If not for NAFTA, when?
Oct 26th 2000
From The Economist print edition
The problems of plugging a square economy into a round world
IN JULY the temperature in the Sonoran desert tops 50°C, but the workers in the heavily irrigated grape plantations get on with the harvest regardless. The north-western state of Sonora used to be known as Mexico’s breadbasket, the main source of wheat. Now it is the country’s fruitbasket. Francisco Amavizca of Agroindustrial Sonora, a company with 1,500 hectares (3,700 acres) of vineyards, rattles off some of the state’s other crops: “Nuts, peaches, asparagus, chickpeas, olives, cucumber, watermelon, jalapeño chilli—the big kind, which isn’t for men, because it’s not very spicy. It’s for export.”
Real men eat real chillies. Foreigners eat everything else. Since the North American Free-Trade Agreement came into effect on January 1st 1994, tariffs on most goods crossing the border have started to come down. They will reach zero in both directions by 2009. Exports have more than doubled, and foreign direct investment more than tripled.
Just as important, say NAFTA’s fans, the new market is forcing Mexican producers to adopt foreign standards and foreign business practices. It also locks Mexico’s economy into the economies of its trading partners, making it impossible for the country to revert to the disastrous protectionist policies of the past. That is one reason why modern Mexican leaders have been signing trade treaties left and right. Mexico trades at reduced or zero tariff with over 60% of the world, measured by GDP. It is the only country other than Israel that has free-trade treaties with both the United States and the European Union. For good measure, earlier this year it signed one with Israel too.
Yet despite all these treaties, Mexico cannot escape the fact that it has swapped one kind of trade dependence for another. In the early 1980s two-thirds of Mexico’s exports were oil, so it was at the fickle mercy of the oil price. Now its exports are rather more diversified, but nearly nine-tenths of them go to the United States, so it is at the mercy, albeit perhaps a little less fickle, of the American economy. A hard landing up north is the government planners’ greatest fear.
But there is another, more subtle difficulty with NAFTA: most of Mexico was not ready for it. Its rulers craved adaptability and modernisation, but did precious little to make it happen. Mexicans were left to work it out for themselves. Not all have been able to. Just look at the farmers.
When the Mexican revolution began in 1910, some 2,000 families owned 87% of the rural land. Following the creed of one of the revolution’s heroes, Emiliano Zapata, who had fought for peasants’ land rights, the government promised “the land to those who work it”, and duly, if slowly, complied: over the following eight decades, 103m hectares, or more than half the country, were distributed in small plots. Most of the 3.5m peasant families who now have a plot live on ejidos, collective communities where they have “usufruct” rights over the land (the right to farm it and use whatever it yields), but do not own it. The average plot is less than 10 hectares.
The land reform made millions of peasants very grateful to the PRI, but it wrecked Mexican agriculture. On tiny plots, and often poor-quality soil, without modern equipment or farming methods, and sometimes beset by land disputes, many peasant farmers struggle to feed their family and grow just a little extra to sell in the village market. For them, competing with American farmers on vast fields with high-tech machines, high-quality seed and high-value subsidies is like attacking a battleship with a machete.
Competing was not necessary in the days of import tariffs and government-guaranteed prices. But with NAFTA, price guarantees have disappeared, and the border has opened to imports from the United States, which are often cheaper. Even before NAFTA, the wheat-growers of Sonora were switching to nuts, peaches and chillies-not-for-men because wheat wasn’t worth bothering with any more. Those who grow corn, the Mexican staple which covers about half the cultivated land, have been especially hard hit because the government has allowed more corn to come in duty-free than NAFTA specifies.
But corn farmers, or indeed any others who want to turn to growing nuts, peaches or chillies for wimps instead, are in trouble. As the banks have been reluctant to lend ever since the 1994-95 crisis, farmers cannot borrow to buy new equipment and seeds. Indeed, the banks treat them with extra suspicion, since they were among the worst loan-defaulters. “The main problem in the agricultural sector is the lack of credit,” says Mr Amavizca. Corn producers who already had irrigation systems and were using more advanced techniques, notably in the north of the country, have increased their production. Elsewhere, some growers who have not been able to switch crops are leaving their cornfields fallow.
The government is modernising agricultural policy, but slowly. It ended land redistribution in 1992 and gave ejido dwellers the option of owning—and selling—their land. But it has not yet finished certifying who owns which bit, an intensely complex job because in some cases the same parcel of land has been granted to several different people.
So far hardly any of the current generation of ejido landholders have been willing to sell the piece of Mexico that they were granted by the PRI. Their children, however, are unlikely to feel the same bond with the land. That could mean, in a few years’ time, another wave of migration to the cities or across the border (see article).
Just as small farmers struggle to cope in the new world order, so do small businesses. Again, it is the lack of credit when they most need it that makes life so difficult. For many the only way to borrow money is to pay their suppliers in instalments, which often means they are stuck with higher interest rates than they could get from a bank.
Those who want to modernise run up against another barrier. In the town of Leon, in Vicente Fox’s home state of Guanajuato, business is booming. “We have the equivalent of full employment,” says Mario Plascencia, head of the Co-ordinating Business Council, the main private-sector group. In his own company, 130 of the 150 employees are not locals but come from the nearby town of Silao. What is Leon’s problem? “The bottleneck is education and training,” says Mr Plascencia. “For the firms that want to implement high levels of technology, meet ISO standards and so on, the supply of middle managers and supervisors is short.”
The government, busy sorting out macroeconomic policy, has done too little to remove barriers at the micro level. “We don’t really have an industrial policy,” admits a senior official, “apart from promoting maquiladoras.” These are the factories that import materials or parts to make goods for re-export—a sector that existed long before NAFTA but has proliferated since the treaty came into effect.
Maquila exports make up nearly half of all exports, and have been growing at around 20% a year since NAFTA came into force. The policy of promoting them seems to have been a great success. But although maquila products are made in Mexico, there is nothing very Mexican about them. Only 2.8% of the maquiladoras’ input is locally produced, and the proportion is rising very slowly.
This means that the export boom, helpful though it has been for bringing down the trade deficit, is not doing much for the rest of the economy. Too much of the supply chain that feeds those exports is outside Mexico. The country’s economic growth, even when it is strong, is unevenly spread. The export sector has been growing by an average of 10.9% a year for the past two decades, whereas output for the domestic market has been expanding by an average of only 3.5%. By the same token, the country’s economic crises are unevenly spread too. For example, the economy as a whole contracted by 6.2% in 1995, but leaving exports out of account the shrinkage was 13.1%.
The benefit of exports is unevenly spread in another way, too. There is work galore in the maquiladoras: 1.3m jobs, compared with 546,000 when NAFTA began. But, since the best place for a factory producing for re-export is near the border across which the goods are to be re-exported, the vast majority of the jobs are in the north of the country. NAFTA is helping to reinforce an age-old Mexican divide: that of geography.
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