Moody’s Investors Service (MIS) this month published a report on Mexico’s biggest hurdles to growth, saying such impediments won’t be easily resolved, despite the current renegotiating of the North American Free Trade Agreement (NAFTA).
NAFTA has continued to enhance Mexico’s export competitiveness, says Moody’s. For example by shifting towards more complex production and stepping up its ongoing integration with America’s economy. “But Mexico has not attained the stellar growth rates that were anticipated from liberalizing its economy, and wage and productivity gaps with the US have widened rather than shrunk,” Madhavi Bokil, a vice president and senior analyst stated in the report entitled, “Successful NAFTA talks alone will not fix structural impediments to Mexico‘s growth.” He added: “NAFTA has not remedied Mexico’s low growth, low productivity and low wages.”
If Mexico’s productivity continues to stall, the current income gap with the US will increase over time, instead of converging. Mexico’s low productivity, low wages and low growth over the last three decades, even outside periods of economic crisis or recession, are not being remedied by the current export-focused growth model reliant on access to the US market through NAFTA.
Mexico has maintained its comparative advantage through negative real wage growth, at the expense of income levels. As a result, instead of converging through trade, wage and productivity gaps with the US have widened.
Ongoing implementation of Mexico’s structural reform agenda could provide a ‘counterweight’ to the current risk that Mexico faces with regards to trade. Mexico’s low productivity and wage growth remain correlated to uneven regional growth opportunities and a somewhat high degree of informality in its economy. “Reducing informality and reducing regional disparity in terms of productivity, development, and growth are key objectives under the 2012/13 structural reforms agenda,” Bokil said.
Indeed, NAFTA has facilitated significant integration with America’s economy, but has not necessarily “remedied” Mexico’s low growth and productivity. Wages, too, have stalled and in some areas declined. It is important to note that Mexico’s economy has changed both structurally and geographically since the mid-1980s, when it was opened to greater trade and financial flows as part of wider economic reforms. This included privatization, deregulation and capital as well as current account liberalization.
Mexico then went on to sign the trade pact (NAFTA) in 1992 and has since signed free trade agreements with a large number of countries. The main objective of economic liberalization was geared towards enhancing export competitiveness and long-term growth prospects, both with the underlying expectation that access to a larger market (the US) would increase productive capacity and generate employment. This process of greater integration into the global economy was also expected to foster a structural change in the Mexican economy toward more productive, knowledge-intensive and complex production processes, which would support employment in a diverse array of activities at higher wages, explains the report.
Productivity growth remains weak, and its post-NAFTA economic performance is no better than other countries in Latin America. So renewed NAFTA negotiations may not be enough to get America’s neighbor on the correct course domestically, especially with the US being the largest economy of the three countries involved and with highly specific demands.