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Mexico under NAFTA: a critical

assessment
Miguel Ramirez
The Quarterly Review of Economics and Finance
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T he Reshaping of Mexican Labor Export s under NAFTA: Paradoxes and Challenges

Humbert o Márquez Covarrubias, Raúl Delgado Wise
T he Mexico-Unit ed St at es migrat ory syst em: Dilemmas of regional int egrat ion, development , and emi…
Humbert o Márquez Covarrubias
Working Group on Development and Environment in t he Americas

Lyuba Zarsky
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 for-
eign 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 con-
cerned, 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 associ-
ated with significant and long-lasting effects on economic growth, trade and investment flows,
∗
Tel.: +1-217-333-8388.
E-mail address: ramirez@uiuc.edu (M.D. Ramirez).
1062-9769/$ – see front matter © 2003 Published by Board of Trustees of the University of Illinois.
doi:10.1016/S1062-9769(03)00052-8
864 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863–892
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 elimina-
tion 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.
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863–892 865
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 Com-
munity) 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, bank-
ing 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 opportuni-
ties 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, bank-
ing 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 em-
ployment 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
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 Eco-
nomic 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
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 Ac-
tion 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,
868
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863–892
Table 1
Mexico: selected economic indicator, 1990–2001
Item 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001a
Percent change
Real GDP 4.0 3.6 3.6 1.7 4.5 −6.2 5.4 6.7 4.8 3.7 6.8 −0.9
Real GDP per capita 1.7 1.4 0.4 −1.9 0.8 −7.8 3.6 5.0 3.3 2.1 5.2 −2.5
Consumer prices 30.0 18.8 11.9 8.0 7.1 52.1 28.0 15.7 18.6 12.3 9.5 6.4
Reel minimum wage −7.3 −6.5 −7.2 −5.6 −5.0 −21.0 −18.0 −11.4 −3.4 −2.6
Open unemployment 2.7 2.7 2.8 3.4 3.9 6.4 5.5 3.7 3.2 2.5 2.2 3.0
Broad open unemploymentb 4.4 4.2 4.8 5.6 6.1 8.6 6.4 4.6 4.2 4.0 – –
Underemploymentc 20.5 20.8 21.5 23.0 22.1 25.9 25.2 23.4 21.2 20.3 – –
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 23.0 21.0
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 −3.1 −3.0
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 96.0 121.8 129.4 136.3 166.4 158.5
Foreign investment (US$ billion) 3.7 3.6 3.6 4.9 10.2 7.6 9.2 12.8 11.3 12.1 13.2 24.5
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.
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, oc-
cupations, 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 surround-
ing 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 elimi-
nation 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 ba-
sic 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 Cana-
dian 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
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 14.0 1991 37.1
1981 13.8 1992 40.4
1982 11.7 1993 42.1
1983 14.0 1994 43.1
1984 16.9 1995 39.1
1985 19.0 1996 38.5
1986 25.9 1997 40.9
1987 25.7 1998 45.1
1988 33.1 1999 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.
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 Mex-
ican 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 pro-
portion 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.
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 ef-
fect 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. Sur-
prisingly, 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, cor-
rected 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 export-
related 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
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 pur-
sued 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 Econ-
omy 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
and diverse ranging from the general level of economic activity to anticipated tax and tariff poli-
cies, 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 imple-
mentation 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 responsibil-
ities 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 dur-
ing 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 immi-
nent 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 govern-
ment 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
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) (2.01)∗ (2.15)∗ (−5.07)∗ (3.18)
2
+ 0.48D2
∗
− 0.35D3∗ Adj. R = 0.74, S.E. = 0.23, F -statistic = 12.21∗ ,
(3.39) (−5.28)
D.W. = 1.85, Akaike criterion = 0.14, Schwarz criterion = 0.50
where denotes the difference operator, ECt−1 represents the lagged residual from the coin-
tegrating 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,
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 8.3 7.2 7.5 7.2 14.6 12.1 25.7 27.9 22.9 54.3a 22.0
Mexico 5.6 8.7 7.1 7.1 16.4 16.6 15.7 16.3 2.8 13.2 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 4.6 −1.7 −2.1 0.8 6.0 10.9 16.7 17.4 17.8 43.8 8.1
Mexico 0.7 4.2 3.4 3.1 11.2 7.9 8.0 10.8 7.2 9.3 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.
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 1,729.0 1,165.8 453.3 109.5 18.0 0.4

