Mexico under NAFTA: a critical assessment

The Quarterly Review of Economics and Finance 43 (2003) 863–892

Mexico under NAFTA: a critical assessment Miguel D. Ramirez∗ Trinity College, Hartford, CT, USA Received 16 May 2003; accepted 16 May 2003

Abstract This paper assesses the evolution and performance of several key economic and social variables in Mexico following the passage of NAFTA. The evidence shows that under NAFTA Mexican trade and foreign direct investment inflows have risen at rapid rates, particularly in the export-oriented assembly-line sector. However, the evidence also suggests that it is hard to disentangle the effects of NAFTA from the other non-NAFTA factors such as demand in the U.S. in explaining the dynamism of the Mexican export sector (and economy). This has been attested by how the Mexican economy has been dragged into a severe recession over the past two years as a result of the relatively mild downturn in the U.S. business cycle. Insofar as employment growth, real wages in manufacturing, and productivity performance is concerned, the evidence presented indicates that the record has been lackluster at best and disastrous at worst. Manufacturing employment fell dramatically after the peso crisis, and remains stagnant. Real wages have plunged since the peso crisis and have yet to recover levels attained in the mid-1980s. In terms of productivity performance, no strong conclusions can be reached given the conflicting estimates in the extant literature. At best, the data show that productivity rose at healthy rates in the tradeable sector, but stagnated in the non-tradeable sector. Finally, the paper presents evidence which shows that both the functional and size distribution of income have become more skewed during the period of trade and investment liberalization (JEL 040,054). © 2003 Published by Board of Trustees of the University of Illinois.

1. Introduction The North American Free Trade Agreement (NAFTA) has been in effect now for almost 10 years, and although it will not be fully phased in until the year 2009, it has already been associated with significant and long-lasting effects on economic growth, trade and investment flows, ∗

Tel.: +1-217-333-8388. E-mail address: [email protected] (M.D. Ramirez).

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employment patterns, wages and salaries, environmental standards, and labor law throughout North America, and particularly Mexico. The debate that raged before its ratification by the U.S. Congress in November 1993 centered on a number of economic, social, and political issues. Proponents of NAFTA argued that it would generate economic growth and increase the volume and quality of investment flows, create a significant number of well-paying jobs in export-related industries throughout the region, and increase the availability of relatively inexpensive consumer goods to all markets. Opponents of the treaty, made up of U.S., Canadian, and some Mexican unions, along with small and medium-sized businesses, academics, environmentalists and human rights advocates, argued that a badly-conceived free trade agreement would lead to the widespread elimination of jobs in the U.S. auto and textile industries, Canadian manufacturing, and in Mexican peasant-based agriculture and small and medium-sized businesses. In addition, these critics claimed that NAFTA would further erode labor and environmental standards in the signatory countries and reinforce Mexico’s and Canada’s dependent economic position vis-a-vis the U.S. Suffice it to say that evaluating the economic and social impact of NAFTA on the Mexican economy is extremely difficult in view of its phased implementation, the overpowering effect of the U.S. business cycle, the inherent difficulty of disentangling the effects of NAFTA from other non-NAFTA factors when dealing with issues related to economic efficiency and distribution, and last but not least, the treaty’s near disastrous debut. It will be recalled that NAFTA’s implementation during 1994 coincided with a series of politically explosive events and an unexpected economic crisis that would shatter Mexico’s facade of modernity, and test the Institutional Revolutionary Party’s (PRI) hold on power in more than 60 years. Beginning with the Zapatista uprising on New year’s day 1994, followed by the assassination of the country’s de facto president, Luis Donaldo Colosio, on March 23, 1994, and then continued by sensational revelations later that year that implicated the brother of outgoing President Carlos Salinas de Gortari in a conspiracy to assassinate the Secretary General of the ruling PRI, only to culminate with the devastating peso crisis of 1994–1995 that led to a precipitous drop in real GDP of 6.2% in 1995 (almost 8% in per capita terms)—the worst drop in economic activity since 1932! In view of the inherently complex and broad range of the issues involved, this paper will focus primarily on the performance of trade and investment flows, employment, wages, and average productivity levels under NAFTA, although non-economic factors such labor standards in the Maquiladora sector and the accord’s impact on subsistence agriculture will be addressed as well. In so doing, it will attempt to go beyond the rhetoric of the claims and counter-claims of NAFTA proponents and opponents alike, and investigate those elements in each view that help us understand the accord’s impact on Mexico. The layout of the paper is as follows: Section 2 outlines some of the key provisions of NAFTA and reviews some of the extant literature on the economic impact of NAFTA on Mexico and the U.S. Section 3 examines the evolution and performance of Mexican exports and investment flows under the accord, and tries to determine whether the impact of NAFTA is overpowered by other non-NAFTA factors. It also presents estimates from an error correction model (ECM) designed to capture the effects of the liberalization of foreign investment rules on foreign direct investment flows. Section 4 provides a critical assessment of the performance of employment growth, average real wages, average labor productivity, and labor standards under NAFTA.

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It also examines how Mexican subsistence agriculture has fared under the accord. Section 5 summarizes the paper’s major findings, and offers a partial evaluation of the NAFTA.

2. Overview of NAFTA In February 1991, the U.S., Mexico, and Canada agreed to begin negotiating a free trade agreement that would create, at the time, the largest trading bloc in the world with a combined GDP of US$ 7.0 trillion (a full US$ 225 billion greater than that of the European Economic Community) and 366 million consumers.1 The accord sought to eliminate all trade and investment barriers and secure equal treatment for foreign investors in energy, telecommunications, banking and financial services, and procurement. In order to formalize the process, the governments of the NAFTA nations also agreed to create a state-of-the-art dispute settlement mechanism. Formal negotiations began in June 1991, and on August 12, 1992, it was announced that the three nations had endorsed NAFTA. Because of the politically sensitive nature of the accord, a vote on NAFTA was delayed until after the 1992 U.S. elections and then, following an intense and fiercely fought political battle that pitted a democratic president against a majority of his own party and organized labor (rarely, if ever seen over a trade agreement in this country in the post-World War II period), it was passed by both the House and Senate in November 1993. It was enacted into law on January 1, 1994—the very same day that the Zapatistas led by their charismatic leader, Commandant Marcos, burst unexpectedly on the Mexican political and social scene. 2.1. Benefits of trade The direct benefits of the agreement stem from the nearly complete elimination of tariffs and non-tariff barriers for most goods between the trading partners, with a phased elimination of 10–15 years for vulnerable industries in the U.S. such as textiles and apparel and subsistence agriculture in Mexico. At the time the agreement went into effect, U.S. tariffs on Mexican imports were already quite low, averaging 4%, while Mexican tariffs hovered around 11%. By the end of the decade, Mexican tariffs had fallen to 2% and quotas, import licenses, and other non-tariff barriers had been eliminated (see Pastor, 2001).2 NAFTA was the first treaty between developed countries and a less developed country and it was anticipated that Mexico would benefit through expanded trade and employment opportunities with a large and growing market (85% of Mexican imports come from the U.S. and close to 90% of its exports are destined for the U.S.).3 More importantly, Mexico was expected to benefit from greater inflows of foreign direct investment into the assembly-line industry, energy, banking and finance as a result of its abolition of foreign investment rules and regulations. The U.S. economy, on the other hand, was not expected to benefit very much in terms of output and employment effects because of the relatively small size of the Mexican economy. For example, at the time, most econometric models estimated that in the long run real income in the U.S. would rise only between 0.11% and 0.25% (overall employment and wage effects were also expected to be quite small). Insofar as Mexico is concerned, the positive effects of NAFTA on employment and income were expected to be relatively large—as much as a 6.6% increase in employment

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and 12% increase in real income or even more by the end of NAFTA’s phased implementation (see Lustig, Bosworth, & Lawrence, 1992; Burfisher, Robinson, & Thierfelder, 2001). It is also important to mention that several studies at the time, in their eagerness to support or derail the agreement, made a variety of mercantilist arguments that focused primarily on the employment and trade balance effects of NAFTA. For example, a study by the Institute for International Economics in Washington, DC, estimated that a net 171,000 jobs would be created under NAFTA and that US$ 12–15 billion a year would be eventually added to total American and Mexican GDP. Other studies such as the one by the Washington-based think-tank, the Economic Strategy Institute, predicted that, on a net basis, as many as 636,000 jobs could be lost as a result of larger imports from Mexico, and a greater exodus of U.S. runaway firms to that country over the next 10 years. More recently, Haar and Garrastazu (2001) cites a study by Scott (1999) which reports that, “from the time the [NAFTA] took effect in 1994 through 1998, growth in the net export deficit with Mexico and Canada has destroyed 440,172 [U.S.] jobs” (p. 1). Most economists dismiss these arguments because the case for free trade is based on the efficiency gains that are generated by countries specializing in those goods and services in which they have a comparative advantage. This means that an overall negative or positive trade balance is irrelevant to assessing the effectiveness of the NAFTA. The direction of the overall trade balance is a macro phenomenon that is determined by the aggregate spending decisions of savers and investors. In other words, if the public and private sectors of a country spend, respectively, in excess of domestically generated tax revenues and savings, then they must finance their excess spending via a capital account surplus or equivalently a current account deficit. From an empirical standpoint, the weakness of the mercantilist argument is also revealed by the fact that changes in the overall U.S. trade balance since the passage of NAFTA have completely overwhelmed changes in bilateral trade balances among the NAFTA partners (see Burfisher et al., 2001). Insofar as employment effects are concerned, recent studies have found that the job loss impact of NAFTA for the U.S. has been relatively small. For example, a recent and widely cited partial equilibrium model that analyzes the impact of Mexican imports on U.S. aggregate demand and employment finds that “. . . the total estimated potential job impact in the United States from 1990 to 1997 due to imports from Mexico at 300,000, or an average of 37,000 jobs per year lost due to increased trade” (see Burfisher et al., 2001, p. 130). Another study cited by Haar and Garrastazu (2001) finds that “during the last five and a half years 259,618 U.S. workers were certified as potentially suffering NAFTA job losses” (p. 8). To put these number into perspective, it should be noted that during the period in question the U.S. economy generated, on average, over 200,000 jobs per month.4 Nevertheless, the idea that the trade balance is primarily or exclusively determined by what happens in financial markets introduces an important (and overlooked) channel for NAFTA to have contributed to the ballooning Mexican trade (and current account) deficit in the early to mid-1990s. In fact, critics of NAFTA point to the 1994–1995 peso crisis as proof positive that the agreement itself was partly responsible for the financial debacle and sharp economic contraction of 1995. The argument is based on the Metzlerian wealth effect on savings, viz., that, in the short-to-medium run an increase in expected wealth and income leads to a decrease rather that an increase in national savings. In the heady days preceding the passage of NAFTA there was the totally unrealistic belief that the adoption of market-oriented reforms would

