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Has Neo-Liberalism Failed Mexico?
J Bradford DeLong is Professor of Economics at the University of California at Berkeley and was Assistant US Treasury Secretary during the Clinton Presidency. His last piece on Webdiary was Man's fate / Man's hope.
by J Bradford DeLong
Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the United States could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.
Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. Next year, Mexico’s real exports will be five times what they were in 1990.
It is here – in the rapid development of export industries and the dramatic rise in export volumes – that NAFTA made the difference. NAFTA guarantees Mexican producers tariff and quota-free access to the US market, the largest consumer market in the world.
Without this guarantee, fewer would have invested in the capacity to satisfy the US market. Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.
Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation, which should have accompanied the guarantee that no future wave of protectionism in the US would shut factories in Mexico.
The key word here is “should.” Today’s 100 million Mexicans have real incomes – at purchasing power parity – of roughly $10,000 per year, a quarter of the current US level. They are investing perhaps a fifth of GDP in gross fixed capital formation – a healthy amount – and have greatly expanded their integration into the world (i.e., the North American) economy since NAFTA.
But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. (Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.)
Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.
Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.
To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they?
Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.
We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far wose off today without NAFTA and its effects weighing in on the positive side of the scale.
That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.
Copyright: Project Syndicate, 2006.
www.project-syndicate.org
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Pourquoi, Monsieur Jacques?
Heard it all before
Some very strange assumptions in this article.
"That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one."
Why? On very single economic indicator the writer himself puts up things have improved. Is there a magic level of improvement that none are aware of? And if this level is not reached should Mexico than go back to the old ways which were WORSE.
I hate the use of the term 'strawman' however that is all the writer does throughout the article. Build one up and attempt to torch it at the end.
In the mid ages Europe was controlled by the State and the Church. A person was either in or out. The control key was education and opportunity. It is natural for those that hold the reigns of power to be reluctant to let go.
Hence why the racsist dog whistle of Kim Beazley will be so effective. Holding back skilled migration is music to the ears of so many across the land. Protection rather than improvement is their mantra.
A person telling you about the evils of free trade in the third world NEVER really means the third world. They are telling you about how the evils of free trade may effect them.
Perhaps I should do myself some more learnen?
Evan Hadkins: "There is a great book on the failure of Liberalism and the rise of fascism by Polanyi (not Michael but his brother whose first name I forget)."
Evan Hadkins: "Neo-Liberalism isn't so much new as a dumb-downed and packaged version of Liberalism. So the book amounts to a great critique of neo-Liberalism before it was invented."
Promoting with conviction a book on the failure of Neo-Liberalism, on the World Wide Web? Am I the only one that sees the irony in this?
Karl Polanyi
Evan Hadkins, the book you're thinking of is probably Karl Polanyi's The Great Transformation, which first appeared in 1944.
It's an historical political economy of the Industrial Revolution in Britain. Also contains an interesting disscussion of economic subjectivity which draws on the anthropology of Malinowski.
Mainly read now, I think, by people interested in Institutional Economics.
Funny. I sorta thought he was better known than Michael Polanyi (who wrote Discrete Knowledge, yes??).
Do you work in the natural sciences, Evan Hadkins?? (don't have to tell me, for the sake "cyberspace personal privacy", of course......)
correction re. earlier post
Michael Polanyi is actually the author of Tacit Knowledge. (not "Discrete")
Damnable thing is I think I've actually managed to (more or less) read this book, once....
Mark E. Smith of British punk band The Fall once sang "(...) And the secret of my success/ Is a memory like a sieve."
The stranger bearing gifts
DeLong, while on the surface questioning free trade theory, really isn’t. Rather, he is saying free trade will work if we put in infrastructure to combat corruption.
One of the areas where free trade theory doesn’t stack up is in “intellectual property”. The key issue in
Since many countries are bowing to
Of course, there are arguments for “intellectual property”. But there are equally strong arguments against what is, in reality, a legal fiction – something created by law rather than having a natural existence. In economic terms, “intellectual property” displays the principal characteristics of public goods.
Economics is often defined as the science of the production and distribution of scarce goods. Capitalism, on the other hand, is about making money, and it is increasingly about making money by making goods that were not scarce, scarce.
Liberalism
There is a great book on the failure of Liberalism and the rise of fascism by Polanyi (not Michael but his brother whose first name I forget).
It points out that fascism arose not only in the countries who lost the First World War. That what the countries had in common was the failure of the Liberal agenda.
Neo-Liberalism isn't so much new as a dumb-downed and packaged version of Liberalism. So the book amounts to a great critique of neo-Liberalism before it was invented.
It is also well written.
Evan