Manufacturing Miracles by Trade Liberalization: an agnostic view from a Mexican perspective

1. Manufacturing Miracles by Trade Liberalization: an agnostic view from a Mexican perspective International Conference on Economic Openness and Income Inequality: IDEAs and Shanghai Administration Institute Shanghai, China, August 26-27 2006 Juan Carlos Moreno-Brid Research Coordinator UN Economic Commission for Latin America and the Caribbean Subregional office, Mexico

2. 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?

3. 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 signed Note: TL is not the same as export promotion or export success

4. First revelation of the Mexican Miracle: a boom in non-oil exports!

5. Manufactured goods doubled their share in total exports; and their technical content rose

6. But, a substantial proportion were exports from assembly industries (maquiladoras) NAFTA In-bond maquladoras

7. Not surprisingly, manufactured exports’ dynamism is not reflected in value added

8. 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.

9. A reason behind this is that imports soared weakening manufactures’ backward linkages Total imports (% GDP)

10. Actually in Latin America’s import ratio rose fourfold relative to pre-crisis level Source: 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.

11. Mexico’s manufacturing activity gradually lost impulse and its trade deficit soared

12. 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!

13. 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

14. Income is still highly concentrated and is a structural obstacle to development LATIN AMERICA (17COUNTRIES): CHaNGES IN GINI COEFFICIENTS, TOTAL 1990 - 2002 Countries where inequality increased Gini coefficient in 2002 Countries where inequality decreased Gini coefficient in 1990

15. 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?

16. 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!

17. 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!

18. 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.

19. An agnostic conclusion: Trade liberalization did not –and actually could not- manufacture a Miracle in Mexico!

20. Thank you!谢谢！ Juan Carlos Moreno-Brid Research Coordinator UN Economic Commission for Latin America and the Caribbean Subregional office, Mexico juancarlos.moreno@cepal.org