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pay off in a matter of a few quarters. Needless to say, the international banking community, multilateral institutions, and Mexican and U.S. pundits fueled this “irrational exuberance” by heaping praise on the Salinas de Gortari administration at every opportunity. Mexico was the darling of international investors and could do no wrong. Few analysts stopped to reflect on the obvious fact that the reallocation of resources, the adoption of new technology and managerial knowhow—not to mention the reorganization of existing institutions to meet the challenges of an open economy—are processes that produce results only after a long gestation period.5 Put differently, NAFTA may have enabled Mexico to get its current “prices right,” but only at the cost of introducing an inter-temporal distortion between present and future consumption for which the country paid a terrible price.6 Table 1 shows that the imbalance in the country’s private sector (measured by the gap between its gross national savings and gross domestic investment) widened significantly during the 1991–1994 period. The rapidly increasing indebtedness of Mexico’s middle class consumers and investors—and the drop in savings—can be attributed to the expectation, widespread in the heady years of 1992 and 1993, that passage of the NAFTA would catapult the Mexican economy into first-world status, thereby raising the country’s future wealth and income. However, as happened in Chile during 1978–1981, Table 1 reveals that Mexico’s inter-temporal substitution of present for future consumption was reflected in a dramatic, and ultimately unsustainable, increase in its current account deficit (as a percentage of GDP), and a concomitant drop in the national savings rate despite a significant rise in the country’s real interest rate during the last three years of the Salinas sexenio. Supporters of NAFTA, however, contend that there was no direct link between NAFTA and the peso crisis because the strains on the Mexican economy were widely anticipated by informed observers. In other words, it was evident that unless Mexico devalued its peso in real terms by at least 20% (and pursued supporting and credible fiscal and monetary policies), some kind of crisis was imminent—even if the exact timing could not be foretold (see Dornbusch & Werner, 1994). Furthermore, they contend that, if anything, the agreement, by preventing a nationalist and protectionist backlash, helped Mexico recover from the peso crisis more quickly than it would have been able to do otherwise (refer to real GDP growth rate in Table 1). What the counterfactual would have been is always hard to discern in an inexact science such as economics, and small comfort to the millions of Mexicans who paid a very steep price under the IMF-sponsored austerity program in terms of rising unemployment and underemployment, plunging real wages, and lost investment opportunities (see Table 1).7 However, there is no question that one of the most important aspects of the accord was (and is) the credible signal it sent to the world business community about the Mexican government’s commitment to freer markets. It certainly has made it extremely difficult for future Mexican presidents to revert to populist programs when faced with economic and social crises. This outcome has been borne out by, first, the election of PRI and pro-NAFTA candidate Ernesto Zedillo (1994–2000) under extremely difficult political circumstances and, more recently, that of conservative National Action Party (PAN) candidate Vicente Fox (2000–2006)—the latter a strong supporter in practice, if not in rhetoric, of neoliberal policies in general, and NAFTA in particular. Turning briefly to Canada, NAFTA was not expected to have a dramatic impact because Canada and the U.S. had already entered into a free trade agreement in 1989. Insofar as Mexico is concerned, Canada’s trade with Mexico was, and remains, relatively small. For example,

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Item

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001a

Percent change Real GDP Real GDP per capita Consumer prices Reel minimum wage Open unemployment Broad open unemploymentb Underemploymentc

4.0 1.7 30.0 −7.3 2.7 4.4 20.5

3.6 1.4 18.8 −6.5 2.7 4.2 20.8

3.6 0.4 11.9 −7.2 2.8 4.8 21.5

1.7 −1.9 8.0 −5.6 3.4 5.6 23.0

4.5 0.8 7.1 −5.0 3.9 6.1 22.1

−6.2 −7.8 52.1 −21.0 6.4 8.6 25.9

5.4 3.6 28.0 −18.0 5.5 6.4 25.2

6.7 5.0 15.7 −11.4 3.7 4.6 23.4

4.8 3.3 18.6 −3.4 3.2 4.2 21.2

3.7 2.1 12.3 −2.6 2.5 4.0 20.3

6.8 5.2 9.5

−0.9 −2.5 6.4

2.2 – –

3.0 – –

– 23.0 – −3.1 – 166.4 13.2 –

– 21.0 – −3.0

Percentage of GDP Fiscal deficit 3.5 1.3 −1.0 −0.2 −0.1 0.0 0.0 −0.7 −1.2 −1.3 Gomestic investment 18.6 19.5 22.0 20.5 21.6 16.2 18.0 19.5 21.3 22.0 Domestic savings 15.5 14.1 13.8 13.0 12.3 15.7 17.3 17.6 17.5 17.2 Current account balance −3.2 −4.8 −6.8 −6.4 −8.1 −0.6 −0.7 −1.9 −3.8 −3.4 Public external debt 31.7 26.1 31.0 31.1 29.8 59.3 49.8 38.2 38.8 – Exports (US$ billion) 40.7 42.7 46.2 51.8 60.9 79.5 96.0 121.8 129.4 136.3 Foreign investment (US$ billion) 3.7 3.6 3.6 4.9 10.2 7.6 9.2 12.8 11.3 12.1 Real effective exchange rate 100.0 91.0 78.5 72.9 75.2 125.6 129.0 115.2 115.8 105.0 (1990 = 100) Source: Banco de Mexico, The Mexican Economy (1995–1999); and ECLAC, various reports. a Preliminary data. b Broad concept includes those who are openly unemployed plus those discouraged workers who stopped looking for work. c Measures the percentage of the economically active population that is unemployed or is employed for less than 35 h per week.

158.5 24.5 –

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Table 1 Mexico: selected economic indicator, 1990–2001

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Burfisher et al. (2001) reports that Canada’s exports to Mexico as a share of total Canadian exports amounted to a mere 0.4% in 1994 and remained at that level in 1999. Likewise, Canadian imports from Mexico as a percent of total Canadian imports rose from 2.1% in 1994 to only 2.9% by dawn of the new millennium. In fact, most of Canada’s benefits came in the form of safeguards: maintaining its status quo in international trade relations; i.e., no loss of its current trade preferences in the U.S., equal access to the Mexican market, and national treatment for its investors in Mexico and the U.S. 2.2. Costs of trade While NAFTA benefits certain economic and financial groups in each nation, it is not a win–win situation for everybody. It produces both winners and losers among industries, occupations, and regions of the U.S. and Mexico. After all, the distributional impact of freer trade on wages, profits, and employment has been a key source of the controversy surrounding the long-standing debate on the relative costs and benefits of free trade (see Samuelson, 1948). Workers, peasants, and employers who are harmed by imports from the U.S. will not be consoled by the economist’s assertion that, on balance (and in the long run), there are overall gains from trade because of rising exports, investment, and the creation of jobs elsewhere in the economy. Unless the winners compensate the losers so that they are just as well off as they were before trade, which rarely, if ever, happens (particularly in LDC’s such as Mexico with non-existent social safety nets), freer trade results in a sub-optimal outcome where economic and social costs are concentrated in certain segments of society.8 More often than not, these are the most vulnerable in terms of regional location, educational background, mobility, and job-related skills.9 In the U.S. it has led to the widespread elimination of jobs in industry groups such as textiles and garment, footwear and leather products, certain manufactured goods, specialty steel, sugar, and citrus growers. In this regard, Haar and Garrastazu (2001) cites several studies that show that “employment effects on men, women, and minority groups have all been negative, especially in manufacturing jobs that pay relatively high wages” (p. 2). In Mexico, small and medium-sized businesses have been adversely affected along with non-Maquiladora manufacturing, domestic banking and financial services, some basic petrochemicals and mining, and last but not least, small growers of basic grains such as corn who, as discussed in the last section, may be wiped out if heavily-subsidized U.S. and Canadian agricultural products are allowed to enter Mexico freely. Of course, any real assessment of the welfare costs of NAFTA—an undertaking beyond the scope of this paper—must also deal with issues such as worker displacement and retraining, domestic content requirements, government procurement, the narcotics trade, and the impact of free trade on migratory flows and the environment (see Pastor, 2001).

3. The evolution and performance of trade, investment, and subsistence agriculture under NAFTA Market size and demand considerations constitute an important factor in stimulating trade and foreign investment. NAFTA, by creating the world’s largest free trade area, has accelerated

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the economic integration of the U.S. and Mexican economies. The immediate lowering of average U.S. tariffs on Mexican goods, particularly imported manufactured goods (U.S. tariffs fell from 5.8% to just 1%), helped boost Mexican total exports from US$ 51.8 billion in 1993 to US$ 166.4 in 2000, before falling to US$ 158.5 in 2001 as a result of the U.S. recession (see Table 1). This dramatic increase in Mexican exports contrasts sharply with the much slower average annual growth rate in total exports of 13% that the country recorded during the 1986–1993 period. The transformation of Mexico into a dynamic regional exporter (the tenth largest exporter in the world) is also evidenced by the rapidly rising proportion of Mexico’s GDP devoted to trade. For example, Mexico’s total trade (the sum of exports and imports) as a percentage of GDP rose from 35% in 1993 to over 60% in 1999, and exports alone rose from 15% to 30% (see Banco de Mexico, 1999). The impact of NAFTA and the peso crash of 1994–1995 also helps explain part of the burgeoning expansion of the Maquiladora (assembly-line) sector of the Mexican economy. The number of Maquilas has jumped from 2000 in 1994 to 3,333 in 1999, and are mostly located in northern border states such as Baja California (1131), Chihuahua (403), and Sonora (262). Firms in this sector are mostly owned by U.S. firms with well-known names such as American Home Products, Beatrice Foods, Caterpillar, Eastman Kodak, Frito-Lay, Ford, GM, IBM, Levi-Strauss, Mattel, Motorola, Pepsico, Siemans, Sony, Wrangler, and Maidenform, to name just a few. They import capital inputs and parts duty-free from the U.S. in order to assemble manufactured goods for re-export that range all the way from low-end goods such as textiles and apparel, toys, processed foods, and leather goods to sophisticated goods such as autos and engine parts, computer equipment, industrial machinery, and TV sets. Table 2 shows that since the passage of NAFTA the proportion of Maquiladora exports to non-Maquiladora exports rose from 39.1% in 1995 to 46.2% in 1999, but as shown in the Table, this upward trend began in earnest well before NAFTA was enacted into law (with Mexico’s formal admission to the GATT in 1986). Notwithstanding the impressive growth of Maquiladoras since the passage of NAFTA, they continue to have a relatively small impact on the Mexican economy because they thrive upon very low real wages, minimal labor standards, sell very little of their output in Mexico, and Table 2 Mexico: Maquila exports as a percentage of total exports, 1980–1999a Year

