Mexico fared poorly over past 23 years under NAFTA, says study
Published in SUNS #8435 dated 3 April 2017
Geneva, 31 Mar (Kanaga Raja) - Mexico performed poorly over the past
23 years that it has been a party to the North American Free Trade
Agreement (NAFTA), with its poverty rate going up, while its per capita
GDP growth was significantly lower than that of the rest of Latin
America during this period.
This is one of the main conclusions highlighted by the Washington
DC-based Center for Economic and Policy Research (CEPR) in an updated
report titled "Did NAFTA Help Mexico?: An Update After 23 Years."
The report, released on 29 March, updates an earlier version released
in February 2014 and is co-authored by Mark Weisbrot, Co-Director
at CEPR; Lara Merling, Research Assistant at CEPR; Vitor Mello, International
Program Intern at CEPR; Stephan Lefebvre, a former Research Assistant
at CEPR; and Joseph Sammut, a former International Program Intern
"If NAFTA had been successful in restoring Mexico's pre-1980
growth rate - when developmentalist economic policies were the norm
- Mexico today would be a high income country, with income per person
significantly higher than that of Portugal or Greece," said the
It is unlikely that immigration reform would have become a major political
issue in the United States, since relatively few Mexicans would seek
to cross the border, it added.
"Many people think that since American workers lost out from
NAFTA, Mexicans must have benefited, but the data show that this is
not true," said Mark Weisbrot, Co-Director at CEPR, in a press
"The Mexican economy has performed poorly since NAFTA went into
effect, as compared with the rest of Latin America or with its own
past; and more than 20 million additional people are below the poverty
line," he added.
"As the US and Mexico consider renegotiating NAFTA, there should
be a serious discussion of what went wrong for Mexico, as well as
for the United States," Weisbrot stressed.
The CEPR report said that as was well known at the time of NAFTA's
passage, the main purpose of NAFTA was to lock in a set of economic
policies, some of which were already well underway in the decade prior,
including the liberalization of manufacturing, of foreign investment
and of ownership, and other changes.
The idea was that the continuation and expansion of these policies
would allow Mexico to achieve efficiencies and economic progress that
was not possible under the developmentalist, protectionist economic
model that had prevailed in the decades before 1980.
"While some of the policy changes were undoubtedly necessary
and/or positive, the end result has been decades of economic failure
by almost any economic or social indicator," it said.
The report compared the performance of the Mexican economy with that
of the rest of the region since 1994 on the available economic and
social indicators, and with its own past economic performance.
On the growth of income per capita in Mexico, the most basic measure
of economic progress, the report found that per capita GDP has grown
by just 28.7 percent, cumulatively, from 1994 through 2016.
This is an average annual growth rate of just 1.2 percent, which is
quite low compared with other countries in the region during this
period. Mexico's growth ranks 15th of 20 countries in Latin America
(South America and Central America).
"From these numbers, and in the absence of any natural disaster
or war in Mexico during the past decades that could account for such
poor economic performance, it would be difficult to argue that Mexico
would have done much worse in the absence of NAFTA," said the
In comparing Mexico's growth rate since NAFTA to that of its past,
again in the context of the rest of the region, the report found that
from 1960 to 1980, Mexico almost doubled its income per person, a
growth rate that was higher than that of Latin America as a whole.
If this growth had continued, Mexico would be a high-income country
today. However, both Mexico and the region suffered a sharp slowdown
in the growth of income per capita over the following 20 years, 1980-2000,
a period that coincided with first a badly handled debt crisis in
the early 1980s and then a number of neoliberal policy changes.
Regional growth of GDP per capita dropped from 87 percent for the
prior two decades, to just 9 percent for 1980-2000, or just 0.4 percent
annually. Mexico's per capita growth fell from 97 percent to 13 percent,
or 0.6 percent annually.
In the twenty-first century, there was something of a rebound in the
region, with per capita GDP growth averaging 1.5 percent annually
for 2000-16, despite two recessions and a slowdown since 2011.
Looking just at the years since NAFTA, Mexico did not do as well as
the region as a whole, averaging 1 percent in per capita GDP growth
for these years.
