Wednesday, October 18, 2006

Has neoliberalism failed Mexico?

Economist Brad DeLong asks if neoliberalism has failed Mexico. (UPDATE: Marginal Revolution offered additional thoughts.) My view, half-assed neoliberalism has failed Mexico.

Having traveled in Mexico quite a bit before and after NAFTA, I can tell you NAFTA has definitely succeeded in creating a more prosperous middle class there, especially in the larger cities, and this in turn has actually boosted US exports to Mexico, where trade used to be mostly the other direction.

However, other NAFTA policies weren't such a great benefit, in part because they were incomplete and skewed toward American interests. For example:
  • Separate rules for maquiladoras left them unregulated and a source of significant labor exploitation that contributes to border instability.
  • US agriculture subsidies, particularly billions subsidizing corn and soy, have virtually depopulated hundreds of Mexican farming communities, forcing millions of young men either to move to the United States to find work, or for farmers to shift to marijuana or other illicit crops to survive.
  • Finally, but perhaps most importantly, NAFTA liberalized markets for (some) goods while failing to liberalize labor markets, which was a recipe for disaster. Markets don't respect national boundaries, so it behooves nations to create multinational structures to control them - that's especially true for the labor market.
So DeLong's incorrect, in my view, to abandon his faith in markets as a (partial) soution to Mexico's woes, though I'd argue that to be effective, neoliberal policies must be coupled with direct economic and infrastructure development assistance - essentially an industrial policy aimed at bolstering emerging industries the way we've done with high tech in the United States. That'd be better spent money than any fence. In the end, though, IMO the ultimate answers may rely on greater reliance on market solutions, or rather, solutions that respect market forces instead of ignoring the most important of them.


Frank Youell said...

Can anyone explain the obsession with US agricultural subsidies? There are at least two points here. First, where is the evidence that US farm subsidies have a material impact on crop prices? Second, what is the logical argument that US farm supports are hurting Mexico?

The first point is that corn (and soybeans, etc.) is a global crop with global prices. Where is the evidence that US subsidies are materially impacting global prices for commodity farm products? Cotton is frequently cited as a heavily subsidized crop. Perhaps it is. However, the FAO (UN Food and Agricultural Organization) has stated that cotton prices might go up by as much as 11% if all (not just US) subsidies were eliminated. This would raise the GDP of Mali by 1%.

A good guess is that corn is less heavily subsidized than cotton. I haven't found a definitive estimate of the impact of US subsidies on global corn prices. One source suggested a 5% price change. Given that corn prices fluctuate far more than 5%, perhaps the concern over US subsidies is not fully justified.

The second point is deeper. Why should we believe that US subsidies are harmful to Mexico? US subsidies (presumably) cut the price of food in Mexico. Why is this so bad? China's overvalued currency is almost invariably defended on grounds that it helps US consumers by making imports cheaper. Lost jobs in the Carolinas are dismissed as either irrelevant or a minor downside to a favorable set of transactions.

If cheap imported textiles are great for the US, why isn't cheap(er) imported food a plus for Mexico? According to neoliberal theory, Mexico should be thanking the US for its subsidies. For the record, I do not subscribe to this worldview.

Based on what I have read, the real impact of NAFTA on Mexico's farmers was not a consequence of US farm subsidies. It appears that NAFTA opened Mexico to global farm commodities. Given the geography of Mexico and the US, literally the imported corn comes from the US. However, the real point is imposing free trade on the Mexico's farm economy may not have worked out quite as intended.

Of course, it is much easier to blame US subsidies than to question whether free trade in farm products is actually beneficial for Mexico or other countries...

Let me restate my original question. Why are so many economists, on the right and left, so fixated on farm subsidies? Compared to a long list of other economic issues, US farm subsidies are small (very roughly $20 billion a year). It seems to me, that US farm subsidies have become a fetish. Sort of like ankles in Victorian England.

Gritsforbreakfast said...

A fair point, Frank, though I think perhaps you hear so much of it because of the flood of immigrants across the southern border over the last decade, in Mexico mostly from rapidly depopulating rural areas which were hit hardest by NAFTA's double whammy with US competitors getting new access to Mexican markets coupled with an unfair trading advantage.

Low commodity prices theoretically help the Mexican consumer, but a byproduct of that policy is a flood of uneducated, rural immigrants pouring into the United States by hook or by crook because their agricultural jobs in Mexico no longer exist.

That's certainly why I focused on it in this post.

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Gabriel said...

wrong! neoliberalism economies have strenghten teh elite mexican class, not the middle class nor the poor class.