Morning Must-Read: Gary Clyde Hufbauer and Cathleen Cimino: NAFTA Rejoinder: The Effects are Positive

Gary Clyde Hufbauer and Cathleen Cimino: NAFTA Rejoinder: The Effects are Positive (Part I): “[The CEPR] preferred the pre-1980 Mexican economic developmental model…

…of protection and state control to the NAFTA model of free trade and private markets. In our view the Mexican financial crises of 1982 and 1994 convincingly demonstrate that the pre-1980 model had run out of gas, but we will not further rehash that debate. Everyone agrees that Mexican economic performance over the past 20 years has been subpar, since real per capita GDP grew only 1.3 percent annually. The question is why: Too big a dose of liberal economic policies and integration with the US economy (the CEPR explanation), or negative factors that were partly offset by a strong push from NAFTA (the PIIE explanation)?… McKinsey’s research shows that the ‘NAFTA sector’ of the Mexican economy (large firms with 500 employees or more) has performed strongly over the past 20 years: Productivity per worker grew 5.8 percent annually, and output of the ten largest Mexican auto plants grew 5.5 percent annually. Unfortunately, the large firms in the NAFTA sector still employ only 20 percent of the labor force… productivity has actually declined among smaller firms (those with ten or fewer employees), falling by 6.5 percent per year. Oppressive regulation largely explains the poor performance of these firms…. (for an overview, see Gordon Hanson [2010], ‘Why Isn’t Mexico Rich?’ [pdf]). Three other negative factors… are the chaos and cost of drug wars (largely fueled by American dollars), widespread corruption, and continued monopolistic control in critical sectors (illustrated by telecommunication and petroleum)…. While Mexico’s growth performance falls short of other countries that have liberalized their economic policies, it exceeds the performance of many economies still relying on state control in an overall assessment of past and potential growth.