Lessons from NAFTA. William Maloney, Luis Serven World Bank Canadian Standing Senate Committee on Foreign Affairs www.worldbank.org/laceconomist. Mexico Before and After NAFTA. How to evaluate the impact of NAFTA?. Only ten years have elapsed. Other major events occurred simultaneously:

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Lessons from NAFTA

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  1. Lessons from NAFTA William Maloney, Luis Serven World Bank Canadian Standing Senate Committee on Foreign Affairs www.worldbank.org/laceconomist

  2. Mexico Before and After NAFTA

  3. How to evaluate the impact of NAFTA? • Only ten years have elapsed. • Other major events occurred simultaneously: • Tequila Crisis and 1995 recession • Unilateral reforms 1986-1993 – 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

  4. 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

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

  6. Trade

  7. 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 Nafta spurs trade

  8. Big increase in trade Trade/GDP

  9. Foreign Direct Investment

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

  11. Convergence of GDP/Capita

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

  13. Institutional gaps limit the reduction of the income per capita gap

  14. Divergence across Regions

  15. The development gap within Mexico: state GDP/capita

  16. 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”)

  17. Productivity and Innovation

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

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

  20. Labor Markets

  21. 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

  22. 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 Human Capital Adjusted Wages More Exports/Worker More Imports/Worker Non Trad.

  23. 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.

  24. Is there an inequality story?: yes in wages, but not in household income

  25. Trends in employment:agriculture (IMSS Data) and maquilas

  26. Agriculture

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

  28. Did NAFTA significantly change trends in agricultural trade? (econometric evidence) EXPORTS STRUCTURAL CHANGE Agricultural products December 1994 Tomato December 1994 Fresh vegetables November 1994 Melon and watermelon September 1994 Other fruits June 1995 IMPORTS Agriculture products None Corn None Other oleaginous None Sorghum None Soy None Wheat None Source: Yúnez-Naude (2003)

  29. Why didn’t Mexican agriculture suffer as much as some feared? • Demand growth in Mexico & U.S. during 1995-2000 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

  30. End

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