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In the US, the war over the pros and cons of NAFTA (the North American Free Trade Agreement) takes place on shifting sands – Bill Clinton (responsible for passing NAFTA into law), who in 1993 declared that Congressional approval would mark “a decisive moment” in US history, subsequently back-peddled, describing it as “largely a trade agreement with Canada and largely done when I got there.”[i] The statistics pro and con tend to confuse more than clarify – total trade between the US and Mexico increased by 522% between 1993 and 2013 and the total stock of US FDI (Foreign Direct Investment) in Mexico increased by 564% in 1993-2012[ii], for instance, but absolute levels of FDI to Mexico declined dramatically from 2001 – 2005; by 2005 nominal FDI was at the same level it had been in 1994. In support, a variety of studies indicate widespread social and economic benefits to Mexico as a result of NAFTA[iii]; against, other studies point out that nominal improvement took place accompanied by little or no growth, in a Mexican economy[iv] in which inflation-adjusted wages in 2012 were only slightly higher than in 1994 and in which the poverty rate was virtually the same in 2012 as it had been in 1994, an extra 14.3 million Mexicans below the poverty line[v].
I propose a different approach to looking at NAFTA in Mexico, in which 1994 is just one amongst a series of events to impact the national economy, beginning with the debt crisis of 1982 – as the US Congressional Research Service points out[vi], after all, it is difficult to distinguish specific, statistical effects of NAFTA on Mexico from those of the 1980s liberalization programme, the peso crisis immediately following NAFTA, the Asian financial crisis and so forth. I suggest instead that all of these events have served to strengthen a long-term process of gating the Mexican economy, turning the most profitable sectors into elite economic enclaves demarcated by legal, bureaucratic and cost walls, in which distinct sectors of the economy have come under the control of hybrid indigenous and foreign (particularly US) elite capital, using the financial services sector (itself an exclusionary sector) as a gating instrument.
To begin this proposal, in a recent co-authored paper on ‘bancarizacion’ (banking the unbanked) in Latin America[vii], our paper pointed to the fact that in 2005 only 25% of Mexican citizens[viii] had access to the formal financial services sector, the lowest percentage in Latin America; by 2014, studies indicated that this had improved – to 27.9%. Of the population over 15, only 8.3% had used electronic means to make payments and only 22.3% had debit cards[ix]. As stark as these figures are, they fail to show the true impacts and extent of financial services strangulation in Mexico – only 32% of firms have a line of credit or a loan, for instance, and only 16.2% of firms are able to use banks to finance investment[x]. Irrespective of substantial financial services sector reform in Mexico since 1982, the banking sector is tiny – in 2009, commercial bank lending to firms and households was a mere 22% of Gross Domestic Product (GDP)[xi], which according to the Economic Commission for Latin America and the Caribbean (ECLAC) increased by 2012 only to 27.8% of GDP. Not only has this highly-restricted banking access had a major impact on economic performance and feeble growth statistics (between 1994 and 2005 Mexico grew at a rate 38% slower than comparable middle-income countries and 54% slower than it grew between 1950 and 1980[xii]), but it reveals some of the underlying framework of the gated formal economy.
How does a financial system whose currency is “the most actively traded emerging market currency”[xiii], with highly-developed equity and sovereign bond markets at the service of global capital, come to play such a microscopic role in the national economy? In order to understand this, we need to look at the complex interaction between indigenous control mechanisms developed by the Mexican commercial and financial elite, the effects of NAFTA itself and those of the peso crisis immediately following implementation.
What McKinsey[xiv] refers to as two Mexicos,“a highly productive modern economy and a low-productivity traditional economy”, is not a post-NAFTA problem (any more than it is a ‘productivity’ problem), and neither is concentration and oligopoly in the banking sector. In 1994, the share of assets of the five largest banks was already 74%, although under foreign ownership it rose to 88% in 2001, amongst the highest concentrations in the world[xv]. Initial restrictions on bank ownership under NAFTA were strong, but the Peso Crisis and the recapitalization it forced on the banks meant that whereas in 1991 only 1% of banking assets were foreign-owned, this rocketed to 82% by 2002, settling at 74% by 2011[xvi].
