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Manufacturing Miracles by Trade Liberalization: an
agnostic view from a Mexican perspective
International Conference on Economic Openness and Income Inequality:
IDEAs and Shanghai Administration InstituteShanghai, China, August 26-27 2006
Juan Carlos Moreno-BridResearch Coordinator
UN Economic Commission for Latin America and the CaribbeanSubregional office, Mexico
The agnostic’s guide to approach
policy-driven economic Miracles
Was the policy applied, under what assumptions and exogenous conditions?
How is the economy performing after the policy? Relative to its recent past? Compared to its historic trend? Other similar economies? Is it catching up with the developed world?
Did it remove constraints on its long term growth?
Are there alternative explanations of the Miracle?
Was trade liberalization (TL) applied in Mexico?
TL was firmly applied in Mexico since 1985, in the context of profound macro reforms including: privatizations, capital account, FDI and financial
liberalization, downsizing of public sector, elimination of industrial policies and fiscal austerity
Rationale: TL would boost exports, which would pull the economy in a high growth path based on labor intensive use, thus more employment and less poverty
Exogenous conditions? Great for Mexico in the 1990s: US economy expanded rapidly, NAFTA was signedNote: TL is not the same as export promotion or export success
First revelation of the Mexican Miracle: a boom in non-oil
exports!
Manufactured goods doubled their share in total exports; and their
technical content rose
Figure 1TO TAL EXPO RTSMill ion of Dollars
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
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MaquiladorasExports w/o maq.
But, a substantial proportion were But, a substantial proportion were exports from assembly industries exports from assembly industries
(maquiladoras)(maquiladoras)NAFTANAFTA
In-bond maquladoras
Not surprisingly, manufactured exports’
dynamism is not reflected in value added
Indeed, Mexican trade of manufactures boomed but
value added grew slowly
Source: UNCTAD secretariat calculations, based on Nicita and Olarreaga (2001).Note: Manufactures as defined by SITC.
Mexico Turkey
Imports Exports Value added
Source: Authors´elaboration based on World Bank, World Development Indicators (2004).
Selected Countries: Imports of Goods and Services (% of GDP), 1980-2003Figure 7
0
10
20
30
40
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
%
Brazil
Chile
Mexico
Argentina
Beginning of NAFTA
A reason behind this is that imports A reason behind this is that imports soared weakening manufactures’ soared weakening manufactures’
backward linkagesbackward linkages
Total imports (% GDP)Total imports (% GDP)
Actually in Latin America’s import ratio rose fourfold relative to pre-crisis level Average rates of growth
GDP (%) Imports (%) M/GDP1950-
8090-
20001950-
8090-
20001950-
8090-
2000
Small economies
4.57 3.54 5.72 7.65 1.25 2.16
Medium economies
4.51 3.57 4.68 9.59 1.04 2.69
Large economies
5.91 3.18 5.12 11.74
0.87 3.69
Latin America
5.47 3.27 5.10 10.68
0.93 3.27Source: Moreno-Brid, JC (2004) “¿Por qué fue tan bajo el crecimiento económico de América Latina en los noventa? Una interpretación estructuralista”, en Enseñanza y reflexiones económicas, homenaje a Carlos Roces, México, UNAM, Plaza y Valdés.
Mexico’s manufacturing activity gradually lost impulse and its
trade deficit soared
Not surprisingly the external constraint on economic growth
became more binding and...
If it were not for oil, the trade deficit would be over and above 5% of GDP!
Mexico widened its per capita GDP gap with the USA
And as formal employment has been stagnant, vast proportions of the population have little or no social protection
LATIN AMERICA (17COUNTRIES): CHaNGES IN GINI COEFFICIENTS, TOTAL 1990 - 2002
Income is still highly concentrated and is a structural obstacle to
development
Countries where inequality increased
Countries where inequality decreased
Gin
i coe
ffici
ent i
n 20
02
Gini coefficient in 1990
Thus, our agnostic test indicates that TL produced
(maybe half) a Miracle Was the policy applied? Yes, and key external factors were favorable
How is the economy performing now? Inflation is down, Non-oil exports dynamic, but GDP in slow growth path, investment ratio stuck (20%) , scant formal jobs
Catching up with the developed world? No Have key constraints on its long term econommic
growth been removed? Fiscal revenues are weak, the external constraint is more binding on the non-oil economy. But oil prices are growing. So there may be hope for a new Mexican Miracle?
The shortcoming of trade liberalization plus Washington Consensus is rooted in
its assumptions S ocial policies would, by themselves, be able to fully
compensate any adverse social effects of economic reforms
I ntervention of the State in the economy distorts prices and crowds out private investment.
L ow inflation and no fiscal deficits are necessary and sufficient conditions to trigger high, sustained growth
L iberalization boosts productivity in export sectors, and spreads out quickly to the rest of the productive system
Y ou all must believe that there is a unique policy package for development that is valid for all countries, always!
The shortcoming of trade liberalization plus Washington Consensus is rooted in
its assumptions S ocial policies would, by themselves, be able to fully
compensate any adverse social effects of economic reforms
I ntervention of the State in the economy distorts prices and crowds out private investment.
L ow inflation and no fiscal deficits are necessary and sufficient conditions to trigger high, sustained growth
L iberalization boosts productivity in export sectors, and spreads out quickly to the rest of the productive system
Y ou all must believe that there is a unique policy package for development that is valid for all countries, always!
On high income inequality and its impact on economic growth
in LDCs’ In underdeveloped markets, inequality inhibits the capacity to grow through economic mechanisms. Shrinks potential domestic market and distorts resource allocation response to prices.
Inequality exacerbates the problem of keeping accountable government. Distorts application of justice and enforcement of property rights
Inequality fosters conflict and discourages the civic life needed for effective collective decision making.
An agnostic conclusion: Trade liberalization did not –and actually could
not- manufacture a Miracle in Mexico!
Thank you!谢谢！
Juan Carlos Moreno-BridResearch Coordinator
UN Economic Commission for Latin America and the Caribbean
Subregional office, Mexico [email protected]