Percentage

Year

Percentage

1980 1981 1982 1983 1984 1985 1986 1987 1988

14.0 13.8 11.7 14.0 16.9 19.0 25.9 25.7 33.1

1991 1992 1993 1994 1995 1996 1997 1998 1999

37.1 40.4 42.1 43.1 39.1 38.5 40.9 45.1 46.2

Source: Banco de Mexico, http://www.banxico.org.mx. a Both Maquila exports and total exports are FOB values, and represent the gross production value.

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buy no more than 3% of their materials, parts and components from Mexican suppliers (see Cypher, 2001; Cross Border Business Associates, 1999). In addition, although their contribution to Mexican GDP and employment has grown, respectively, from 2% and 1.4% in 1993 to 6% and 3.4% in 1999, they remain a highly disarticulated sector from the rest of the Mexican economy and highly dependent and susceptible to the dynamism of industrial production in the U.S.10 At this juncture, it is important to observe that it is very difficult to disentangle the effects of NAFTA from other non-NAFTA factors. For example, how much of the increase in Mexican exports can be attributed to NAFTA-induced tariff reductions and/or to the massive real devaluation of the peso in 1994–1995 which rendered Mexican goods much cheaper to U.S. consumers? Or, for that matter, is the rapid increase in total Mexican exports more the effect of the unprecedented expansion of the U.S. economy (the income effect) during the 1994–2000 period? After all, even before NAFTA went into effect, as a result of the opening up of the Mexican economy following its formal admission to the GATT on July 25, 1986, a large proportion of Mexican exports (imports) were destined to (came from) the U.S. market. In other words, is Mexico’s increased integration with the rest of the world (globalization) the creature of NAFTA or is NAFTA the creature of Mexico’s adoption of neoliberal policies following the collapse of the import-substitution model (ISI) model in 1982? One study that tries to isolate the effect of the devaluation of the Mexican peso from the NAFTA is by Gould (1998). On the basis of a monthly bilateral trade model that spans the period from January 1980 to January 1996, he reports that, on average, NAFTA’s contribution to the growth of U.S. exports to Mexico was 7 percentage points higher per year, while the growth of Mexican exports to the U.S. is only 2 percentage points higher per year with NAFTA (pp. 7–8). He also estimates what would have happened to U.S.–Mexico trade had the peso crisis not happened. His model suggests that exports from the U.S. to Mexico would have risen 22% without the crisis, rather than the 11% drop that took place with the crisis. On the other hand, U.S. imports from Mexico (Mexican exports) were not significantly affected by the peso crisis (p. 9). He attributes the disparity in the results to the fact that the economic depression generated by the massive peso devaluation had a devastating effect on the purchasing power of the average Mexican via both substitution and income effects (see Table 1), while it had little, if any, perceptible (negative) effect on U.S. aggregate income. In a follow-up study undertaken in 1998, Gould recalculates NAFTA’s effect on U.S-Mexican bilateral trade based on a “gravity model” that uses quarterly data for the 1980–1996 period. He now finds a more powerful effect, with NAFTA contributing, on average, an additional 16.3 percentage points per year to the growth of U.S. exports to Mexico and 16.2 percentage points per year to the growth of Mexican exports to the United States. However, he is quick to qualify his estimates for U.S. imports (Mexican exports) by noting that “NAFTA’s statistical significance for U.S. imports from Mexico is at best marginal. The 90% confidence interval lines shows that we cannot exclude the possibility that trade without NAFTA would have been different from trade with NAFTA” (p. 16). He attributes the larger effect found in the more recent study to the positive effect that NAFTA has had on private-sector expectations by “locking-in” neoliberal policies which, in turn, have acted as a catalyst for foreign direct investment in export-oriented industries such as autos, computer equipment, industrial machinery, electronic goods, and textiles and apparel products.

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Similarly, Krueger (1999), on the basis of annual data from 1980 to 1998, reports that non-NAFTA factors such as the peso devaluation and the prior liberalization of the Mexican economy under Miguel de la Madrid (1982–1988) “appear to dominate whatever effects NAFTA may have had on trade patterns to date.” She also reports that the Mexican export categories that grew rapidly to the United States were the very same ones that grew rapidly with the rest of the world. On the basis of this finding, she makes the important observation that the opening of the Mexican economy since 1986 seems to have generated more trade creation than trade diversion. One last piece of empirical evidence that buttresses the notion that NAFTA is more the effect of an on-going process of globalization of trade and investment, rather than its cause, has been provided by Gruben (2001) in a recent paper. He finds that, contrary to the widespread belief that NAFTA has fueled the spectacular growth of production and employment in the Maquiladora industry, it is non-NAFTA factors such as “. . . demand factors (as expressed by changes in the U.S. industrial index) and in supply/cost factors (as expressed by changes in the ratios of Mexican to U.S. manufacturing wages and to manufacturing wages in four Asian countries)” (p. 19)—that made Maquiladora firms grow faster. His Maquiladora employment equations, based on annual data beginning in 1975 and ending in 1999, suggests that U.S. industrial production has a contemporaneous positive and highly significant effect, while the one year-lag of the Mexico–U.S. wage variable is, as expected, negative and significant. Surprisingly, the NAFTA dummy variable is found to have a negative and insignificant coefficient. The results suggest that Maquiladora firms respond quickly to changes in U.S. demand, while the employment response to changes in the wage ratio is delayed by one to two years because Maquiladora operators “. . . wait to see if the wage shocks are going to be permanent” (p. 19). Finally, it should be noted that Gruben’s estimates are robust to various specifications, corrected for collinearity via the principal components procedure, and they address the possible simultaneity problem that arises when employment and wages are jointly determined.11 Further evidence that non-NAFTA factors have played a more important role in the dynamism of the Mexican export sector (and economy)—and, also, validating Gruben’s estimates above— is evidenced by how Mexico has been dragged into a severe recession by the faltering U.S. economy in the past two years. Table 1 shows that with the onset of the recession in the United States in 2001, Mexican real GDP has fallen close to 1% (or 2.5% in per capita terms) and Mexican exports to the United States have dropped by 4.9% in 2001, which stands in sharp contrast to the cumulative increase of almost 49% recorded during the previous three years. Not surprisingly, the slowdown in the U.S. has led to hundreds of plant closings in exportrelated industries (including the once booming Maquiladora sector) and the loss of hundreds of thousands of jobs. For example, Orrenius and Berman (2002) report that “as of January 2002, 240,000 Maquiladora workers had lost their jobs in the previous year. This represents a loss of 19% of total Maquiladora employment in just one year” (p. 8). More ominously, the authors note that Maquiladora operators (mostly U.S.-based TNCs) are taking advantage of the downturn to relocate their operations to lower-wage countries in Central America and Asia, particularly China. In a country where nearly half the population is poor by any measure (47 million in 2000) and where, to boot, there are no unemployment benefits, it is more than likely that the standard of living of millions of people has been adversely affected by the country’s recession (see Table 1 which shows negative private real consumption during 2001). The outlook for

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Mexican exports and employment in 2002–2003 is not encouraging either given the lackluster performance of the U.S. economy in particular, and the world economy in general. 3.1. NAFTA and foreign investment The impact of NAFTA on foreign investment flows in general, and FDI in particular, has to be placed also within the larger liberalization, deregulation, and privatization strategy pursued by Mexican governments, beginning with Miguel de La Madrid (1982–1988), and more intensely and extensively, under the Salinas administration (1988–1994). This market-based, outward-oriented strategy, accompanied by the (apparent) macroeconomic stability of the early 1990s, paved the way for the surge in investment flows that financed the country’s growing imbalance in the current account deficit observed after 1990 (see Table 1). Other important non-NAFTA factors that contributed to the surge in short-term money into emerging markets in both Mexico and the rest of Latin America were the relatively low interest rates in the United States and the economic recovery in the United States from the 1991 to 1992 recession (see Ramirez, 1997). Initially, a disproportionate share of these funds were not of “the bolted down variety” such as FDI flows, but of the short-term or portfolio variety. In 1993, for example, Mexico received an estimated US$ 17 billion in foreign investment, of which close to 70% went in the stock market— not into direct investments in plants, machinery, and equipment (see Table 1). The bulk of these funds were attracted by the overly generous terms being offered to investors by the privatization of the banks and major state-owned enterprises, as well as by the issue of dollar-indexed government debt (Tesobonos). Foreign (and domestic) investors were especially attracted to these short-term debt instruments because, although payable in pesos, they transferred the devaluation risk from creditors (investors) to the government or ultimate borrower. In exchange, the government benefited from replacing maturing non-dollar indexed Cetes with Tesobonos via an immediate drop in its interest servicing costs because the interest rate on Tesobonos was between 6 and 8 percentage points below the rate on Cetes (see Whitt, 1996, p. 12). An additional benefit to the Mexican government stemmed from the enhanced credibility of its commitment to the peg-precisely because it “would not benefit from a reduction in the real value of its dollar-indexed debt, as it would in the case of the peso debt” (ibid., p. 12.) In the tumultuous year of 1994, Tesobonos de facto became the only mechanism available to the Mexican government to attract funds or, more precisely, reassure nervous investors who might otherwise transfer money out of the country. Again, Whitt (1996) observes that “before the [peso] crisis, most of Mexico’s debt took the form of short-term, peso-denominated securities, such as cetes . . . in December 1993 about 75% of foreign holdings took this form . . . [However], by November 1994, cetes had shrunk to only 25% of foreign holdings of Mexican government securities; 70% was now in Tesobonos” (p. 12). In the wake of the near collapse of the Mexican economy following the peso devaluation of 1994–1995, long-term funds, in the form of FDI flows, have played a very important role in financing the subsequent recovery and growth of the Mexican economy (see Table 1).12 Economy theory and empirical evidence suggests that the motivation for investment abroad arises when the profit expectations from such investments exceed those from alternative uses of those funds in the home country. The factors governing the decision to invest abroad are numerous

