Liberalization, growth and welfare:

The ‘maquiliación’ of the Mexican Economy

Andy Mold[1] and Carlos A. Rozo[2]

Publicado en el libro:

Trade, Growth and Inequality in Developing Countries

Kishor Sharma y Oliver Morrisey, editores

Routledge, 2006.

“[I]n every case where a poor country has significantly overcome its poverty this has been achieved while engaging in production for export markets and opening itself to the influx of foreign goods, investment and technology: that is, by participating in globalisation”

Former Mexican President, Ernesto Zedillo, cited in Rodrik (2001:57)

“NAFTA means more and better paid employment for Mexicans. This is the essential thing, and it is so because more capital and investment will come, which means more opportunities here in our country for our citizens. Put simply, we can grow more rapidly and then concentrate our efforts more on those who have least”

Former Mexican President Salinas de Gortaori, cited in Dussel Peters, 2000:2000

“Arguments for free trade often appear most convincing to those who have no stake in their truth, but for the workers whose livelihood depends on the accuracy of the trickle-down models, the theories usually seem too flimsy to justify the risks”

Bruce E. Moon (2000:174)

One morning at the beginning of 2001, Mexico woke up to the disturbing news that the percentage of the population living in extreme poverty had increased by 4.5% during the previous two years (INEGI, 2001), an anouncement which paradoxically coincided with the news that the economy had grown by 6.9% in 2001. The question on many peoples’ minds was “how was this possible?”. This outcome was apparently incongruous with the idea that the ‘outward-oriented’ development model, which had been pursued agressively by the Mexican administration since the beginning of the 1980s, would promote simultaneously both economic growth and welfare. Was the news simply a statistical blip in an otherwise promising panorama of underlying improvement? Or was something more profundly amiss with the outward oriented strategy?

This chapter attempts to demonstrate that while there has undoubtedly been important progress in particular dimensions of the Mexican economy, the disjuncture between export growth and welfare is symptomatic of some deep underlying problems with the strategy adopted. It is an (often overlooked) fact that, in absolute terms, the population living in extreme poverty has increased by 18.3 millions over the same period. It is also highly significant that the pursuit of outward-orientation has been accompanied by what we term the maquilización of the whole Mexican economy – a hollowing-out of domestic industry and a sharply increased dependence on imported intermediate products. We argue that, although such tendencies have some positive aspects, they are essentially incompatible with the long-term development of the Mexican economy (if we understand by development sustained increases in the level of employment and real wages). The aims of the paper are modest. We make no attempt to construct a theoretical model concerning the channels through which these changes have taken place. We limit the discussion to clarify the many contradictions which the current strategy has engendered.

Although we focus on the Mexican experience of trade liberalisation and export promotion, the paper has implications for other countries which have followed a similar path, in the sense that Mexico represents one of the most dramatic and a priori favourable cases of reorientation of trade strategy. With the signing of the North American Free Trade Area (NAFTA) in 1991, the administration of Carlos Salinas de Gortari firmly locked Mexico into an outward-oriented strategy. Mexico is now the eleventh biggest trading nation of visibles in the world, ahead even of South Korea. Moreover, in adopting this strategy, Mexico has enjoyed some advantages that many other developing countries have lacked – principally, the large size of its domestic market and, above all, its proximity to the world’s largest economy, the USA. In such a context, export growth from Mexico has been among the fastest in the world since the early 1980s. To some extent, therefore, it could be argued that the validity of the outward-oriented strategy stands or falls on the strength of the results produced in Mexico- nowhere could free traders conceive of a more favourable take-off point, and nowhere has that experience been so successful, if interpreted simply in terms of the promotion of a dynamic export sector. However, there is a widespread feeling of frustation, even among supporters of the strategy, regarding the failure of the new policies to produce the expected payoff in terms of income growth and poverty reduction (Lustig, 2001; Tornell et al, 2003).

The paper is organised as follows. Firstly, we describe the achievements of the Mexican economy in terms of the dramatic increase in exports. We then consider how these developments have affected the structural characteristics of the Mexican economy, and analyse how these changes have influenced Mexico’s growth performance. These achievements are then contrasted with the new model’s performance in social terms – a lack of employment generation, low wages and neglible poverty reduction. Using an Error Correction Model, we then attempt to estimate empirically the long-run contribution of the export sector to economic growth in Mexico. Thereafter, a number of hypotheses are broached regarding the plausible linkages which explain the apparent divergence between export performance and general economic and social outcomes. Conclusions are drawn as to the impact of the liberalisation process on the overall welfare of the Mexican population, in terms of employment impact, the incidence of poverty and other indicators of human welfare.

THE POSITIVE RESULTS

Over the last two decades Mexico has succeeded like no other country in Latin America in achieving a structural shift in its economy and a rapid integration into the world economy (Table 12.1). Manufactured exports now contribute around 84 percent of total exports in value terms, and oil has fallen to nine percent of total. Macroeconomic stability has also been achieved, with inflation falling from 83.9 percent average for the period 1982-87 to 7.0 percent in 2000-2. Foreign direct investment (FDI) inflows, expressed as a share of GDP, have increased nearly three fold. The change in strategy was a reaction to the debt crisis which struck the country in 1982, with the objective of restructuring the economy and allocating resources in line with international prices (‘getting prices right’). A fundamental first step in this process was the dismanteling of tariffs and restrictions on imports under the Immediate Programe of Economic Restructuring (Programa Inmediato de Reorganización Económica (PIRE)) at the start of the government of Miguel de la Madrid (1982-88). During this period, Mexico also entered into the GATT (1985), thereby giving an important signal regarding the seriousness of the reform process. Between 1985 and 1988, import licensing requirements were scaled back to about a quarter of their previous levels, reference prices were removed and tariff rates on most products substantially reduced. Between 1986 and 1988, average tariffs fell from 24 percent to only 11 percent. In 1989, Mexico also eased restrictions on the rights of foreigners to own assets in the country. Thus ‘by 1989, Mexico was one of the most open economies in the developing world’ (Revenga, 1997: 22).