In examining where Mexico would be today if its income per person
had continued to grow at the rate that it did over the two decades
prior to 1980, the report said that Mexico in 2016 would have an income
per person of more than $39,000 in 2011 international purchasing power
parity dollars, which would make its living standards comparable to,
or even above, a number of Western European countries.
It also said that as would be expected during such a period of very
little economic growth, the poverty rate was not reduced in Mexico;
in fact it increased.
In 2014, Mexico's national poverty rate was 55.1 percent, compared
to the 52.4 percent rate in 1994. As a result, there were about 20.5
million more Mexicans living below the poverty line as of 2014 than
Measures of more extreme poverty - "unable to afford health care,
education and food," and "unable to afford food" -
improved very little since 1994, falling by just 0.6 and 0.9 percentage
For the region as a whole, there was no progress in reducing the poverty
rate for more than two decades, from 1980 to 2002. The poverty rate
for the region then fell substantially, from 43.9 percent in 2002
to 28.2 percent in 2014.
By the measure of the UN Economic Commission for Latin America and
the Caribbean (ECLAC), Mexico's poverty rate fell from 45.1 percent
in 1994 to 41.2 percent in 2014 (3.9 percentage points).
However, excluding Mexico, poverty in the region fell more than five
times as much, from 46 percent to 25 percent (21 percentage points).
As for real (inflation-adjusted) wages in Mexico from 1994 to 2014,
the report found that there was a fall in real wages of 21.2 percent
from 1994-96, associated with the peso crisis and recession.
Wages did not recover to their pre-crisis (1994) level until 2006,
11 years later. By 2014, they were only 4.1 percent above the 1994
level, and barely above their level of 1980. The minimum wage, adjusted
for inflation, fared even worse. From 1994 to 2015, it fell by 19.3
Although the unemployment rate jumped during the peso crisis and then
fell steadily until 2000, it then increased again until 2014. Unemployment
has averaged 4.0 percent during NAFTA (1994-2016), compared to an
average of 3.1 percent for 1990-94 and a low of 2.2 percent in 2000.
The report pointed out that NAFTA removed tariffs (but not subsidies)
on agricultural goods, with a transition period in which there was
a steadily increasing import quota for certain commodities.
The transition period was longest for corn, the most important crop
for Mexican producers, only ending in 2008.
"Not surprisingly, US production, which is not only subsidized
but had higher average productivity levels than that of Mexico, displaced
millions of Mexican farmers," it said.
Examining agricultural employment in Mexico in 1991 and 2007, it found
that there was a 19 percent drop in agricultural employment, or about
2 million jobs.
The loss was in family labour employed in the family farm sector.
Seasonal (less than six months employment) gained about 3 million
jobs, but it was not nearly enough to compensate for the 4.9 million
jobs lost in the family farm sector.
The CEPR report said: "Proponents of NAFTA of course knew that
family farms in Mexico would not be able to compete with subsidized
US production but argued that displaced workers would shift to higher
productivity agriculture (mainly vegetables and fruits for export),
as well as industrial jobs."
Although vegetable and fruit production did expand considerably (from
17.3 million tons in 1994 to 28.2 million in 2012), and presumably
accounted for many of the 3 million seasonal jobs created, it was
clearly not enough in terms of employment.
According to the report, from 1994 to 2000, the estimated annual number
of immigrants from Mexico to the United States soared by 79 percent,
with the annual flow of migrants rising from 430,000 in 1994 to 770,000
The number of Mexican-born residents living in the United States more
than doubled from 4.5 million in 1990 to 9.4 million in 2000, and
peaked at 12.6 million in 2009.
The report said that if the Mexican economy had continued growing
at its 1960-80 rate, Mexico would be a high- income country today;
and that it would also have become a high-income country even if its
pre-1980 growth rate had been restored after NAFTA.
There would still be a significant income and wage differential between
Mexico and the United States, but the incentive to emigrate to the
United States would have been tiny as compared with what actually
"It is questionable whether immigration would have become a political
issue in the United States, as it did especially in the 2016 election
and now under the Trump administration, if not for the poor performance
of the Mexican economy in the post-NAFTA years."
NAFTA JUST ONE VARIABLE IN MEXICO'S POOR PERFORMANCE
The report pointed out that NAFTA was just one variable among others
that could account for Mexico's poor economic performance since 1994.
