Mexico and Nafta at 20. Why it went wrong for one of ‘Tres Amigos’

February 18, 2014 7:18 pm

Mexico and Nafta at 20. Why it went wrong for one of ‘Tres Amigos’

By John Paul Rathbone in London

The country has not become the developed one it thought it would

Twenty years into Nafta, Mexico has too many criminals and not enough policemen; too many workers earning low wages and not enough skilled jobs; too many false dawns and not enough economic growth.

Such concerns would make for a poor conversational gambit when Enrique Peña Nieto, the Mexican president, proudly hosts his US and Canadian counterparts, Barack Obama and Stephen Harper, in Mexico on Wednesday for their annual check-up on the North American Free Trade Agreement.

So instead he could cast them another way for the so-called “Tres Amigos Summit”. Mexico’s main problems on Nafta’s 20th anniversary, he could say, stem from the fact the country had too many macroeconomists and not enough microeconomists.

That might sound bizarre. Yet, if it was the other way around, Nafta might not be viewed as critically as it is by many now – and Mexican wages (and Mr Peña Nieto’s domestic ratings as opposed to his soaring international standing) might be better too.

Since the three countries inked Nafta in 1994, the US has not suffered “a giant sucking sound” of jobs disappearing south across the border. Canada has also maintained its cultural distinctiveness. But Mexico, while a rising star, has not quite become the developed country it thought it would.

Instead of a process of inexorable convergence, per capita Mexican gross domestic product remains a fifth of that in the US – exactly where it was in 1994. What went wrong?

For one, the world changed dramatically around Mexico.

China rose as a manufacturing power, displacing Mexican manufacturers. The 9/11 terrorist attacks caused the US to boost security, especially along its southern flank (border delays today cost the US and Mexico an estimated $6bn a year).

Mexico also made a transition from one party rule – a boon for democracy, if not always effective governance. Lastly, new technologies such as fracking transformed North American energy markets.

One problem for Mexico is that, even as the world changed around it, Nafta stayed the same. Indeed, for all the growing talk of a united “North America”, Nafta remains a series of often lukewarm bilateral relationships rather than a trilateral one.

On the political front, Mr Harper and Mr Obama have no particular chemistry, while bilateral relations are hung up over the Keystone XL pipeline. Mexico-Canada relations have stiffened since Canada decided Mexican visitors need visas. US-Mexican relations always ebb and flow.

Economic affairs have similarly waxed and waned. Regional supply chains have deepened, yet this process is not reflected in greater intra-regional trade. Today 40 per cent of total North American trade takes place within Nafta, slightly less than in 1993. (In the EU, intra-regional trade is over 60 per cent.)

None of these factors helped Mexican convergence, but they were also largely outside the country’s control. Of more fundamental importance for Mexico’s wellbeing was the huge list of microeconomic reforms it left undone while embracing macroeconomic change.

These include liberalising energy markets and breaking-up local oligopolies, to removing structural bottlenecks, such as a notoriously poor education system, and a high degree of labour informality.

After stonewalling these reforms for 12 years, Mr Peña Nieto’s ruling Institutional Revolutionary Party is now working to make many of them happen, to international if not always local applause.

Industrial policy is also enjoying a new life, in contrast to the mantra 20 years ago that “the best industrial policy is no industrial policy”. Today, there is more talk of “industrial clusters”. These are designed to encourage greater backward linkages into the domestic economy by Mexican manufacturers that more often assemble inputs made elsewhere.

All of these microeconomic policies have a single, crucial vanishing point: to boost Mexican productivity. If Mr Peña Nieto can pull that off, Mexican real wages will rise – as will his domestic popularity.

Fears in Ottawa and Washington about Mexican immigrants would also diminish. Greater prosperity might even reduce the lure of organised crime. And future Nafta summits would more likely be a true meeting of “Three Amigos” rather than an at-times uncomfortable photo-opportunity as they often are now. Who would have thought that microeconomists could play such a large role?

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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