Tuesday, October 17, 2006

DeLong: Why didn't Mexicans get more from NAFTA?

Comparative advantage is the cornerstone of globalization and the justification for even unilaterally lowering trade barriers and tarrifs. If there had been a Nobel prize for Economics in 1820 Ricardo (note from bio: eloped with a Quaker and became a Unitarian!), who developed the theory, would have won it. Comparative advantage is why neoliberals backed NAFTA; we figured it had to be very good for Mexico. The problem now is that while it might have been good, it hasn't been great:
Brad DeLong's Semi-Daily Journal: My Talk at the Center for Latin American Studies on NAFTA

... 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...

From an economist's perspective, the real problem is the challenge to theory of comparative advantage. If it turns out that comparative advantage is fatally flawed in the real world ...

No comments: