Why Is Mexico in Such a Mess? Neoliberal Economics and NAFTA

I wake up around 7 every morning, in time, on clear days, to watch blue strengthen and wash away the gray of dawn. Fhe sun land in sparkles on trees outside our windows.  As I've said, from our windows we see a lush place, brilliant colors against a rich, deep-green carpet. 

To the side and back of our house, beyond  our wall, the mostly small houses of wood or concrete, line the streets around a raggedy park.  Most of the people here are not poor in the sense of a bureaucrat's definition of poor, most I would say are no more unhappy than the same number of people in a working class neighborhood in the US would be, though they clearly have less: less healthcare, less education (though that is open to discussion), less stuff, including stuff like dishwashers and refrigerators and electric stoves.  Like people in the US, they are probably more anxious than they used to be, but they are more worried than Americans (who are indeed also more worried than they used to be) because of La Crisis. As Mexicans, they live in the country in the hemisphere most affected by the recession in the US, one that appears to be slipping faster in health care, education and poverty. In addition to decline, inflation continues, so prices are going up at the same time people have less money. [Here is a link to a brief summary of Mexico's overall economic status. Here is a link to poverty and standard of living projections.] You may remember reading on this blog about our neighbor's son's health problems.  I can add now that Juan Pablo had an asthmatic crisis. He was admitted to the seguro popular hospital in Coatepec for treatment overnight. They were not charged for that, but his family could not pay for the prescribed inhalation therapy at discharge.  We paid for it.  It cost about $50.00.  You can imagine how many people there are in the informal economy with kids with asthma and other conditions who simply cannot afford treatment now. And everywhere, there are people trying to sell bits of things on busy highways and street corners.  Kids who used to juggle for pesos are now blowing fire from mouthfuls of gasoline.  We saw an indigenous woman, her baby tied on her back, trying to get some cash by trying hard (and not succeeding) to juggle two balls.

La Crisis  has grim consequences in Mexico.  For a detailed look at the numbers, you can look at this analysis.  But La Crisis as it is called here is does not mark a huge shift from prosperity to despair but rather big dip at the end of a long slide which began, for ordinary people, even before NAFTA when the Mexican government decided to go for an orthodox neoliberal approach to economic development a la the Washington Consensus. * This meant the elimination of government subsidies, taxes, tariffs, planning, etc. which were meant to help local economic development in favor of throwing development into the winds of free markets which Mexico did with much more fervor than did the US where farm subsidies still reign. It would have been so much better all around if the US and Canada had approached NAFTA as the wealthier European countries approached the creation of the European Union.  They supported infrastructure and other development which gave Portugal and Spain and other countries a leg up so they could actually benefit from membership in the European Union.  Mexico was comparable to Portugal at one point in the not too distant past.

An outstanding analysis of Mexico's situation  is presented in Rethinking Trade Policy for Development: Lessons from Mexico under NAFTA written by Eduardo Zepeda, Timothy Wise and Kevin Gallagher under the auspices of The Global Development and Environment Institute at Tufts University.  I have butchered it, probably, in my efforts to try to present the highlights below in note form.  I hope the authors, should they ever come across this post, forgive me both for the butchering and for the sometimes direct quotes that creep in without being identified by quotation marks.

Here is why Mexico went the Washington Consensus route:

• Lack of interest in Mexico on the part of Europe.
• Special interests in both countries were dominant and stood to gain.
• Strategic issues.
• Ideological commitment to Washington Consensus by US-trained Mexican politicos and economists.

NAFTA, the North American Free Trade Agreement, entrenched and hardened this approach.

Of course not all of Mexico's problems can be attributed to NAFTA, but a review of NAFTA's effects reveals that it has underlain many of the economic, social and environmental problems of recent years.  My interests are primarily in the effects on agriculture, employment/social issues/immigration and the environment, but in this post, I look at the bigger picture.  

