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NAFTA's Ugly Reality: U.S.-Mexico Wage Gap Is Actually Widening

Nov. 29, 2017
Despite all the promises, NAFTA is turning into the exact opposite of a growth miracle, especially in Mexico.

What’s the opposite of a growth miracle? Whatever the term, it applies in spades to Mexico in the North American Free Trade Agreement (NAFTA) era.

Poor countries are expected to grow faster than rich ones, and they need to. Trade agreements are supposed to help. Yet by almost any benchmark -- certainly the ones trumpeted by the deal’s architects a quarter-century ago -- the Mexican economy’s performance has been dismal.

Growth of 2.5% a year since 1994 is less than half the developing-world average. It’s pretty much the same as the U.S. and Canada. But even that’s misleading. Because Mexico’s population expands much faster, the economic pie has to be divided among more and more people. So the average Mexican earns less today, relative to U.S. and Canadian peers, than before NAFTA.

“The main idea was to promote convergence in wages and standards of living,’’ says Gerardo Esquivel, economics professor at the Colegio de Mexico. “That has not been achieved.’’ And what meager growth there’s been, says Esquivel, has mostly gone to “the upper part of the distribution.’’

For an emerging market, Mexico has an impressive collection of billionaires, including the world’s sixth-richest man. Its poverty rate, meanwhile, is still around early-1990s levels -- more than half the population, encompassing a permanent class of the underemployed. Crime and corruption are rampant.

All this poses a problem for the U.S., especially now that Donald Trump’s in charge. Mexico’s glacial economy means there’s still a lively incentive for the things Trump hates: the flow of underpaid Mexican labor northwards, and American factories the other way. No wonder, as his trade team trudges through round after round of renegotiation, that the U.S. president is still threatening to blow up the pact altogether.

It’s a much more urgent matter for Mexicans. And they’ll have a chance to do something about it in presidential elections next year. The early frontrunner, leftist Andres Manuel Lopez Obrador, says he’ll usher in a new economic model. What role NAFTA would play in that, if any, remains vague.

In Mexico’s policy circles, there’s little inclination to blame NAFTA. Some point out that, while the economy clearly hasn’t boomed, it’s at least avoided the busts that sunk several Latin neighbors in the last two decades. The trade pact couldn’t be expected to solve deep social problems, but it’s brought “multiple benefits in different industries, generating jobs and wealth,” Enrique Ochoa, political chief of the governing PRI party, said last week.

Still, there’s broad consensus among economists that the promises made by Presidents Carlos Salinas and Bill Clinton at the dawn of NAFTA haven’t been fulfilled. Rapidly expanding trade with the world’s biggest economy hasn’t been a panacea. Or even, some say, a paracetamol.

“Mexico’s basic mistake was to assume that integrating into the world economy, and the U.S. market in particular, would suffice,’’ says Dani Rodrik, economics professor at Harvard University. “Other aspects of development strategy were ignored.’’

by Eric Martin and Nacha Cattan

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