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and diverse ranging from the general level of economic activity to anticipated tax and tariff policies, unit labor costs, and foreign investment laws. At the risk of some oversimplification, these factors can be grouped into three broad categories: cost or supply considerations—influencing costs of production and distribution, market or demand considerations that influence total sales revenues (and therefore profits), and institutional factors, that affect the legal status of foreign investors relative to domestic investors. It is safe to say that the passage of NAFTA has played an important role in enhancing these flows because it set in motion a series of institutional reforms that have fundamentally improved the FDI environment in Mexico. More generally, the rapid increase of foreign direct investment flows into Latin America during the decade of the 1980s and 1990s has been stimulated by dramatic changes in the region’s legal–institutional environment associated with the implementation of liberalization, privatization, and deregulation programs. In general, there has been a major liberalization in the restrictions governing the remittances of capital and profits, as well as the introduction of new laws that grant TNCs essentially the same benefits and responsibilities as domestic firms (viz., national treatment). For example, in most countries there are no restrictions on the repatriation of profits and dividends, corporate taxes have been reduced or replaced by value-added taxes, and the need for prior authorization has been either eliminated entirely or restricted to a few “priority” sectors such as oil in Mexico (see Ramirez, 2002). In the Mexican case, it is readily apparent that the impetus for change in the government’s attitude and policy toward foreign investment in general, and FDI in particular, can be traced to the country’s pressing need for funds following the credit squeeze generated by the onset and aftermath of the August 1982 debt crisis. Major changes in the legal framework governing FDI were first introduced by the Miguel De La Madrid administration (1982–1988), and further intensified by the neoliberal administration of Carlos Salinas de Gortari (1988–1994). For example, under the De la Madrid administration several sectors that had been off limits to foreign investors such as petrochemicals, mining, banking, and telecommunications were opened on a selective basis and, in some instances, foreign investors were allowed a majority shareholding position (see Cornelius, 1986; Ramirez, 1989). FDI regulations were significantly relaxed under the Salinas de Gortari administration during 1989 when the government allowed 100% foreign participation with no prior approval for investments valued under US$ 100 million (see ECLAC, 1998; Lustig et al., 1992). The imminent vote on NAFTA in late 1993 was also instrumental in the enactment in March of that year of the Mexican Investment Promotion and Foreign Investment Regulation Act which further liberalized the entry of foreign investors into “strategic” sectors. ECLAC (2000) reports that the legislation now in force permits foreign investors to participate in most economic sectors. It reports that “. . . of the 704 [sectors] listed in the Mexican Classification, 606 are fully open to foreign capital, a share of up to 49% is permitted in 35 others, prior authorization from the National Foreign Investment Commission (CNIE) is required in 37, and FDI participation is not allowed in only 16 cases” (p. 103). The aforementioned act also gave the Mexican government additional discretionary powers to determine in which sectors or projects foreign investors would be allowed to control majority interests. The passage of NAFTA in November of that year “locked in” the more liberal provisions governing the rights of foreign investors. Fig. 1 shows that the relaxation of FDI rules in 1989 and the commencement of NAFTA negotiations in 1991 explains the rapid increase in FDI flows after 1991. The dramatic increase

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Fig. 1. FDI inflows to Mexico, 1990–2000.

in FDI flows to the country, however, takes place after the passage of NAFTA in 1993. In this connection, my own empirical work (reported below), based on an ECM using annual data for the 1956–1996 period, suggests that institutional variables such as the debt conversion program (1986–1989), variable D2, and the liberalization of foreign investment rules from 1991 to 1994 (D1) had a positive and statistically significant effect on FDI flows to Mexico, while economic and political turmoil (D3) had a negative effect. To conserve space, the results of one of the EC models estimated in this study is given as follows: LFDIt = − 0.65 + 1.13 LGDPt−1 + 0.28 LREXt−2 − 0.61ECt−1 + 0.38D1 ∗ (−0.68)

+ 0.48D2 − 0.35D3∗ ∗ (3.39)

D.W. = 1.85,

(2.15)∗

(2.01)∗

(−5.28)

(−5.07)∗

(3.18)

Adj. R = 0.74, S.E. = 0.23, F -statistic = 12.21∗ , 2

Akaike criterion = 0.14,

Schwarz criterion = 0.50

where  denotes the difference operator, ECt−1 represents the lagged residual from the cointegrating equation, and ‘*’ denotes significance at least at the 5% level. The ECM model also suggests that a one-year lagged percentage increase in real GDP (a proxy for market size) has a positive effect, while a two-year lagged percentage increase (depreciation) in the real exchange rate (a proxy for labor and material costs) has a positive and statistically significant effect. In addition, the relative fit and efficiency of the ECM model is good and, as the theory predicts, the lagged residual term (from the cointegrating equation) is negative and statistically significant at the 1% level. Finally, stability test indicate that the null hypothesis of no structural break could not be rejected for the economic crises years 1976 (p-value: 0.124), 1982 (p-value: 0.166) and 1987 (p-value: 0.575).13 The strength of FDI flows is further revealed by the fact that despite the serious economic downturn in Mexico in 1995, and the associated “Tequila effect” which reduced FDI inflows in 1995 and 1996, they staged a remarkable recovery during the rest of the decade, easily surpassing the pre-crisis levels. The chart shows that, on average, FDI flows more than tripled, from US$ 3.3 billion in the 1985–1993 period to US$ 11.3 billion during 1994–2000. From an economic standpoint, the importance of these inflows is more fully appreciated by focusing on their evolution relative to the country’s gross fixed capital formation (see ECLAC,

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Table 3A Mexico and Chile: FDI flows as a percentage of gross fixed capital formation, 1990–2000 Country

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Chile Mexico

8.3 5.6

7.2 8.7

7.5 7.1

7.2 7.1

14.6 16.4

12.1 16.6

25.7 15.7

27.9 16.3

22.9 2.8

54.3a 13.2

22.0 12.9

Source: Computed from Banco de Mexico, http://www.banxico.org.mx; ECLAC (1996–1997, Table VIII. 4, p. 126), and ECLAC (2002, Table A-5, p. 40; and Tables 12 and 15, pp. 760 and 763). a The unusually high figure for Chile is the result of a doubling of FDI inflows and a steep drop in gross fixed capital formation in 1999.

2000, pp. 106–111). Table 3A shows that throughout the decade of the 1990s, and particularly after 1993, FDI flows are averaging 14.9% of Mexico’s gross fixed capital formation, but well below those of Chile—the region’s stellar performer (up until 1997 when it was hard hit by the Asian crisis). Critics of FDI, however, contend that these flows, rather than contributing to Mexico’s financing of capital formation, are, in fact, a drain on the country resources because they generate substantial reverse flows in the form of remittances of profits and dividends to the parent companies (see Cypher & Dietz, 1997). One, admittedly, crude way of addressing this criticism is to measure the net contribution of FDI to private capital formation by subtracting from these gross inflows the repatriation of profits and dividends to the parent companies.14 Partial support for this contention can be gauged from the following figures for Latin America. During the decade of the 1990s, remittances of profits and dividends by Latin America and the Caribbean to the developed countries more than tripled between 1990 and 1999, from US$ 7.0 billion to over US$ 25 billion (see ECLAC, 2002). Not surprisingly, the lion’s share was accounted for by Argentina, Brazil, Chile, Colombia, and Mexico. In the case of Mexico the remittances of profits and dividends more than doubled between 1990 and 2000 from US$ 2.3 to US$ 5.2 billion. Relative to the inflows of FDI during the 1990–2000 period, Mexico’s remittances of profits and dividends averaged 55.6%. If we subtract profits and dividends from FDI flows and express the net figure as a proportion of fixed capital formation, it is evident from Table 3B that the net contribution of FDI inflows to gross fixed capital formation in Mexico is far less than that advertised in Table 3A. It is also evident that during 1998–2000 FDI’s contribution has declined relative to the 1994–1997 period. Finally, it is important to note that the net contribution of FDI would be further reduced if we could

Table 3B Mexico and Chile: FDI flows adjusted for the remittance of profits and dividends as a percentage of gross fixed capital formation, 1990–2000 Country

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Chile Mexico

4.6 0.7

−1.7 4.2

−2.1 3.4

0.8 3.1

6.0 11.2

10.9 7.9

16.7 8.0

17.4 10.8

17.8 7.2

43.8 9.3

8.1 8.0

Source: Same as in Table 3A. A negative value indicates that profits and dividend payments exceeded FDI inflows for that year, thereby diverting resources away from fixed capital formation.

