Free Trade Battle – Vote of Confidence Lacking

Viewpoint / Mark A. Martinez

Sunday December 7, 2003

Several weeks ago protesters from Latin America and the U.S. rallied in Miami against “spreading the magic” of the North American Free Trade Agreement (NAFTA) to the rest of the hemisphere. Concerned about what’s happened in Mexico demonstrators argued against transferring a flawed market pact to the rest of the Americas in the form of the Free Trade Area for the Americas (FTAA) accord.

This is puzzling for many because Mexico’s economy has changed significantly under NAFTA. Private investment rather than state-led initiatives now drives Mexico’s economy, while principal tradable goods have changed from basic commodities to telecommunication equipment and electrical machinery. In addition, while petroleum still generates a majority of Mexico’s income, it no longer dominates Mexico’s export sector.

In spite of these developments the promise of free trade – well-paying jobs, stable employment, keeping Mexicans in Mexico, accelerated economic growth, and development – has yet to pay off. Indeed, as NAFTA gets ready to celebrate 10 years in January, one question is increasingly asked in Mexico: If Mexico is doing so well, why are Mexicans doing so poorly?

A review of basic economic indicators helps answer this question. On the wage front things are positively dismal. Almost 51% of Mexico’s workers earn two minimum wages or less (minimum wage is about $4.00 per day). Critical here is that minimum wage has lost 2/3 of its purchasing power since 1983, meaning that workers need to work three minimum wage jobs today to buy what they bought in 1983.

One of the reasons for this is that, in spite of several strong years, overall economic growth has been rather laggard. For example, per capita Gross Domestic Product (GDP, what a country produces and sells each year) in 2002 was only 7.3% greater than it was in 1982, an annual growth rate of 0.35%. Similarly, per capita fixed investment – necessary for equipping a population with skills and education – was only 0.2% higher than in 1983, a paltry 0.04% growth rate per annum.

The impact of declining wages and lethargic growth come to life when we look at specific sectors of the economy. Since 1983, when Mexico began embracing free markets, its manufacturing sector registered average growth rates of 2.9%, and ticked up to 3.6% during the NAFTA era (1994-2002). These are respectable numbers until we consider that between 1935 and 1982 manufacturing growth rates averaged 6.7%.

Surely, one might argue, “We must consider exports, which have grown under NAFTA and made Mexico more dynamic.” Think again.

First, exports are growing at about the same clip as under Mexico’s state-led economy. For example, while exports grew 11.8% during the NAFTA period (1994-2002), from 1951 to 1981 manufacturing exports grew at an 11.9% clip. Second, manufactured exports may be a misleading indicator because the maquiladora sector – specially zoned export assembly areas created by the state in the 1960s – has been the primary force behind growing exports. Finally, outside of the maquila sector job growth has been flat, meaning NAFTA’s direct impact on job creation has been negligible.

In Mexico’s banking sector, things aren’t much better. In fact, its story in the neoliberal era is perhaps the industry worst. To be sure, President Lopez Portillo’s ill-advised nationalization in 1982 didn’t set a positive tone, but the banks liberalization and eventual privatization (from 1988-1992) were akin to forced marches that left the industry in the hands of political cronies and un-skilled financiers.

Because the technical details are complex, the best way to picture Mexico’s banking collapse is to think about the recent scandals in Corporate America and our own Savings & Loan debacle. What moves Mexico beyond the cronyism and inside deals that caused financial uncertainty here is that:

· Mexico paid more to bail out the banking system ($130 billion) than it received when it sold them.

· Eighty percent of Mexico’s banks are now in the hands of foreigners.

· Credit has been suppressed across the country.

In the case of the latter, in 2002 bank credit for businesses and individuals – necessary for small business investment and growth – was 55.6% less than in 1993 and 9.1% less than in 1982. All of this has contributed to an inefficient and costly banking system that helps us understand why many Mexicans keep their money elsewhere (according to one public official only 27% of Mexicans participate in the formal banking system).

While I could continue, it’s sufficient to say Mexico’s oil (no R&D), agriculture (a net importer) and other industries have fared similarly, while wealth disparities have increased across the country. To put this all in perspective – and in terms everyone understands – rates of migration from Mexico to the U.S. have increased rather than fallen since NAFTA. In fact, the number of Mexicans who have left Mexico since 1980 is three times the previous 50 year period (1930-1980).

None of this is a vote of confidence for NAFTA, and helps us understand why protesters in Miami were concerned about “spreading the magic” of NAFTA to the rest of the hemisphere. It also helps understand why few, if any, will be celebrating NAFTA’s tenth anniversary in Mexico come January 1.

Dr. Mark A. Martinez is an associate professor of American foreign policy and international relations at California State University, Bakersfield.