Here are what the purported benefits were to be:

• Access to "huge" US markets.
• Dramatic expansion of exports and increasing manufacturing.

This was to lead to growing employment in Mexico and a consequent improvement in the economy and a decrease in migration to the US.

Here is what actually happened:

Overall economic growth did not happen. Gains in one area were wiped out by losses in others.

• Free-market policies were locked into place which caused more problems than they solved.
• These policies could not be reversed because of NAFTA rules.
• Mexico eliminated agricultural subsidies but the US did not.

When people say that NAFTA has been a success, this is what they are looking at:

• Growth of exports between 1993 and 2007 of 311%.
• Growth of non-oil exports of 283%
• Growth of exports to US of around 280%
• Manufacturing exports grew from 43% of total exports in 1993 to 77% in 2007.
• Agricultural exports doubled in the same time frame.
• Foreign Direct Investment more than tripled from 1992-2006, with 58% coming from the US.
• Efforts to establish macroeconomic stability through tightening of fiscal, monetary policies a success. 
• Productivity/efficiency gains of about 80%.

HOWEVER, the inherent assumption that the achievements listed above would automatically lead to dynamic economic growth and that this would translate into improved standards of living proved to be FALSE.

Assumptions of standard economic theory:

• Opening of the economy leads to increased trade and foreign investment.
• Demand for exports will fuel growth.
• Reduced protectionism will permit Mexico to find true comparative advantage.
• Foreign investment will stimulate economic growth and increase productivity.
• Domestic firms will benefit from the above.
• Employment and wages will increase.
• Country will enter a period of dynamic growth.

BUT in spite of faithful adherence to the principles of neoliberal economic policy, this is what happened between 1994 and 2007 with NAFTA in effect:

• Sluggish economic growth
• Low level of investment
• Vulnerability to macroeconomic shocks remained high because of 
• • fiscal dependence on oil revenues
  • Reliance on overvalued currency
• Job creation was limited even in growth sectors.
• Competition from imports eliminated many jobs, especially in agriculture (remember, the US continued subsidies to farmers)
• Wages remained low and fell further behind the US.
• Although poverty decreased, inequality remained high.
• Ecological costs of economic growth were high.

Let's look at this further.

Sluggish economic growth:

• Mexico's economy grew at a annually at a per capita rate of only 1.6% between 1992-2007, only half the growth rate of the years between 1960-1979.
• • Low rate by developing country standards.
  • One of the lowest growth rates in all of Latin America.
  • Countries that refused to follow "orthodox" trade and development policies such as those demanded by NAFTA grew much faster.  These countries include Brazil, China and India.
  • Mexico emphasized deficit reduction whereas Brazil, India and China emphasized pro-growth policies with high levels of public investment to maximize growth-stimulus of expanding trade.  They did the OPPOSITE of Mexico whom the US praised mightily for its orthodox neoliberal fiscal policies.
  • Rapid growth of imports diminished impact of exports. 
  • Mexico's exports often used imported components which minimized the value of those exports.
  • NAFTA preferences given to Mexico have been eroded by US trade agreements with other countries.
  • CHINA has moved ahead of Mexico as exporter to the US.
  • It is estimated that over half of Mexican exports are threatened by Chinese exports. 
  • Manufacturing trade between Mexico and US declining in importance since 2001.
  • Current economic crisis has erased any significant advantage from NAFTA.  The recession has particularly hit the automobile industry in Mexico.
• Low levels of investment in Mexico -- Neoliberal doctrine for foreign direct investment (FDI) assumes an automatic virtuous cycle: FDI brings capital and technology which raises productivity and increases efficiency resulting in spillover effects in domestic economy and thus more foreign firms buying their stuff from domestic companies thus stimulating further growth.
• • NAFTA has not translated into increasing overall investment rates in Mexico.  
  • Money has been going to CHINA instead.
  • Poor infrastructure, lack of credit caused many domestic firms to go out of business due to pressure from imports.  (THIS is what a European Union approach and a less rigid monetary policy might have at least minimized)
  • Foreign investors bought domestic firms rather than establishing new facilities (Wal-Mart buying Superama, for instance)
  • Foreign Direct Investment in manufacturing has been concentrated in operations like Maquiladoras which add little domestic value.  That is, these companies use imported rather than domestic parts so little is bought in Mexico.
  • Mexican firms have had difficulty linking with foreign companies to stimulate local economies.
  • Efforts to reduce the deficit (tight monetary policy) led to collapse of public investment.
  • Mexico strictly adhered to NAFTA (many things China does are illegal under NAFTA) and this model failed to lead into increased investment.
  • NAFTA prohibited practices effective in converting foreign investment into domestic activity.