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accurately measure the amount of capital that leaves the region as a result of the widespread practice of intra-firm transfer pricing to avoid taxes and restrictions on the repatriation of profits (see Plasschaert, 1994). From an economic standpoint, it is preferable to concentrate on the accumulated stock of FDI, rather than the flow variable, because it is the former that ultimately determines the marginal productivity of private capital (and labor). For Latin American as a whole the stock of FDI in constant 1990 dollars rose from US$ 175.6 billion in 1990 to US$ 466.9 billion in 2000 (see ECLAC, 2002, Table 12, p. 760). This represents more than a doubling in the stock of FDI of these countries, an increase which is far greater than that of the entire “lost decade” of the 1980s. Focusing on Mexico, its stock of FDI rose from US$ 37.1 billion 1990 and accelerated after 1993 (following the passage of NAFTA) reaching an impressive level of US$ 106.5 billion by year-end 2000.15 Endogenous growth theory suggests that if this accumulation of capital in the form of FDI has generated substantial spillover benefits in terms of innovation and managerial knowhow, both of an indirect and direct nature, then the long-term positive contribution of this surge in FDI during the decade of the 1990s cannot be adequately measured by focusing solely on flow variables. The sectoral destination of net FDI flows into Mexico during the decade of the 1990s is shown in Table 4. FDI flows have been primarily channeled to “greenfield” investments in the manufacturing sector, particularly in branches with a strong participation by TNC’s and with investments oriented towards exports such as those of the Maquiladora industry. Table 4

Table 4 Sectorial distribution of FDI flows in Mexico, 1985–1999 (millions of dollars) Year

Total

Industrya

Services

Commerce

Mining

Agriculture

1985 1986 1987 1988 1989

1,729.0 2,424.2 3,877.2 3,157.1 2,499.7

1,165.8 1,918.9 2,400.5 1,020.0 982.3

453.3 323.1 1,433.9 1,877.4 1,102.3

109.5 151.2 21.2 246.8 386.3

18.0 30.8 48.8 24.9 9.5

0.4 0.2 15.2 12.0 19.3

1990 1991 1992 1993 1994

3,722.4 3,565.0 3,599.6 4,900.7 10,158.8

1,192.9 963.6 1,100.8 2,320.5 5,878.9

2,203.1 2,138.0 1,700.0 1,730.7 2,929.5

171.4 387.5 750.9 759.9 1,239.6

93.9 31.0 8.6 55.1 102.9

61.1 44.9 39.3 34.5 7.9

1995 1996 1997 1998 1999

7,613.3 9,186.1 12,831.0 11,311.0 12,100.0

4,294.0 5,236.1 7,826.9 6,809.2 7,296.3

2,307.9 2,939.6 3,207.8 2,827.8 3,025.0

923.5 826.7 1,549.7 1,357.3 1,331.0

79.0 91.8 108.4 203.6 242.0

8.9 45.9 138.3 113.1 205.7

Source: Instituto Nacional de Estadistica, Geografia e Informatica (INEGI), Anuano Estadistico de los Estados Unidos Mexicanos. Aguascalientes, Mexico: INEGI, 1998, Table 17.23, p. 500; and Economic Commission for Latin America and the Caribbean (ECLAC), Foreign Investment in Latin America and the Caribbean, 1999 Report. Santiago, Chile: United Nations, 2000, pp. 106–116. a Includes the Maquiladora sector.

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reveals that during the 1990s, in anticipation of the passage of NAFTA, there was a surge of FDI flows into industrial sectors producing small automobiles (e.g., Ford Escorts) and auto parts (engines), industrial machinery and computers, electronic equipment, transportation equipment, food precessing, and basic petrochemicals. This evolution in FDI flows is consistent with Dunning’s (1988) locational advantage hypothesis, particularly now that NAFTA has “locked in” many of the neoliberal reforms initiated by both the De la Madrid (1982–1988) and Salinas (1988–1994) administrations. Nowhere is this better illustrated than in the impressive growth and transformation of the Mexican auto industry—a sector that has been one of the major recipients of net FDI flows between 1994 and 1999 (10% of the total). Major U.S. auto companies (Ford, General Motors, and Daimler-Chrysler) and the German auto company, Volkswagen, were able to transform an inward-oriented and inefficient industry into an impressive and sophisticated export base from which to take advantage of Mexico’s strategic location and low unit labor costs (see Table 5) to compete more effectively in the U.S. market with Japanese and Korean auto firms. In a study of the industry, Calderon, Mortimore, and Peres (1995) report that the average annual production of passenger automobiles in Mexico rose from 250,000 units during 1983–1987 to 860,000 units during 1992–1994, more than half of which were exported to the U.S. market (p. 30). The export orientation of these firms is further corroborated in a recently published study by ECLAC (2000) which shows that between 1990 and 1998 automobile production rose from 821,000 to 1,475,000 vehicles. During the same period, the share of exports in total production rose from 33.7% to 68.5%, with exports to Canada and the U.S. constituting over 90% of total exports (Table II.5, p. 113). The export orientation of the automobile industry is not just confined to American producers as attested by Volkswagen’s decision in 1995 to invest over US$ 1 billion and create close to 2000 jobs to expand its long-standing facilities in Puebla to produce exclusively its new Beetle Table 5 Export propensity of the top 100 companies in Latin America, by sector, activity and company status, 1994 and 1997a Region/country

1994

1997

Domestic firms

Foreign affiliates

Domestic firms

Foreign affiliates

Latin America All sectors Manufacturing

15.9 9.5

15.1 17.7

31.0 21.5

26.2 33.7

Brazil All sectors Manufacturing

4.7 8.8

5.2 5.9

6.1 22.4

4.3 5.3

Mexico All sectors Manufacturing

17.2 10.3

48.6 48.6

29.3 20.6

71.4 71.4

Source: United Nations, World Investment Report, 1998. New York and Geneva: United Nations (1998), Table VIII.5, p. 257. a Export propensity is defined as the ratio of exports to sales multiplied by 100.

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for worldwide distribution. In fact, between 1990 and 1998 the proportion of the German company’s total passenger vehicles destined for the export market rose from 20% to 82.9%, and according to ECLAC (2000), “in 1998, the United States was the final destination for 73% of its output” (p. 114). The impressive growth in auto production and the improvement in quality can be attributed to major investments by the “big three” in new plant, machinery and equipment, as well as the reorganization of production along the lines of “just-in-time” inventory controls and “computer-aided” manufacturing techniques, particularly in Ford’s state-of-the-art auto plants in the northern states of Sonora and Chihuahua. Moreover, the “big three’s” transformation of the Mexican auto industry was motivated by the “Japanese challenge” in the U.S. market, and it was made possible by the access to the Mexican market secured by the liberalization process that culminated in the passage of NAFTA in November 1993. The unhindered access to the low cost Mexican input market enabled U.S. auto firms to import the complementary capital inputs and technology with little government interference, as well as establish numerous links with local suppliers in the Maquiladora industry for auto repair parts and components (see Moctezuma & Mugaray, 1997). The successful establishment of the export platform was further secured by the Mexican government’s provision of adequate infrastructure and the NAFTA-created barrier to nonmembers which demands that they use at least 62.5% of locally produced inputs in the production of passenger automobiles destined for the North American market. Somewhat unexpectedly, however, instead of acting as a barrier to non-members, the NAFTA rules of origin played a key role in adjusting and consolidating the operations of non-North American companies such as Volkswagen. Undeterred by the Mexican 1994 currency devaluation and the sharp economic contraction of 1995, the German company made a strategic (long-term) decision to adjust its operations to the new NAFTA-induced constraints, thereby expanding and consolidating its production base in Puebla in order to permanently access the North American market. Mexico has also attracted substantial inflows of FDI into apparel, banking and financial services, electronics and computers, telecommunications and the tourism industry. Many of these sectors have a substantial TNC presence and are characterized by considerable intra-industry specialization and subcontracting of local parts and components, which is likely to further enhance FDI’s contribution to the transfer of technology and managerial knowhow (see Buitelaar & Urrutia, 1999; United Nations, 1998). For example, Agosin (1995) reports a survey study by Mortimore and Huss (1991) which finds that “. . . of 67 [Mexican] companies surveyed, 37 used local subcontracting [and that] the branches with 100% foreign capital tended to use subcontracting much more intensely than did branches with mixed ownership” (p. 29).16 In addition, most of the sectors in which TNC affiliates operate, particularly manufacturing, have developed a strong outward orientation in recent years. For example, Table 5 shows that the export propensity of the largest 100 TNC manufacturing affiliates operating in the Mexican market rose from 48.6% in 1994 to 71.4% in 1997, compared to 10.3% and 20.6% for Mexican domestic manufacturing firms. The table also shows that, in general, the export orientation of Mexico’s largest firms (both domestic and foreign) in all sectors, and particularly in manufacturing, is significantly higher than that of Brazil’s top firms. This is partly explained by the proximity to the U.S. market, Mexico’s relatively low unit labor costs, and the investment opportunities offered by NAFTA. Finally, the table reveals that for Latin

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America as a whole the process of trade liberalization and market-oriented reforms has resulted in a higher export propensity for both its largest domestic and foreign firms in recent years.

4. Economic welfare effects of NAFTA Economic theory suggests that, ceteris paribus, the unrestricted movement of capital from where it is relatively abundant (the U.S.) to where it is relatively scarce (Mexico) generates a net increase in the combined output of the countries in question. As indicated in Section 1, however, the process of adjustment is not a smooth or painless one for the countries and/or regions involved. Critics of the “new” FDI-led outward-oriented strategy exemplified by the Mexican auto industry contend that the industry has yet to establish significant forward and backward linkages with the domestic market, make significant contributions to the transfer of technological and managerial knowhow, and advance national or social objectives (see Cypher, 2001; Peters, 2000; Hart-Lansberg, 2002; Buitelaar & Urrutia, 1999). In addition, they argue that the market-based and outward-oriented model embodied by the NAFTA has yet to increase significantly employment levels, real average wages, and average productivity (output per worker) in the economy. According to officially reported data provided by INEGI, total employment in Mexico grew from 33.9 million in 1995 to 38.6 million jobs in 1999, resulting in an annual growth rate of just 1.2%. However, a study by CONAPO estimates that total employment must grow by at least 2.5% per year in order to meet the annual demand for 1.2–1.5 million new jobs. The study goes on to note that this target can only be met if real GDP grows at about 7% per year—a rate that was attained only once (2000) in the past decade, before promptly plunging −0.9% in 2001 as a result of the U.S. recession (see Salas, 2002; Peters, 2000). To make matters worse, Table 6 shows that employment in the manufacturing sector, where working conditions are relatively better and wages are higher than in other sectors of the Mexican economy, fell by close to 14% between 1990 and 1999. Neoliberal economists, however, point to the dramatic fall in the open unemployment rate after 1995 (see Table 1) as proof positive that NAFTA has had a beneficial effect on Mexican workers by creating employment opportunities. Critics on the left counter by criticizing the government’s estimates because they count someone as employed if that person reports working at least 1 h during the previous week or if they tell interviewers that they are certain to start working within the next four weeks (see Salas, 2002, pp. 12–19; Ramirez, 1989). In addition, they caution that the country’s lack of unemployment compensation and other forms of social support means that those individuals who report being unemployed tend to come from better-off families that can afford to support them in their job search. The very poor, to paraphrase Gunnar Mrydal, cannot afford the “luxury” of searching for a job for very long, so they stop the process and are thus technically no longer counted among the unemployed (see Salas, 2002, pp. 12–19). Many of these people enter Hernando De Soto’s informal sector, where they find low-paying and low-productive jobs such as street vending, shining shoes, parking attendants, and housework.17 Critics contend that a better measure of Mexico’s woeful underutilization of labor resources is given by the underemployment rate. Table 1 shows that, even as late as 1999, at least 20% of Mexico’s economically active population was still either unemployed or underemployed.