Table 12.1 about here

It is therefore misleading, as some observers do, to portray Mexican trade liberalisation as principally the result of NAFTA. The process of liberalisation had already been pursued for some nine years when NAFTA came into force on 1st January 1994. Most analysts argue that the decision to enter into a free trade agreement with the US was based not only on economic grounds, but also to ensure the irreversability of the policy measures – to lock Mexico into a path of liberalisation and policy reform. That the resulting agreement has been full of tensions, misunderstandings and intentional blockages is well-known – the United States has proved to be a difficult partner, and has conceded to Mexico far less than the Mexican administrations would have wished for. However, even in the dark period of the ‘Tequila crisis’, (the severe financial crisis which hit the Mexican economy the very year that NAFTA came into force – 1994), there has not been any question of withdrawing from NAFTA, and in this sense, the agreement has achieved its purpose from the Mexican side.

One policy which was key to this transformation process was the consolidation of the maquila industry, an investment attraction and export promotion scheme that offers benefits to qualified firms regarding import duties and other taxes. This policy actually predates the shift towards an outward-oriented strategy by twenty years, being originally established in the mid-1960s with the objective of mitigating the serious unemployment problem in the border areas with the United States (Buitelaar and Padilla Pérez, 2000). However, the maquila as a strategy for promoting exports came into its own under the new economic strategy. Employment in the maquila went from around 100,000 in 1980 to over a million by the end of the 1990s.

Mexico almost tripled the degree of openness of its economy, expressed as total imports and exports as a percentage of GDP from 21 percent in 1982 to 59.4 percent in 2000, and a remarkable inversion in the structural charateristics of the exports – oil falling from 78 to only 20 percent of total exports in 2003.[3] During the government of Miguel De la Madrid, total exports (excluding oil) rose from US$6.3 billion in 1983 to $13.9 billion in 1988, while under the administration of Salinas de Gortari (1988-94) they reached $53.4 billion by 1994. In total, that represents a growth of 750 percent. In relative terms, manufacturing export growth (excluding the maquila) was even more dynamic, rising from US$4.6 billion in 1982 to US $24.1 million at the end of the administration of Salinas. If we include oil and maquila industry exports, total exports in 2000 reached US$166.5 billion, making Mexico one of the ten most important exporters in the world. Only during the first three years of the Fox government have these trends reversed, with negative rates of growth for exports. To sum up, in terms of achieving its principal objectives of an increase in the volume and composition of exports, the success of the new developmental model has been truly impressive.

These structural changes have been accompanied by a sharp intensification of the links between the US economy and that of Mexico. The US accounted for around 70 percent of all exports at the beginning of the 1980s, but by the late 1990s accounted for almost 90 percent. Mexico has also become increasingly dependent on FDI from the US, on average accounting for two thirds of total inflows. Mexico has been drawn into the economic cycle of the US economy; whereas in the 1980s, economic performance was practically asymmetrical between the two countries, now the growth cycles have converged (Ayhan Kose et al, 2004; Garcés Díaz, 2003).[4] While the increase in manufactures exports has lowered the vulnerability of export revenue to changes in oil prices (OECD, 2004:35), Mexico has replaced a sectoral dependence on a single commodity with one based on single market. An evaluation whether this strategy has been the correct one would have to revolve around the long-term prospects of the US economy, on which many analysts are quite pessimistic (Todd, 2002; WTO, 2004: 12).

LIBERALISATION AND STRUCTURAL CHANGE

In evaluating the impact of the new strategy on welfare, there are other important features to be taken into account. Foreign direct investment has played an increasingly important role in the dynamics of investment in Mexico. The FDI/GDP ratio rose from 1.4 percent in the 1980-1985 period to 1.8 percent in 1986-1993 and 3.4 percent in 1994-2000, while the share of FDI in gross fixed capital formation increased from 3.2 percent to 9.1 and 16.3 percent, respectively, for these periods (Mattar et al, 2002: 15). Together with the indicators related to export performance, the figures on FDI inflows have been widely praised by the IFIs and the financial press. Nonetheless, some caveats are worthy of mention.

FDI is widely assumed to act as a catalyst for rapid export growth (e.g. OECD, 2002), and ‘by 2000, nearly two-thirds of Mexican exports came from foreign affiliates’ (Palma, 2003: 6). However, the presumption that increased FDI flows would lead to an improved trade balance for Mexico is not well-founded. For instance, the early surge in FDI into the Mexican automobile industry was accompanied by a steep rise in imports, especially parts from the US, so the sector experienced only small trade surpluses, and even deficits, up until 1994 (UNCTAD, 2002b: 110). For the multinational sector as a whole, UNCTAD (1999:Annex Table A.I.9) estimates a negative trade balance of $6.9 billion in 1993 (up from $3 billion in 1990). If we also bear in mind the high rate of profit repatriation (see Palazuelos, 2001: 22), the overall contribution of multinationals to the balance of payments is massively negative. This point is relevant because Mexico suffers from an incipient balance of payments deficit, the root of the 1982 debt crisis and the 1994 Tequila crisis; these crises, and the responses to them, are the source of much ofdeterioration in living standards witnessed in Mexico over the whole reform period. This puts into question the long-term sustainability of the export-oriented model – FDI has been associated with a much higher import intensity on the part of multinational corporations, and this has been a modus operandi which has been generally copied by national manufacturing firms too. Thus, despite the extremely rapid growth of exports, this has been more than matched by import growth.