An overwhelmingly indigenous banking cartel (exclusionary banking practices intact) passed almost wholesale into foreign ownership as a result of systemic financial crisis. As the financial inclusion figures cited above show, Mexican banks continue to restrict access, particularly for commercial purposes (although not for consumption or house purchases, to service the middle-class consumer) and the evidence indicates that as a bank’s market share increases commercial lending to firms declines. In order to obtain a loan moreover it is necessary to have an account with the lending bank, enabling the bank to levy rents through fees and commissions, and any loan attracts substantial fees and commissions; the cost of a loan is not exorbitant in terms of interest rates, but in transaction charges[xvii], an oligopolistic tax on financial services.
NAFTA itself unleashed substantial flows of capital (primarily from the US – 51% of FDI 1999-2011[xviii]) into the Mexican economy, but this has been ‘cherry-picking’ capital channelled through a bespoke financial services sector, contributing to nominal national statistics (GDP, FDI) but unable and unwilling to make any widespread social improvement through employment or earnings. Over half these capital inflows went to the services sector[xix], with manufacturing and agriculture being favoured as well, but the processes that built one of the world’s top 15 manufacturing economies and one of the world’s top 5 car makers, saw employment declining [xx]in the same four sectors of the ‘modern’ economy which saw the biggest productivity gains from 2000, agriculture, manufacturing, construction and transport, communication, and postal services. The declining situation of Mexican labour that came about following the influx of profit-maximizing foreign capital has been substantial, particularly in terms of movement from the formal to the informal economy – by 2014 an estimated 54% of non-agricultural workers were employed in the informal sector[xxi], a sector almost completely alienated from the formal financial services sector. As the McKinsey report plaintively suggests: “Together, these findings suggest that the owners of capital benefit from productivity improvements rather than labour, which is unexpected for a labour-abundant country.”[xxii]
Another indication that this is the case is the massive growth in illicit (non-drug-related) outflows of money from Mexico; even though wealth accruing to billionaires pushed their total net worth up from 4% of GDP in 2000 to 10% in 2008[xxiii], and an increasing percentage of the labour force was pushed into the informal sector, the Gini coefficient improved from 0.54 in 1994 to 0.49 in 2012. As more workers moved into low-paid informal work, financial liberalization substantially increased illicit flows of money out of the country – from an average of 4.5% of GDP prior to 1994 up to 6.3% in the next 17 years[xxiv]. Elite tax privileges, offshoring mechanisms and accountancy fraud facilitated by trade and financial liberalization allows Mexican elites to disappear increasing amounts of their growing wealth; at the same time, decreasing earnings of the growing informal sector are ‘invisibilized’, contracting the Gini (which can only be based on officially recorded income) in the middle. Thus, Mexican non-oil tax collection declined from near the Latin American average in 1990-92 to 10.7% of GDP[xxv] (the lowest place) in 2008-2009, depriving the Mexican state of much-needed public resources.
The biggest provider of informal labour in Mexico is the agricultural sector; by 2008 the average wage of an agricultural worker was a third of what it had been in 1994[xxvi]. At the same time that heavily-subsidized US agricultural produce flooded the Mexican economy and displaced some 4.9 million family farmers, agribusinesses increasing their share of agriculture, creating millions of part-time, seasonal jobs and a net loss of 1.9 million jobs[xxvii]. In contributing to this, the gating processes powering the Mexican economy and its NAFTA component have driven both substantial emigration to the US (a 79% increase from 1994-2000, a doubling of Mexican-born US residents from 4.5 million in 1990 to 9.4 million in 2000, to a peak of 12.6 million in 2009[xxviii]) and the outstanding success of the most economically important indigenous Mexican industry, the drug sector.
