Might Not be the Central Narrative of Mexico’s Economic Development during the Past 40 Years Daniel Lederman Deputy Chief Economist Latin America & the Caribbean The World Bank Group April 7, 2014 Rice University, Baker Institute

The Impossibility of Evaluation and the Muddled Waters of Politics  Development Economists would have liked to “treat” a random sample of countries with NAFTA- type agreements – the impossibility of evaluation  Given the change in relative prices (e.g., tariff reductions), high politics at stake  These two issues alone explain the unresolved heated debates

Given the Impossible Evaluation, Before-and-After Assessments: Mexico’s Growth

Can We Tell Mexico’s Growth Story without NAFTA?  Many can… at their convenience  Let’s try: The story of long and recurrent adjustments  Mexico’s NAFTA proposal came during the recovery of the Debt Crisis ( ) – negotiations initiated in 1991  Preceded by unilateral reforms ( …)  The financial crisis of 1994 had lasting impacts (banking)  At end of that “recovery”; China rising  Towards the “end” of the manufacturing adjustment: violence + Global Financial Crisis of 2008/9

Scene 1: Banking Sector Chronology  1982: Expropriation of Banks  1985: From 60 institutions before 1983 to 20 (6 National, 8 Multi-regional, 6 local).  1991: Privatization.  1992: All national institutions were sold.  : Crisis  1994: 4 new international banks (GE Capital, Santander, J.P Morgan and Chase Manhattan)  : From 18 institutions to 34.  : Foreign Capital Share in banking increased from 5% to 52.4%.  : Capitalization program.  2003: Foreign Capital Share in banking is 82.3%.

Scene 1 (cont.): Credit to the Private Sector

Scene 2: China Effect on Manufactured Exports, Source: Artuc, Lederman & Rojas (2014, in progress)

Scene 3 Homicides: From 20 per 100K population, , plus Geography… Source: Chioda (2014, in progress.

So, What’s the Real Story: In Search of a “Counterfactual”  Probably helped, but not enough to become the central driver of growth  FDI (but less than before-and-after assessments)  Trade (but less than before-and-after assessments)  Huge gains during this time period in terms of macro management  Plus 1995 rescue

Big Lessons  Economies need to “adjust” to the unpredictable  Can FTAs be nimble?  Rules of Origin  IPRs  FDI  Can FTAs drive development strategies (models)?  Key role of the complementary agenda  Re-phrasing: Can FTAs stimulate other reforms? Beyond the “lock-in” effect …

END – Thanks!

Additional Materials on Economic and Policy Indicators  Openness: Rising since 1994 but declining w.r.t. U.S.  Structure of exports: Surprising decline of share of exports to the U.S. after 2004  Structure of imports: The weight of China rising  Mexican tariffs: Difference between MFN and applied tariffs  U.S. tariffs: They still favor Mexico  Mexican (formal) wages: Synchronized across industries; the highest are not in tradables  Trends in Mexican agriculture: The persistence of duality  The China Effect on mining & agriculture: It has been positive

Openness

Exports

Imports

Tariffs: Simple Mean

Tariffs: Weighted Average

Mexico’s Tariffs

USA’s Tariffs

Formal Wages by Sector in Mexico Source: IMSS

Wages by Sector Source: IMSS

Maquila Wages, Source: INEGI

China Effect on Exports Source: Artuc et al (2014)

China Effect on Exports Source: Artuc et al (2014)