Macroeconomic vulnerability

• Tight fiscal policies have slowed domestic economic growth.
• Tight monetar policies have led to overvalued currency.  This means, I think, that Mexican products are expensive vis-a-vis other countries' products.
• Financial services sector is weak.
• Not much bank lending to private firms compared to international practices, at least before the crisis.
• Problems because of oil.
• • Oil masks true trade deficit.
  • Oil revenues supplement what in other countries would be provided by taxes.
  • Oil revenues go to support the government instead of taking care of oil production issues.
• Mexico is way too tied to US.  More vulnerable to US downturns than other Latin American countries because of US as its market and because of dependence on remittances from Mexicans in US, down in this crisis.

Weak job growth

• Only small games in manufacturing ad service sectors, large losses in agriculture.
• Mexico's no-maquiladora section had less employment in 2008 than in 1994 except in the informal economy. Of course the number of jobs in the informal economy which offers nothing in the way of protections and benefits, etc. always grows in downturns.
• Jobs in both the maquiladora and non-maqiladora sectors have been declining since 2000-2001.
• Increased productivity has reduced the number of jobs.  There are few new plants (sounds like the US).
• Jobs have increased in: business, financial services; tourism (until this year); malls and supermarkets, education. Has obviously been downturn this year.
• Jobs have been lost in agriculture to such an extent that they have taken away gains in other areas.  Employment has fallen s significantly from 190 through the second quarter of 2008.

Consequences of Mexico's unilateral liberalization --ahead of NAFTA schedules. 

• Imports of US-subsidized grains and oilseeds have surpassed Mexican non-subsidized produce exports to the US.  Mexico's products now are not subsidized.
• US INCREASED farm subsidies as Mexico reduced them, further burdening Mexican farming.
• Mexico's trade balance in agricultural goods with the US has remained negative SINCE NAFTA:
• Little (if any) employment increase in export crops.  These crops are grown mostly in industrialized fashion which means FEWER jobs than traditional agriculture produces.
• Seasonal only agricultural practices have increased drawing internal migrants. These practices also diminish the jobs formerly available in traditional forms of agriculture.
• Great losses among small-scale farmers producing staples...especially and very significantly corn which had been classified as a "sensitive product," meaning not subject to the rapid removal of subsidies.  AND Mexico removed its subsidies ahead of schedule.  CORN is a huge issue and I will talk about it soon (as I am fond of saying).
• INFORMAL employment in 2004 57% of the economically active population vs. 52% in 1992.  NOT the direction it was supposed to go in. It has obviously worsened this year. 

Continuing low wages

• In the face of a big growth in productivity, wages have remained stagnant or only risen slightly.
• NAFTA was supposed to lift wages for Mexico, but instead, they have fallen further behind US levels.  In 1993, average wages for manufacturing workers in the US was 5.6 times the Mexican wage.  In 2007, it was 5.8 times the Mexican wages.  Agricultural wages are LOWER than they were pre-NAFTA.
• Minimum wages in Mexico has FALLEN 25% since NAFTA.
• Benefits have declined since NAFTA.  In the formal sector, half of post-NAFTA formal economy jobs have not offered basic benefits even though required by law.
• Low-wage policies were set to attract foreign investment, but CHINA's low wage policy means even lower wages than in Mexico.  Low wages have not brought Mexico more jobs.

