Ten years on, it is clear that membership of Nafta brought a number of benefits to Mexico, but it is equally clear that free trade alone did not suffice to help Mexico overcome old problems and start catching up with the US. These are the main conclusions of a report prepared by the World Bank to help acquaint countries of the region with possible effects of the Free Trade Area of the Americas (FTAA), currently being negotiated.
The 346-page report,
Lessons from Nafta for Latin America and the Caribbean Countries: A Summary of Research
Findings, was co-authored by World Bank economists Daniel Lederman, William F Maloney and Luis Servén. At its launch last week, David de Ferranti, the bank's vice-president for Latin America and the Caribbean, said, `Nafta has had positive effects in Mexico but they could have been better. Free trade definitely brings new economic opportunities, but the lessons from Nafta for other countries negotiating with the US are that free trade alone is not enough without significant policy and institutional reforms.'
The authors acknowledge the difficulty of separating the impact of Nafta from the Tequila Crisis experienced by Mexico in 1994-95 and from the dramatic liberalisations of trade barriers that began in the 1980s, but believe that through the use of various statistical methods they were able to identify the specific effects of the agreement.
The report estimates that without Nafta, global exports would have been roughly 25% lower; foreign direct investment (FDI), which was exceptionally high in 1994-95, around 40% less, and Mexico's per-capita income, US$5,920 in 2002, would have been 4-5% lower.
However, hopes that Mexico would make bigger strides in catching up to the US were diminished by underinvestment in education, innovation and infrastructure, as well as low institutional quality — a term covering accountability, regulatory effectiveness, control of corruption and related issues.
Unequal effects
Moreover, the report says that the benefits of Nafta, and of trade more generally, have been unequal across regions and sectors. `Nafta definitely further plugged Mexico into the most dynamic economy in the world, but the country's development across the 1990s, including the Nafta period, was unequal,' says Guillermo Perry, the bank's chief economist for Latin America and the Caribbean. `The most developed and competitive regions and sectors have clearly benefited from the trade liberalisation, while those lagging behind have not. Extending the benefits of greater integration to all of society remains the challenge.' Some of the unequal effects included in the report are:
- The rise in the wages of those with higher levels of education, relative to those with less, that began with unilateral liberalisation of the 1980s, largely remained after Nafta.
- Northern and central states grew faster across the 1990s, modestly reducing income gaps with Mexico city, while poorer southern states grew slower due to low levels of education, infrastructure and quality of local institutions.
- Large Mexican firms increased their access to northern capital markets as domestic credit dried up after the Tequila Crisis, while credit remained constrained for small and medium enterprises.
- In the countryside, the productivity of the irrigated lands increased, but non-export, non-irrigated agriculture didn't benefit.
Employment
The report concludes that there is little evidence of adverse impacts of Nafta on workers. The labour market recovered relatively quickly after the tragic adjustments of the 1994-95 Tequila Crisis, and unemployment and real wages returned to 1994 levels. Wages and employment tend to be higher in states with higher FDI and trade, and emigration from those states is lower. Wages are also higher in sectors with more exposure to imports or exports.
`Overall, there is little evidence that increased trade liberalisation has led to greater risk faced by workers, or an increase in the size of the informal sector,' says co-author William F Maloney. `More generally, free trade has increased the demand for a more skilled Mexican workforce, a challenge the educational system must be prepared to meet.'
Productivity
Due to Nafta, productivity growth rose sharply, as the amount of time for adoption of foreign technologies was cut in half relative to the pre-Nafta period. In addition, the national innovation effort also rose modestly after Nafta, possibly due to the strengthening of intellectual property rights.
Agriculture
The biggest surprise to researchers was the farm sector's resilience in the face of changes that included Nafta, the elimination of some price supports in the 1980s, the severe impacts of the 1995 crisis, and long-term declines in the agricultural relative prices. Although not necessarily Nafta-driven, domestic production and trade in agricultural goods rose across the late 1990s, the productivity of the irrigated lands increased, and subsidies and income supports for traditional agriculture became more efficient.
The report says that Mexican farmers, including those at the subsistence level, were not adversely impacted by Nafta as had been widely feared, although better policies for the non-export, non-irrigated agriculture, particularly in the southern states, are needed.
`Nafta has been quite positive for export agriculture, but it has probably had little impact on small farmers in the southern states who have suffered a long history of social, political and economic neglect,' says co-author Daniel Lederman. `There should be improvements in rural education, infrastructure, institutions and in rural development policies in general.'
Innovation
Overall, the study concludes that Mexico's deficiencies in education and research and development (R&D) limit the power of Nafta to enable the country to reach the level of technological progress of the US or even of countries such as Korea.
The lesson applies to the rest of the region as well. `The international evidence suggests that the region's R&D investment effort should be more than doubled,' says co-author Luis Servén.
Finally, the report argues that Nafta would be more effective with certain modifications — allowed by the agreement itself — in the areas of rules of origin to allow certain Mexican industries, like textiles and apparel, to enter the US more easily, as well as certain changes to unfair trade practices related to antidumping and countervailing duties.