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Table 6 Mexico: employment, wages, productivity, and unit labor costs in Mexico, 1990–1999a Year

Employment in manufacturing

Wages in manufacturing

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

102.2 100.6 96.7 89.8 87.1 79.3 81.2 85.0 86.2 88.0

102.5 109.3 119.0 127.6 132.3 114.4 102.0 101.0 102.8 99.0

Minimum wages 63.8 61.0 58.2 57.3 57.3 50.2 46.0 45.6 45.3 44.0

Labor productivityb 112.0 118.2 126.0 134.1 143.3 148.1 159.4 166.5 173.1 171.7

Unit labor costsc 100.1 99.2 102.2 100.6 98.2 83.2 69.5 65.5 65.1 64.3

Change (%), −2.0 −22.4 −23.2 28.0 −36.1 1993–1999 Source: Computed from Banco de Mexico (1999), Tables 20 and 21, pp. 227–228; and Banco de Mexico (1997), Table 20. a Manufacturing and minimum wages in 1985 = 100; employment, productivity, and unit labor costs in 1987 = 100. b Output per worker. c Wages per hour divided by output per man-hour.

In like manner, the performance of real wages under NAFTA has been lackluster at best, and disastrous at worst. There has been a steady erosion in the purchasing power of both minimum and average wages in the 1990s. Table 6 shows that the real minimum wage, which is used as a reference point for wage bargaining each year, lost over 23% of its value between 1993 and 1999, while the average real wage in non-Maquiladora manufacturing lost 22%.18 The dramatic fall in real wages explains why labor income as a percentage of GDP fell from levels over 40% in the early 1980s to 30.9% in 1994, and a mere 18.7% in 2000. Capitalists, on the other hand, saw their profits as a share of GDP jump from 48% in 1982, to 57.1% in 1994, and 68.1% in 2000 (see OECD, 1995, pp. 34–35; Peters, 2000, pp. 160–61; Cypher, 2001, p. 21). Obviously, the steep drop in labor’s share of national income—the main source of income for the majority of the population—does not bode well for the future of the Mexican economy because it robs the country of requisite effective demand to sustain adequate levels of employment and income growth.19 In addition, it has contributed to aggravating the country’s already skewed distribution of income in recent years. For example, the income share of the top quintile rose from 49.5% in 1984 to 54.2% in 1992, and remained essentially unchanged at 54.1% in 1998, while the cumulative share of the “bottom” 80% of the Mexican population fell from 50.5% in 1984 to 45.9% in 1998 (see INEGI, 1992, Table 27, p. 110; OECD, 1995, pp. 34–35; Cypher, 2001, Table 3, p. 30). What about average labor productivity? Did it rise significantly during the 1990s? After all, NAFTA enthusiasts dubbed the 1990s the “decade of hope” as they envisioned the “invisible hand” working its efficiency magic via the liberalization of trade, deregulation of labor and financial markets, and privatization of state-owned enterprises. Answering this question

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is difficult because of data shortcomings and conflicting results cited in a number of studies due to differences in methodology and estimation procedures (see Looney, 1985; Lustig, 2001; Kim, 2001). For example, official Mexican data reported in Table 6 shows that labor productivity in the manufacturing sector averaged a respectable 4.5% over the 1993–1999 period—a rate that compares favorably with those recorded in this sector during the heyday of state-led industrialization in the 1960s and early 1970s (between 3% and 5%).20 Cypher (2001), on the other hand, cites data by Banamex (2000) which shows that nonMaquiladora manufacturing average labor productivity rose by a mere 1.8% over the 1994–2000 period, and surprisingly, that Maquiladora [labor] productivity was just 0.9% over the same period.21 In this connection, Lustig (2001), a strong supporter of the NAFTA, claims that “since NAFTA went into effect in 1994, labor productivity has grown fast in the tradeable sector [at an average of 2.3 per year between 1988 and 1994] but has been lagging in the non-tradeable sectors” (p. 99). She reports that the growth in average labor productivity in the non-tradeable sector was a dismal 0.45% for the 1988–1994 period, similar to the rate recorded in the 1980s—“lost decade of development.” She attributes the disparity in estimates to the fact that firms operating in the tradeable sector, primarily in the border states, are larger and more integrated with the U.S. market, have better access to credit, and are modernizing more quickly relative to small and medium-sized firms producing for the internal market.22 She opines that unless the Mexican state supports the lagging sectors with adequate economic and social infrastructure, Mexico’s “already strong [sectorial and] regional inequalities will not only remain but become exacerbated” (p. 99).23 The most dynamic tradeable sector, spurred on by a surge in FDI inflows, has been without question the Maquiladora sector.24 Employment has increased in the booming Maquiladora sector from 540,927 in 1993 to 1.3 million in 2000; in relative terms, Maquiladora employment as a proportion of total employment in manufacturing has risen from 18.9% in 1993 to an estimated 36% in 2000 (see Cypher, 2001, Table 1, p. 21). However, the shift away from the traditional manufacturing sector to the Maquiladora sector has entailed high turnover rates, lower wages, and no union representation for hundreds of thousands of Mexican workers. For example, in the mid-1990s average Maquiladora wages were only 47% of the average wage in the non-Maquiladora manufacturing sector, and although the wage gap narrowed to approximately 80% by 2000, it was not the result of rapidly growing real wages for Maquila workers; rather, it was the result of non-Maquiladora manufacturing wages falling at an even faster rate than Maquiladora wages. From the standpoint of labor standards, a troubling aspect of the Maquiladora industry is that workers have little, if any, effective union representation and, in some sectors such as textiles and apparel, toys, and electronic goods, employ a high proportion of young females from rural areas (in some sectors the percentage of women is as high as 75%). These workers are not provided with adequate working conditions, transportation, healthcare, and housing. Turnover rates, therefore, tend to be high (e.g., in several Maquilas at least 50% of workers report previous experience in 1–2 plants).25 Even in “state-of-the-art” auto Maquilas in Nogales, Mexico, Kopinak (1996), in a timely and well-researched study of 10 Maquiladoras, finds that there is little, if any, effective union representation of workers’ economic interests and constitutional rights. She cites a particularly revealing, and representative, interview with a manager from Plant D who volunteered the following opinion: “The unique thing about Nogales

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in comparison to Tijuana or Juarez is that it has no [independent] unions. When businesses come here from somewhere else, they think that they are in heaven. The only unions are ones which the company pays dues for, and workers don’t even know that they belong” (p. 169). It thus remains an open question whether the institutionalization of NAFTA will lead to a model of relatively weak union representation such as that found in Nogales, or whether Maquilas will move toward a model of mutual accommodation and compromise among independent unions, Maquila managers, and the Mexican government. So far, the Mexican government has been reluctant to use its tremendous political leverage to support independent border unions resist cuts in real wages and enforce labor contracts that incorporate basic protections such as well-defined job descriptions, shop-floor representation, and seniority-based promotion and job-security systems. Another important criticism levied against the NAFTA is that its passage has further solidified the country’s structural dependence on the U.S. Critics contend that the inherent dynamism of the Mexican manufacturing sector is generated primarily by the U.S export market and the financing provided by U.S.-based FDI flows, thereby rendering the Mexican economy structurally dependent and vulnerable to the vicissitudes of the U.S. business cycle. In an ironic twist, although dependencia theory has been all but abandoned in academic circles, including by most leading Mexican economists, the country’s dependence on external factors (and the U.S.) has, if anything, increased further since the passage of NAFTA. The U.S. market is now the destination of almost 90% of the country’s exports (up from 70% in 1990), 85% of its imports (compared to 65% in the early 1990s), and the source of three-quarters of all its foreign investment.26 Critics on the left emphasize that, as a result of this “locked-in” structural dependence, the relatively mild recession in the U.S. has generated a very sizable downturn in industrial production and employment in 2001–2002, including the much heralded auto industry. Table 1 shows that the Mexican economy is estimated to have contracted by 1% in 2001 with Maquiladora sector production and employment falling, respectively, by 9.2% and approximately 20% (see Hart-Lansberg, 2002; Quintin, 2002). They also argue that the long-term employment creation of the industry is limited and unpredictable given that the technology transferred from the parent companies is in the form of capital-intensive, computer-aided manufacturing techniques that require a network of suppliers which must be globally integrated and highly responsive to the changing cost and quality concerns of the TNCs. In their view, the precarious nature of this industry has been fully exposed over the past two years. Faced with rising unit labor costs that can be traced, in part, to the real appreciation of the peso (see Table 1), a modest rise in Maquila wages, and sub-par labor productivity, the Maquiladora sector has witnessed a growing exodus of TNCs that have decided to shift their operations from Mexico to other low-wage countries, particularly China. According to The Economist (2002), “While the average labor cost for assembly plants in Mexico is now around US$ 2 an hour, China’s figure is 22 cents. Although plants in Mexico are more sophisticated, the country has failed to develop a network of suppliers that would make it hard for manufacturers to leave as the Chinese catch up” (p. 36). Radical economist Hart-Lansberg (2002) observes that this is a “no-win situation for workers in Mexico as well as Asia.” In no uncertain terms, he concludes that “it makes it crystal clear that neoliberalism is more an ideological cover for a competitive race to the bottom than it is an economic approach capable of advancing a process of human development” (p. 25).