Persistent poverty and inequality

• Poverty was reduced from 1992 to 2006, from 53% to 43%.  Extreme poverty fell from 21% to 14%.  The introduction of the program Oportunidades  helped considerably in this.
• BUT in 2008, poverty increased to over 50%. 2009 promises to be even worse, with estimates of a rate of 53+%.
• Rural poverty in 2006 was at 55% with 25% in extreme poverty.  Extreme poverty means not being able to get enough to eat.
• Poverty rates are high for what has been a middle-income contry.
• Poverty is worse in southern than in northern Mexico.  NAFTA contributed to this geographical inequality.

Migration during NAFTA

• Migration has increased dramatically during NAFTA for reasons discernible in the above data.
• Militarization of the border has increased the number of migrants who stay in the US from fear of the border crossing.
• The country has grown dependent on remittances from the US which have declined significantly during the present crisis.

Environmental costs of NAFTA

• NAFTA has weakened Mexico's commitment to environmental protection.
• Restructuring of agriculture to an agro-industrial model has resulted in increase water use, especially in export sectors in water-stressed regions.  You can see this when you drive through the desert and near-desert areas of northern Mexico: huge fields abloom through irrigation which draws from non-renewable water tables.
• Agroindustry has led to soil being loaded with nitrogen and other agrochemicals.
• Industrial raising of animals has led to significant water and soil pollution.
• Economic pressures on poor farmers, particularly maize farmers, has contributed to loss of maize biodiversity.
• Deforestation from unsustainable exploitation of marginal lands has occurred as poor farmers have pursued survival strategies.

The authors of Rethinking Trade Policy for Development: Lessons from Mexico under NAFTA conclude:

• THe Mexican economic model, which hinged significantly on strict adherence to free-market policies backed by a trade agreement wit the US and Canada (NAFTA) has largely been a disappointment for Mexico.
• It is in both the short- and log-run interests of the US to develop trading relations with less-developed partners that stimulate those partners' economic development.
• Mexico's key mistakes:
• • 
    Overemphasis on tight fiscal policy instead of exchange rate competitiveness and economic growth.
  • Weak tax collection.
  • Falling public investment.
  • Abandonment of public investment and research in oil and other industries.
  • Failure to develop government-led programs to correct for critical failures in credit markets. 
• What to avoid in trade agreements with the US:
• • Avoid NAFTA's prohibitions on policies for industrial competitiveness which favor the US such as selective promotion of industries, temporary preferences to national entrepreneurs in particular areas, etc.
  • Avoid conditions which prevent the government from being a strategic partner in economic development.  The Mexican government needs to be a strategic partner to help steer and to stimulate dynamic domestic activities. NAFTA's limits on such policies meant that growth in exports and foreign investments could not be channeled into areas that could yield long-term benefits to the Mexican economy.
  • AVOID liberalization of sensitive food-producing sectors.  IF this is done at all, it should be well-coordinated with employment-creating reforms and with continued investments in rural development and agriculture productivity.  
  • AVOID being victimized by highly subsidized US agriculture.  EMPLOY tariffs, quotas, voluntary export restraints and whatever other means are necessary so that Mexican agriculture is not crushed in this highly unequal situation.
• What to insist on in future agreements:
• • 
    Benchmark standards for labor and the environment.
  • Provisions which include funding for development to bring Mexico to a position where it could realistically compete with the US and Canada.
• MEXICO should NOT look to trade agreements to provide a coherent national economic development strategy.  THEY WON'T.  Countries that have succeeded in recent years have not only resisted the limitations imposed by NAFTA-style trade agreements, they have generated and followed active and coherent economic development policies to ensure that there are domestic benefits from expanding trade.    

*Just in case I have some readers stuck in the past, I am not about to launch into a socialism vs. capitalism diatribe.  Things are way too complicated for any such simplistic approach.