July 16, 2014
In an effort to defend NAFTA and promote similar agreements, the Peterson Institute for International Economics (PIIE) – Washington’s most influential think tank on international economic policy – had a full day of events yesterday. The program highlighted one of their recent publications [pdf], which seeks “not to rehash old claims that may have been overstated but to clear the air so that the benefits and challenges of trade can be examined in an objective light.” In spite of this disclaimer, the authors grossly overstated the benefits of NAFTA for Mexico, and put forward a number of misleading claims, including a particularly egregious bait-and-switch used to justify a rant against the economic policies of the “Andean-3” aka Bolivia, Ecuador and Venezuela. It is a good example of how ideology can trump facts when it comes to commercial agreements made in Washington.
Earlier this year, CEPR published a paper giving an overview of the Mexican economy in the NAFTA era (“Did NAFTA Help Mexico? An Assessment After 20 Years”), so I will focus here on the claims made about Mexico by the PIIE economists. In terms of their bottom line for Mexico, the authors’ findings concur with our conclusions. They say that “Mexican growth in the NAFTA era has been disappointing.” But they also argue that without NAFTA Mexico’s economy would be $170 billion smaller. In other words, they attribute half of Mexico’s (per capita) growth rate to trade in goods and services stimulated by NAFTA (see table below.) Given Mexico’s population (about 118 million), this amounts to a payoff of $1,441 per person, or about $4 per day. In a country where over 27 percent of the population lives on less than $4 a day – in rural areas it is over 48 percent of the population – this would be very significant. In reality, results such as these are produced by economic models that are highly sensitive to parameters which the researchers themselves determine, so it is easy to end up with results that corroborate one’s worldview.
According to Hufbauer’s estimations (above), Mexico’s growth performance – which ranked 18th out of 20Latin American economies during the past 20 years – would have been less than half its actual abysmal performance without NAFTA. This is a bit tough to swallow. How badly can an economy like Mexico’s perform, when the rest of the region, including the U.S. economy is growing? And if that is the baseline, what does it say about what else is wrong with the Mexican economy? After all, NAFTA was mostly a continuation of policies adopted in the decade prior to the agreement.
The author of these conclusions is Gary Clyde Hufbauer, a name with which anyone who has done research on NAFTA will likely be familiar. For example, in 1993 he wrongly predicted that NAFTA would expand the U.S. trade surplus with Mexico. At the time, he was widely cited in the news media and by those who supported signing the deal. Under NAFTA, the opposite happened as the U.S. surplus turned into a growing deficit. He also said that NAFTA would “lead to long-term growth in Mexican per capita income,” eventually reaching “half of the U.S. level, a gain that substantially would ease illegal immigration to the U.S.” Instead, Mexico’s growth rate slowed, its unemployment level worsened, and immigration soared in the years following NAFTA (until post 9/11 border restrictions and two recessions, including the Great Recession, dampened it).
Certainly NAFTA is not solely to blame for this poor economic performance, but trade liberalization was part of a set of neoliberal economic reforms that on the whole resulted in a dramatic failure. While countries such as Brazil and Venezuela lifted millions out of poverty, Mexico’s stagnant poverty rate and growing population meant an additional 14.3 million people were left below the poverty line in 2012 as compared to 1994, the first year under NAFTA.
The policy brief takes an interesting turn when Hufbauer tries to defend Mexico’s low economic growth by comparing it to growth in the “Andean-3,” which he defines as Bolivia, Ecuador and Venezuela. He writes,
As mediocre as Mexican GDP performance was for two decades, it could have been worse. Look no further than the Andean-3 to see the adverse impact—in per capita income levels as well as growth—of populism, macroeconomic follies, and deep state intervention.
There are a few problems with this. First of all, Bolivia and Ecuador have grown faster than Mexico since 1994. That’s right, it is only by picking a third country, Venezuela, and averaging across all three countries since 1994 that one can get Hufbauer’s result. It is extremely misleading to claim that Mexico grew faster than a certain group of countries — in this case Bolivia, Ecuador and Venezuela – when in fact Mexico grew slower than two out of the three. When I asked the Dr. Hufbauer whether there was some mistake in my understanding, he simply confirmed that Mexico indeed grew slower than two of the three “Andean-3” countries.
Hufbauer attributes the supposedly poor economic performance of the “Andean-3” to “populism, macroeconomic follies, and deep state intervention,” but the growth rate that he uses is measured from 1994, and therefore does not correspond with the period in which the populist (left) governments were elected. He says that these countries took a “sharp left turn,” likely in reference to the elections of Evo Morales, Rafael Correa and Hugo Chávez, but these took place in 2005, 2006 and 1998, respectively. It makes no sense to critique a set of polices based on data on the country’s economic performance from more than a decade before those policies were enacted or even proposed.
Furthermore, we can look a little more closely at the Venezuelan example, since Hufbauer used that country’s data to make the country group as a whole appear as though it underperformed compared to Mexico. Was it “populism” and “deep state intervention” that led to Venezuela’s poor growth performance when we average up the years since 1994?[1] Not even close. The country suffered one of the worst growth collapses in a dismally performing hemisphere for the 20 years prior to 1998. This did not turn around until the Chávez got control over the oil industry in 2003. (The oil industry, which is the most important sector of Venezuela’s economy, was controlled by Venezuela’s political opposition from 1999-2003, who used it to try and overthrow the government). Over the past decade, the Venezuelan economy has grown about twice as fast as Mexico’s.
Seemingly without irony, Hufbauer’s paper is titled “NAFTA at 20: Misleading Charges and Positive Achievements.” While I have tried to point out a few misleading claims related to Mexico, there is more to be done. As trade and investment agreements that hurt developing countries continue to move forward, and as their scope and impact only widens with each new round, there is a great demand for honest research that explains the connections between trade and international development goals around poverty reduction and inequality, as well as between trade and each country’s capability to pursue its national priorities.
[1] A meaningless date for Venezuela used for comparison with Mexico under NAFTA.