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Cypher and Dietz (1997), Cypher (2001), and Hart-Lansberg (2002) also contend that the direct subsidies provided by the Mexican government to the export-oriented firms, as well as the large tax concessions and unlimited profit remittances they are granted, represent a major diversion of scarce resources away from more socially desirable projects designed to meet the urgent economic and social demands of the relatively larger non-tradable sector.27 Cypher (2001), for example, argues that Mexico’s ability to compete and become an efficient producer of high-value added products is hampered by the fact that, on average, it spends relatively small amounts on education and research and development. For example, “Mexico’s outlays for research and development (R&D) equaled 0.3% of GDP in 1996–2000. Advanced industrial nations regularly devote 2% of GDP to R&D, and for Japan and Germany the figure is 3%” (p. 19). In terms of human capital, even pro-market analysts such as Gruben (2000, pp. 1–7) find that Mexico’s educational attainment (as measured by average years of education) and health indicators (measured by infant mortality) are abysmal when compared to developed countries and weak relative to other Latin American nations. For example, at 11 years, Mexico’s average level of education places it markedly below developed countries such as Korea (14.6), the U.S. (15.9) and France (15.5), far below Chile (12.6), and even Brazil (11.1).28 Quintin (2002), a fellow economist at the Dallas Fed, reports that a third of the workforce has not completed primary school, and “the country today stands roughly where S. Korea did 40 years ago” (p. 3, see Chart 3). In terms of infant mortality (deaths per thousand), Gruben notes that Mexico mortality rate (at about 32 deaths per thousand) places it slightly below Brazil at 35, but markedly above Argentina (22) and Chile (12), not to mention Korea, the U.S., and France (all in single digits). The low and unequal levels of human capital accumulation in Mexico and the rest of Latin America are particularly worrisome in light of new empirical evidence provided by the pioneering work of Birdsall, Londono, and O’Connell (1998), and more recently, Baer, Campino, and Cavalcanti (2001), and Ramirez and Nazmi (2003). For example, Birdsall finds that, via both demand and supply channels, the region’s low and unequal accumulation of human capital not only helps explains Latin America’s skewed distribution of income and poverty,29 but also contributes to explaining the region’s low rates of investment and economic growth. Her estimates suggest that both education accumulation along with capital accumulation have a positive and statistically significant effect on economic growth. Ramirez and Nazmi also report estimates from a panel regression of nine major Latin American nations over the 1983–1993 period which suggests that public expenditures on education and healthcare have a positive and statistically significant effect on private capital formation and economic growth. Both sets of results are consistent with the literature that argues that “better-educated workers earn higher incomes and, particularly in the case of women, are more effective in household production of children’s good health and schooling” (see Birdsall et al., 1998, p. 169). More importantly are Birdsall’s findings, reported in Table 2, which show that, controlling for the level of education, “the degree of inequality in the distribution of education has a strong and robust negative effect on growth” (p. 169). That is, greater inequality in access to education, independent of both the education level variable and the negative effect of the natural resource variable, is associated with lower rates of economic growth in Latin America. Finally, the elasticity of income growth of the poor with respect to initial inequalities in the distribution of land and education “have a clear negative effect on the income growth of the poor, by magnitudes twice those of their effects on average income growth” (p. 170). From a policy standpoint, she

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concludes that if the great majority of the people of Latin America are to benefit from more growth and improved equity, then effective institutions must be created to ensure greater and more equal access to education and healthcare so as to reverse “the trickle-down” approach so prevalent in the region in recent years. Finally, NAFTA critics contend that the most important and politically sensitive impact of the accord is in the area of subsistence agriculture because of its potential to increase both the supply of unemployed Mexican farmers, rural violence, and migratory flows within Mexico and to the U.S., over and above, presently high levels.30 Small growers of corn, beans, barley, and wheat in Mexico which number 8 million people or 22% of the economically active population do not have the resources, access to credit, and technological knowhow to compete effectively against relatively more efficient (and heavily-subsidized) agricultural producers in the U.S. and other industrialized nations. For example, The Economist (2002) reports that “in the U.S. subsidies per farmer averaged US$ 20,000 in 2001, while in Mexico they were significantly below US$ 1000” (p. 31). Moreover, critics point out that the aforementioned levels of support to U.S. farmers do not even include the amounts in the farm bill signed by the Bush administration in 2001, which will provide U.S. farmers with an additional US$ 180 billion over the next 10 years! To be sure, the U.S. is by no means the only or worst offender because the governments of Europe and Japan confer more generous levels of support to their farmers (see The Economist, 2002, p. 31). In order to protect subsistence farmers in Mexico, tariff reductions under the NAFTA were scheduled to be phased in over a 15-year period, with the removal of the last tariffs in 2008. In practice, the removal of government subsidies, price supports, and the elimination of institutional support to this sector following the reform of Article 27 of the Constitution in 1992, which essentially privatized the ownership of ejido (communal Indian) land, led to a pronounced decline in agricultural prices and output. For example, official Mexican data reveals that between 1996 and 1999, corn and wheat production fell, respectively, 17.8% and 12.2%, while bean production rose by a mere 1.4%.31 The dismal performance of this sector has generated a ballooning agricultural trade deficit with the U.S. that, according to The Economist (2002), reached more than US$ 2 billion in 2001.32 To compound matters, the 1994–1995 peso crisis, with its adverse output and price effects, further devastated this sector and forced the Mexican government to, de facto, import much more corn than that allowed by the tariff-rate quota (TRQ) regime in order to feed the country’s growing poor who numbered 47 million in 2000, a 17.5% increase over 1996 (see Cypher, 2001). At the time that NAFTA was negotiated, Mexican corn producers (who number over 3 million and have, on average, five dependents) were given assurances, under Chapter VII, that the government would support them during the 15-year transition period with a variety of programs, ranging from direct money outlays, credit, investments in infrastructure, and technical advise. In reality, the 15-year transition was compressed into 30 months and, according to Raghavan (2002), “Between January 1994 and August 1996, domestic corn prices fell 48%, thereby converging with the international market some 12 years ahead of the period set by NAFTA, thus forcing Mexican corn producers into a rapid [and painful] adjustment” (p. 5). He attributes this to the Mexican government not implementing the TRQ as planned, “but instead exempting all corn imports [mostly from the U.S.] from tariff payments after 1994, on the grounds of a need to lower prices and reduce inflationary pressures” (ibid.).33 Even scholars such as Lustig

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(2001) who are, in general, very supportive of market-based, outward-oriented reforms, and NAFTA in particular, are led to conclude that, “Mexico’s market oriented reforms . . . hurt performance in agriculture, where elimination of state intervention left an institutional vacuum and many [subsistence] producers with less access to credit and technical assistance. In developing country economies with market failures in the traditional sectors—in credit and insurance markets, for example—policies to enhance productivity cannot rely simply on withdrawing state intervention, but must rather seek out an appropriate balance of state and market.” (p. 90) NAFTA critics such Cypher and Raghavan do not mince words. In their view, the decision to liberalize the agricultural sector under NAFTA, particularly the corn sector, was based more on neoliberal ideology than a careful analysis of how the accord would affect Mexican subsistence agriculture.

5. Summary and conclusion This paper has assessed the evolution and performance of several key economic and social variables in Mexico following the passage of NAFTA. The evidence shows that under NAFTA Mexican trade and foreign direct investment inflows have risen at rapid rates, particularly in the export-oriented Maquiladora (assembly-line) sector. However, the literature suggests that it is hard to disentangle the effects of NAFTA from other non-NAFTA factors such as demand in the U.S. in explaining rising trade flows between the U.S. and Mexico, particularly in the booming Maquiladora sector. More definite conclusions can be made with respect to FDI flows, where empirical evidence supplied in this paper shows that institutional reforms under NAFTA have created a favorable environment for foreign investors. The contribution of FDI flows to the financing of capital formation is not an unmitigated blessing, however. The paper shows that, once the rising remittances of profits and dividends are deducted from gross FDI flows, the contribution FDI to capital formation is far less than that advertised by neoliberal enthusiasts. Mexico has also done an effective job of channeling these flows to the auto and engine assembly sector. There is also some anecdotal evidence—disputed by critics on the left—which suggests that some auto plants are engaged in substantial subcontracting for parts and repairs from domestic suppliers. Thus, there is the potential for “learning from doing” as local suppliers gain experience in meeting the design and quality standards of TNCs. Turning to the performance of employment growth and real wages in the manufacturing sector, the record has been lackluster at best and disastrous at worst. Employment in the manufacturing sector fell dramatically after the peso crisis, and remains stagnant as we enter the 21st century. Real wages in manufacturing, not to mention real minimum wages, have plunged since the peso crisis and have yet to recover levels attained in the mid-1980s. In terms of productivity performance in this sector, no strong conclusions are possible given the poor quality and paucity of the data and the different methodologies used by investigators, which, in part, explains the conflicting estimates. At best, the data show that average labor productivity has risen at healthy rates in the export-oriented manufacturing sector, and stagnated in the non-tradeable sector

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where most of the country’s small and medium-sized firms reside. This does not bode well for the country because a dynamic sector catering to the domestic market is needed to absorb the estimated 1.2–1.5 million new entrants into the labor force each year. Mexican distributional indicators have also performed poorly during the 1990s. Both the functional and size distribution of income (not to mention wealth) have become more skewed during the period of trade and investment liberalization. Critics of the accord have furnished compelling evidence which shows that the opening of Mexican goods and asset markets has conferred disproportionate benefits to those regions, sectors, and socioeconomic groups that have the requisite infrastructure, financial resources, and educational background to take advantage of market-based opportunities. In this respect, Mexico, like the rest of Latin America, is characterized by low and unequal levels of human capital accumulation. Not surprisingly, relatively few and large firms operating in sectors that are well-integrated with the U.S., primarily in the northern states, have benefited from the liberalization process, while the small and relatively numerous labor-intensive firms, often with no access to credit (and residing in the country’s poor middle and southeastern states), have been left to languish. In this connection, subsistence farmers producing staples such as corn and beans have been particularly hard hit by the withdrawal of state and institutional support. Despite strong assurances from NAFTA negotiators, Mexican corn producers have been harmed by falling prices and output generated by a flood of imports from heavily-subsidized corn producers in the U.S and elsewhere. As indicated in the introduction, this paper provides only a partial and modest contribution to our understanding of the complex economic effects and broad-ranging issues that NAFTA has generated for Mexico. The paper also makes evident that the NAFTA accord represents the latest (and most dramatic) installment of a process of globalization that began in earnest with the demise of state-led ISI following the onset and aftermath of the debt crisis. Many of the favorable as well as disturbing trends examined above have been in place for sometime now. NAFTA has only institutionalized, accelerated, and “locked-in” this market-based process of integration. Still, as the economist and social critic Polanyi (1944) reminds us, this market-determined path is by no means irreversible, particularly if the distributional and regional costs generated by freer trade are not addressed by assertive public policy that complements markets with adequate economic and social infrastructure and creates an effective legal–institutional framework that promotes competition and equality of opportunity. Not surprisingly, the debate surrounding NAFTA’s passage, followed by its phased implementation, has led to the establishment of transnational citizen networks such as the coalition for justice in the Maquiladoras, the fair trade campaign, union groups such as the United Electrical Workers and the Frente Autentico del Trabajo, the Mexican Action Network on Free trade, Mujer-a-Mujer, Southerners for Economic Justice, etc. All of these community action groups and organizations have raised the general public’s awareness of the importance of protecting labor rights, wages, working conditions, and the environment in Mexico and elsewhere. In the final analysis, it is up to these activist groups and non-governmental organizations, and the public at large, to ensure that NAFTA becomes a vehicle for pressing their respective governments to both enforce existing labor laws and environmental regulations in the NAFTA document and device future trade and investment policies that are transparent, increase corporate accountability, and are armed with appropriate sanctions to ensure equitable and sustainable development for the citizens and communities of the signatory countries.

