The Boston Globe | January 5, 2004
THE NORTH American Free Trade Agreement celebrated its 10th anniversary on New Year's Day. NAFTA has boosted trade among the United States, Mexico, and Canada, and the agreement has not resulted in the sweeping erosion of jobs that its US opponents feared. Nor has it resolved deep-seated problems that have kept Mexico from fulfilling its potential.
A decade ago, Ross Perot worried about the "giant sucking sound" of US jobs being pulled to Mexico if NAFTA became law. Instead, the United States embarked on an economic boom in which trade with its neighbors was a minor factor. Canada prospered as well.
In Mexico the results were ambiguous, according to a study by the World Bank. The study estimates that trade was 25 percent higher than it would have been without NAFTA, but the impact on Mexican workers was marginal and was skewed downward by the devaluation of the currency forced by an economic crisis in 1994 and 1995.
That crisis came on top of the catastrophe of the mid-1980s. The Mexican government had financed much of its operations through revenues from the nationalized oil company and borrowed heavily in anticipation of higher oil prices. When prices collapsed, it had to open up the economy to generate the foreign currency needed to pay its debts.
NAFTA can go only so far to make up for these dislocations. According to the World Bank, annual growth in Mexico has been only 1.2 percent a year over the last decade. Mexicans expected far more, which explains a decline in support for NAFTA in Mexico from 68 percent in 1993 to 45 percent last year. This disenchantment is exacerbated by the loss of manufacturing jobs to China. But Mexicans need to look at their own society for the deeper causes of their troubles.
The Mexican tax system transfers only about 12 percent of GDP to the government, compared with 27.5 percent in the United States and 34.7 percent in Canada. With this low revenue yield, it is no wonder that Mexico lags behind the United States and Canada in education. Mexicans leave school, on average, at age 14 even though they need far more education to be qualified for the skilled jobs that would complement the country's new openness.
President Vicente Fox lost a fight last month in his legislature to expand the tax base as Mexican politicians put popular aversion to taxes over the long-term good.
The marginal success of NAFTA in Mexico offers a cautionary lesson to the four Central American countries seeking to set up a free-trade zone with the United States. They, too, need the benefits of liberalized trade, but their social problems are far deeper than Mexico's. Guatemala, a much poorer country, garners only 10.4 percent of its gross domestic product in taxes. Free trade is no panacea when nations fail to invest in human capital. sdThe Boston Globe:
