Mexico under NAFTA: a critical assessment

This paper assesses the evolution and performance of several key economic and social variables in Mexico following the passage of NAFTA. The evidence shows that under NAFTA Mexican trade and foreign direct investment inflows have risen at rapid rates, particularly in the export-oriented assembly-line sector. However, the evidence also suggests that it is hard to disentangle the effects of NAFTA from the other non-NAFTA factors such as demand in the U.S. in explaining the dynamism of the Mexican export sector (and economy). This has been attested by how the Mexican economy has been dragged into a severe recession over the past two years as a result of the relatively mild downturn in the U.S. business cycle.Insofar as employment growth, real wages in manufacturing, and productivity performance is concerned, the evidence presented indicates that the record has been lackluster at best and disastrous at worst. Manufacturing employment fell dramatically after the peso crisis, and remains stagnant. Real wages have plunged since the peso crisis and have yet to recover levels attained in the mid-1980s. In terms of productivity performance, no strong conclusions can be reached given the conflicting estimates in the extant literature. At best, the data show that productivity rose at healthy rates in the tradeable sector, but stagnated in the non-tradeable sector.Finally, the paper presents evidence which shows that both the functional and size distribution of income have become more skewed during the period of trade and investment liberalization (JEL 040,054).