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Notes 1. In 1999, 409 million people lived in the three nations of North America, and their combined gross domestic product (GDP) was almost US$ 10 trillion. In terms of territory, population, and GDP, NAFTA is larger than the 15-nation European Union (see Pastor, 2001, Table 1.1, p. 7). 2. With the enactment of NAFTA, average U.S. tariffs on Mexican products fell immediately from 3.3% to 1.1%, while Canadian tariffs dropped from 2.4% to 0.9%. Mexican average tariff levels fell from 11% to 5% (see 2000, pp. 5–6). 3. Estimates obtained from Banco de Mexico, The Mexican Economy 1999. 4. Operating under the transitional adjustment assistance program (NAFTA–TAAP), the U.S. Department of Labor certified that between 1994 and 1999 nearly 260,000 workers were eligible for assistance because of jobs lost due to import competition from Mexico and Canada or because of plant relocation to either country. In other words, the actual amount of U.S. jobs displaced because of NAFTA is 86.7% of the numbers estimated by the Hijinosa et al. model. For further details, see Haar and Garrastazu (2001), Table 2, p. 5. 5. On this point Lustig (2001) observes that “. . . it took Chile more than ten years—and a severe financial crisis in 1982—to reap the benefits of market-oriented reforms and macroeconomic discipline” (p. 89). 6. For a cogent discussion of the impact of trade liberalization on private sector expectations, and therefore, the credibility of reforms, see Rodrik (1992, pp. 87–105). 7. For further details on the devastating impact of the IMF-sponsored austerity program, see Ramirez (1997, pp. 129–156). 8. Of the many restrictive assumptions underlying the basic HO trade model (e.g., identical preferences and technology between trading nations), perhaps the most problematic one is the assumption of full employment of economic resources. This is a totally unrealistic assumption in LDCs such as Mexico where a significant percentage of the labor force is either unemployed, underemployed, or in the informal sector (see Table 1). Under these conditions, it is possible to increase production (and employment) in both traded and non-traded sectors without sacrificing economic efficiency (see Husted & Melvin, 2000). 9. See Irwin (2002) for a sensible treatment of the relative costs and benefits associated with freer trade. 10. Calculated from Banco de Mexico (1999), Appendices A and B, pp. 208–230. 11. In fact, the Hausmann test shows that the instrumental variables model is not statistically different from the OLS model, thereby obviating the need for an instrumental variables approach. Nevertheless, Gruben proceeds to construct an instrumental variable equation “. . . because of theoretical reasons to suspect simultaneity bias” (p. 19). 12. It goes without saying that the US$ 51 billion rescue package put together by the Clinton administration played a key role in preventing a financial and economic meltdown in Mexico (such as the one now taking place in Argentina) with far-reaching repercussions in terms of political turmoil in Mexico, large-scale illegal immigration, and the likely loss of jobs in export-oriented industries in the U.S. For further details see Whitt (1996). 13. For further details see Ramirez (2002, pp. 416–421).

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14. Critics such as Cypher and Dietz (1997) also emphasize that substantial flows of capital leave LDCs such as Mexico via the subsidiaries’ widespread practice of intra-transfer pricing, viz., their over-invoicing of imports from, and under-invoicing exports to, the parent company. 15. FDI stock data obtained from United Nations, World Investment Report, 1998. New York and Geneva: United Nations (1998), Table B.3, pp. 374–375; and ECLAC, Foreign Investment in Latin America and the Caribbean—1999 Report. Santiago, Chile: United Nations (2000, p. 9), and ECLAC (2002, Table 12, p. 760). 16. The findings reported by Agosin (1995) on the subcontracting practices of TNCS in Mexico are corroborated by two recent studies by Moctezuma and Mugaray (1997, pp. 95–103) and Buitelaar and Urrutia (1999, pp. 151). 17. Estimates of the size of the informal sector range between 50% and 60% of the economically active population (see Quintin, 2002). Mexican economist Peters (2000) reports that “Between 1988 and 1996, 6.5 million persons did not find a formal job—i.e., only 39.3% of the growing EAP found a formal job, the rest of employment generation was created in the informal sector and/or migration to the U.S.” (p. 163). 18. Mexican economist Peters (2000) contends that real minimum wages are a very important source of income for poor households in Mexico. His estimates for 1996 show that “the current monetary income of 51.2% of Mexican households is between 0 and 3 times the minimum wage” (p. 161). 19. Keynes (1936), for example, argued that “Measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favorable to the growth of capital” (p. 373). 20. For data on Mexican labor [and total factor] productivity during the 1960s, 1970s, and early 1980s, see Looney (1985, Table 1.2, pp. 6–7). See also, Ramirez (1989, pp. 45–54). 21. Grupo Financiero Bancomer economists Sanchez and Karp (1999), both strong supporters of the NAFTA, also note that “Surprisingly, since NAFTA took effect, no clear increase in average productivity or in real wages has occurred [in the manufacturing sector] . . . After the 1995 crisis, NAFTA seems to have involved a significant absorption of cheap labor, thereby reducing productivity in this sector” (p. 17). Insofar as real wages are concerned, their figure (Chart 5) clearly shows that since 1996 real wages have been stagnant in the manufacturing sector and well below their levels in 1994. 22. Senior Dallas Fed economist Quintin (2002) cites evidence which indicates that “over half of Mexican firms [mostly small and medium-sized ones] described their access to financing as severely limited, compared with 15% in the U.S. In Singapore . . . only 10% of firms reported that they faced the same situation” (pp. 3–4, see also Chart 7). In this connection, Cypher (2001) reports evidence that as a result of the privatization and near collapse of the Mexican banking system bank loans to the private sector fell from 45% of GDP in 1994 to “a mere 11.6% [in 2000]” (p. 13). For further details, see Dallas Fed Vice President, William Gruben (2000, pp. 1–7). 23. The divergent trend between productivity and real wages, in and of itself, should give pause to neoliberal economists. After all, economic theory tells us that, in competitive labor markets, average real wages reflect average productivity. In other words, unit labor

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costs should remain roughly the same over time. As clearly shown by Table 6, this has not been the case in recent years for the Mexican manufacturing sector. Quintin (2002), a senior economist at the Dallas Fed, observes that “firms that receive foreign direct investment account for over 20% of all employment in Mexico . . . Within Manufacturing, the Maquiladora sector accounts for a third of foreign [direct] investment” (p. 2). The high turnover rates that Kopinak (1996) finds in the 10 Nogales Maquilas she studied is consistent with the view that workers who are dissatisfied with their working conditions “have few alternatives except to quit their jobs and find work at other Maquilas with better working conditions” (p. 177). For further details see Quintin (2002), Figs. 1 and 2, p. 2. For earlier estimates on Mexico’s dependence on the U.S. market, see Ramirez (1993, pp. 182–187). Rodrik (1999), another important critic of the neoliberal model, makes the important point that the “export-at-all costs” strategy implemented by Mexico will not “not yield much” unless “policymakers . . . focus on the fundamentals of economic growth— investment, macroeconomic stability, human resources, and good governance—and not let international economic integration dominate their thinking on development” (p. 13). His research leads him to conclude that, in the absence of necessary complements, a strategy of external liberalization “will cause instability, widening inequalities, and social conflict” (p. 137). Quintin (2002) also comes to a similar conclusion. He notes that “as recently as 10 years ago [1990], only a third of Mexico’s education budget was allocated to primary education [compared to Korea’s two-thirds back in 1970]” (p. 4). This share rose to one half in 1995 but, according to Quintin, “it will take a generation for these efforts to begin paying off” (p. 4). For example, Birdsall’s estimates suggest that “if the economies of Latin America had maintained the same income distribution throughout the 1980s as in 1970, the increase in poverty over the 1983–1995 would have been smaller by one half (Fig. 6)” (p. 170). Dallas Fed Economist Pia M. Orrenius (2001) reports that border patrol apprehensions have jumped from about 900,000 in 1993 to 1.5 million in 1999 (see Fig. 2, p. 3). She further notes that “the undocumented immigrant population from Mexico was estimated at 3.1 million in 1997 (about 60% of the total undocumented population of the U.S.) . . . and that the net inflow of illegal immigrants from Mexico, excluding short-term cyclical migrants, averaged about 202,000 immigrants per year between 1987 and 1996” (p. 2). Obtained from Banco de Mexico (1999), The Mexican Economy, Table 12, p. 219. Wiggins, Preibisch, and Proctor (1999) in a careful three-year (1996–1998) study of the impact of policy liberalization on four rural communities in Mexico, finds that, contrary to neoliberal claims, “the hope that private companies would provide services to farmers once supplied by the state has been rebuffed. Farmers face technical and ecological difficulties with their crops, but neither state nor private actors are able or willing to offer any help. Technical assistance and credit are notable by their absence: the private sector seems uninterested in the small farmers of the four villages studied” (p. 1042).

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