However, it appears to be related to other economic policy choices
that have negatively affected the Mexican economy during this period.
It said that today, China accounts for 21 percent of US imports while
Mexico accounts for 13.5 percent.
This is a very tough competition for Mexico for a number of reasons.
First, Mexico has been throughout the vast majority of the post-NAFTA
period a much higher-wage country than China, although the gap has
narrowed and there is no definitive data for China in recent years.
In 1996, labour compensation costs in Mexico, in US dollars, were
$3.05 per hour, and rose to $5.59 by 2002. For China, in 2002, hourly
compensation costs in US dollars was $0.73.
Although these data are not exactly comparable because of differences
in their construction, they indicate a huge gap in dollar terms -
which is what matters for export or import-competing industries.
By 2009, the gap was still very large: $1.74 for China, versus $6.36
for Mexico. So it was difficult to compete on the basis of wages.
Second, China maintained a commitment to a competitive exchange rate
throughout the 2000s, in effect fixing this exchange rate against
the dollar or (since 2005) a basket of currencies.
The Mexican Central Bank by contrast has had, as the International
Monetary Fund notes, "a firm commitment to exchange rate flexibility."
In other words, the Mexican Central Bank would typically raise or
lower interest rates as necessary to reach its target inflation rate
(3 percent), and let the exchange rate go where it may.
This means that Mexico's exchange rate was for most of the past two
decades unlikely to be competitive with China's, which further worsens
Mexico's cost disadvantage.
In the past few years, said the report, the Mexican peso has significantly
depreciated against the US dollar, while China's currency has seen
an overall slight appreciation since 2007.
The combination of a rapidly depreciating peso (with relatively little
wage growth) in Mexico and rising labour costs in China has narrowed
the gap in labour costs between the two countries.
"However, it is not yet clear how much difference these changes
will make going forward in the competition between Mexico and China
in US markets."
CEPR said the Mexican peso is difficult to predict, since its value
depends on monetary policy decisions by both the Mexican Central Bank
that are unrelated to exchange rate policy; and by decisions of the
US Federal Reserve, as well as by speculation on international markets.
It noted that China has other advantages that make it a formidable
competitor for Mexico in the US market: the Chinese government controls
most of the banking system in China, and can therefore ensure that
its most important exporting firms have sufficient access to credit.
In Mexico, by contrast, the banking system is not only private, but
70 percent of it is foreign owned.
The Chinese government also has an active industrial policy that enables
it to help its exporting firms in various ways. China also spends
over 2 percent of its 10-times-larger GDP on research and development,
as compared to Mexico's 0.54 percent.
For all of these reasons, said the report, it is an uphill battle
for Mexico to compete with China in the US market.
Although Mexico has done better than other countries in the US market
in terms of this competition since China joined the World Trade Organization
and achieved "permanent normal trade relations" with the
US in 2001, its share of US imports is still only about half that
NAFTA also increasingly tied Mexico to the US economy. Much of this
synchronization is because over two- thirds of Mexico's exports now
go to the United States.
Unfortunately, 1994 was a particularly bad time for Mexico to hitch
its wagon to the United States. First came the peso crisis, which
was brought on by the US Federal Reserve's increases in US monetary
policy rates beginning in 1994. Mexico lost 9.5 percent of GDP in
two quarters during the resulting crisis and recession, which started
in December 1994 and continued into the first half of 1995.
The fall in the peso helped boost exports for a while, but the peso
appreciated as capital flowed back into the country and the advantage
of a competitive exchange rate was soon lost.
Perhaps more importantly over the longer run, the US economy was just
beginning a period in which its growth would be driven by enormous
asset bubbles. First there was the stock market bubble, which burst
in 2000-02, causing a recession in both the Unites States and Mexico.
The stock market bubble was then immediately replaced by what would
then become the biggest asset bubble in world history, the United
States' real estate bubble. This bubble burst in 2006-07, causing
the Great Recession.
Mexico's loss of output from the US Great Recession (and world recession)
was the worst in Latin America, with a decline in real GDP of 6.7
percent from the second quarter of 2008, to the second quarter of
2009, said the report.
(The report can be found at: http://cepr.net/publications/reports/did-nafta-help-mexico-an-update-after-23-years)