NAFTA Rejoinder: The Effects are Positive (Part I)

July 28, 2014 11:15 PM

A new post by the Center for Economic Policy Research (CEPR) takes issue with the Peterson Institute Policy Brief "NAFTA at 20." Evidently PIIE and CEPR scholars assess Mexico's experience of NAFTA quite differently: PIIE sees success; CEPR sees failure.

Much of CEPR's critique restates what the authors argued in an earlier report, "Did NAFTA help Mexico? An Assessment After 20 Years." [pdf] That report acknowledges that NAFTA was "an integral part of a 'reform' process that began with major trade liberalization reforms in the 1980s" and that "some of the policy changes were undoubtedly necessary and/or positive." But these observations are followed by the conclusion that, since NAFTA was followed by "decades of economic failure," NAFTA must be blamed (the authors passingly admit that NAFTA could be just one factor among "other variables"). Ultimately, it seems that the report preferred the pre-1980 Mexican economic developmental model of protection and state control to the NAFTA model of free trade and private markets. In our view the Mexican financial crises of 1982 and 1994 convincingly demonstrate that the pre-1980 model had run out of gas, but we will not further rehash that debate.

Everyone agrees that Mexican economic performance over the past 20 years has been subpar, since real per capita GDP grew only 1.3 percent annually. The question is why: Too big a dose of liberal economic policies and integration with the US economy (the CEPR explanation), or negative factors that were partly offset by a strong push from NAFTA (the PIIE explanation)?

At the event on July 15, 2014, where the "NAFTA at 20" Policy Brief was launched, the McKinsey Global Institute presented new research that illuminated both the successes of NAFTA and one of the negative factors. McKinsey's research shows that the "NAFTA sector" of the Mexican economy (large firms with 500 employees or more) has performed strongly over the past 20 years: Productivity per worker grew 5.8 percent annually, and output of the ten largest Mexican auto plants grew 5.5 percent annually. Unfortunately, the large firms in the NAFTA sector still employ only 20 percent of the labor force, about the same as 20 years ago. The negative counterpoint is that productivity has actually declined among smaller firms (those with ten or fewer employees), falling by 6.5 percent per year. Oppressive regulation largely explains the poor performance of these firms, which employ 42 percent of the Mexican labor force. An extensive literature has further analyzed such factors as the role of regulatory distortions, the size of the informal sector, and the failure of credit markets, which help account for Mexico's lagging economic performance and productivity growth (for an overview, see Gordon Hanson [2010], "Why Isn't Mexico Rich?[pdf])

Three other negative factors in the Mexican growth story, all mentioned in "NAFTA at 20," are the chaos and cost of drug wars (largely fueled by American dollars), widespread corruption, and continued monopolistic control in critical sectors (illustrated by telecommunication and petroleum).

CEPR dismisses the PIIE calculation that the "extra" two-way US-Mexico trade—some $345 billion, largely attributable to NAFTA—has generated a $170 billion GDP payoff for Mexico. Elsewhere we have explained this calculation at length (see Bradford, Grieco, and Hufbauer [2005]; "The Payoff to America from Global Integration," in The United States and the World Economy; and Hufbauer, Schott, and Wong (2010), appendix A in Figuring Out the Doha Round). Recent econometric work by Peter Petri, Michael Plummer, and Fan Zhai suggests an even higher payoff from trade and investment liberalization. Accordingly, we stand by our calculation, and we repeat the point already made: that without NAFTA and associated reforms, negative forces in the Mexican economy could have produced two decades of economic stagnation.

The new CEPR post dwells on our comparison between "neoliberal" Mexico and the even worse average real per capita growth performance of the "Andean-3" (Bolivia, Ecuador, and Venezuela). CEPR objects to averaging the per capita growth performance of Bolivia and Ecuador with the performance of Venezuela because Bolivia and Ecuador performed slightly better than Mexico. However, if a single failed country is to be identified as a relevant comparator, Venezuela (with real per capita growth of 0.83 percent) would still be a relevant exemplar of failure. But this aspect of the broader debate wanders far from our focus on Mexico and NAFTA. The point we made, and still insist upon, is that while Mexico's growth performance falls short of other countries that have liberalized their economic policies, it exceeds the performance of many economies still relying on state control in an overall assessment of past and potential growth.

See also Part II of this post.