1986 2,424.2 1,918.9 323.1 151.2 30.8 0.2
1987 3,877.2 2,400.5 1,433.9 21.2 48.8 15.2
1988 3,157.1 1,020.0 1,877.4 246.8 24.9 12.0
1989 2,499.7 982.3 1,102.3 386.3 9.5 19.3
1990 3,722.4 1,192.9 2,203.1 171.4 93.9 61.1
1991 3,565.0 963.6 2,138.0 387.5 31.0 44.9
1992 3,599.6 1,100.8 1,700.0 750.9 8.6 39.3
1993 4,900.7 2,320.5 1,730.7 759.9 55.1 34.5
1994 10,158.8 5,878.9 2,929.5 1,239.6 102.9 7.9
1995 7,613.3 4,294.0 2,307.9 923.5 79.0 8.9
1996 9,186.1 5,236.1 2,939.6 826.7 91.8 45.9
1997 12,831.0 7,826.9 3,207.8 1,549.7 108.4 138.3
1998 11,311.0 6,809.2 2,827.8 1,357.3 203.6 113.1
1999 12,100.0 7,296.3 3,025.0 1,331.0 242.0 205.7
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.
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 15.9 15.1 31.0 26.2
Manufacturing 9.5 17.7 21.5 33.7
Brazil
All sectors 4.7 5.2 6.1 4.3
Manufacturing 8.8 5.9 22.4 5.3
Mexico
All sectors 17.2 48.6 29.3 71.4
Manufacturing 10.3 48.6 20.6 71.4
Source: United Nations, World Investment Report, 1998. New York and Geneva: United Nations (1998), Ta-
ble VIII.5, p. 257.
a
Export propensity is defined as the ratio of exports to sales multiplied by 100.
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 non-
members 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 ser-
vices, 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 en-
hance 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 sec-
tors, 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
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 link-
ages with the domestic market, make significant contributions to the transfer of technologi-
cal 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 signif-
icantly 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.
Table 6
Mexico: employment, wages, productivity, and unit labor costs in Mexico, 1990–1999a
Year Employment in Wages in Minimum Labor Unit labor
manufacturing manufacturing wages productivityb costsc
1990 102.2 102.5 63.8 112.0 100.1
1991 100.6 109.3 61.0 118.2 99.2
1992 96.7 119.0 58.2 126.0 102.2
1993 89.8 127.6 57.3 134.1 100.6
1994 87.1 132.3 57.3 143.3 98.2
1995 79.3 114.4 50.2 148.1 83.2
1996 81.2 102.0 46.0 159.4 69.5
1997 85.0 101.0 45.6 166.5 65.5
1998 86.2 102.8 45.3 173.1 65.1
1999 88.0 99.0 44.0 171.7 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 employ-
ment 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 “invis-
ible 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
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 produc-
tivity 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 non-
Maquiladora 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
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 solidi-
fied 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 struc-
turally 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 produc-
tion 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).
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 pio-
neering 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 cap-
ital 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
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 insti-
tutional 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 be-
tween 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
(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 re-
mittances 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 manu-
facturing 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
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 ad-
vantage 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., pri-
marily 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 imple-
mentation, 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.
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 immedi-
ately 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 expecta-
tions, 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).
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 econom-
ically 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 sup-
porters 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 sec-
tor] . . . 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
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.
24. Quintin (2002), a senior economist at the Dallas Fed, observes that “firms that re-
ceive foreign direct investment account for over 20% of all employment in Mexico
. . . Within Manufacturing, the Maquiladora sector accounts for a third of foreign [di-
rect] investment” (p. 2).
25. 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).
26. 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).
27. 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).
28. 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).
29. 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).
30. 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 es-
timated 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).
31. Obtained from Banco de Mexico (1999), The Mexican Economy, Table 12, p. 219.
32. 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).
33. According to Raghavan (2002), “during the 15-year transition period, the tariff free
quota, initially set at 2.5 million tons a year, was to be expanded at a constant rate of
3% per annum, while the applicable ad valorem tariff for imports exceeding the quotas
would be reduced from 206% in 1994 to 0% by 2008” (p. 4).
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