In many ways NAFTA was made for the drug industry; greatly increased footfall across the US/Mexican border (licit and illicit), massive increases in intensity and extent of rail and road transport networks (over 150 million vehicles cross the border annually) and laxer supervision, regulation and checking of goods shipments through liberalization and harmonization, have increased the safety and ease of transporting drugs north and arms and cash south. 65-70% of drug business operating-costs in Mexico are funded from foreign sources[xxix], estimated by US Customs and Border Patrol to be repatriated sales profits from the US in the main. Increasing financial liberalization has also been beneficial, allowing the substantial profits from drugs to enter the financial services sector with relative ease; depending on estimates, between 25%-50% of an estimated $30 billion of drug profits (3-4% of Mexico’s $1.2 trillion annual GDP)[xxx] enters the Mexican banking system to conjoin with other elite capital flows.
Declines in employment and earnings under NAFTA have also contributed substantially to the development of the drug sector. The 1.9 million agricultural jobs lost since 1994 have been partially offset by the estimated 500,000 jobs in national drug businesses, three times the number employed in the state-owned oil business PEMEX, and of the 31 million hectares in Mexico estimated to be under agriculture, 9 million are growing marijuana and poppy – Mexico grows more marijuana than corn[xxxi], and whereas in 2003 one kilogram of corn would fetch only four pesos, a kilogram of opium would pay 10,000 pesos[xxxii]. Whether involved in producing drugs, transporting them, providing security, legal and ancillary services furthermore, drug sector employment is much better paid than the informal sector average and markedly more so than formal employment; the OAS estimates that the mean salary of internal drug employees is six times the minimum wage and 1.3 times Mexico’s mean formal sector wage[xxxiii].
As the 20th anniversary of NAFTA approached, a bewildering chorus of analyses sang out from proponents and opponents alike – the struggle over the TPP, the Trans-Pacific Partnership has made the legacy of NAFTA and its effects too important to be left to mere academics. Canadian Prime Minister Stephen Harper is confident of the benefits accrued, to Mexico no less than Canada and the US: “Over the past two decades, Mexico has experienced impressive economic and social development.” The staff of Mexican President Peña Nieto point to the resultant increase in trade: “Since the inception of NAFTA, trade between the US and Mexico has grown by 11.3% a year. Mexican exports have increased 10.5% per year while imports have grown by 7.7% per year.” The reality is, however, that these simplistic two-dimensional utterances conceal rather than reveal.
NAFTA has acted to overlay existing elite structures, income-earning activities and command-and-control processes in Mexico with a vertically-integrated finance and production system working to the demands of capital outside the country, predominantly in the US. The key segments of the formal economy have been divided up amongst indigenous and foreign capital interests (which co-exist happily) in a process which has increased sectoral concentration, continued to reduce access to financial services and credit for the Mexican population to a trickle and achieved substantial formal productivity gains and profitability at the expense of the workforce. As this process of slow strangulation has continued, vast numbers of Mexicans have emigrated or moved into the informal economy in general and the drug industry in particular, as wages to be earned formally and prices to be gained from indigenous commercial activities have declined over the decades since 1994. The apparent paradox of impressive trade and growth figures in the modern, formal sector alongside immiseration and decline in the informal economy is not a paradox at all, therefore, but two sides of the same coin.
Jon Cloke is Lecturer in Human Geography at Loughborough University. He researches and writes about geographies of marginality: education and social inclusion; corruption; energy marginality; and urban-rural development, and has collaborated with researchers in Chile, Brazil, Nicaragua and Guatemala.
[i] ‘Off-base on NAFTA and “Hillary Care”’, Washington Post 01/07/2008, http://blog.washingtonpost.com/fact-checker/2008/01/offbase_on_nafta_and_hillary_c.html.
[ii] Villareal and Ferguson (2014) NAFTA at 20: Overview and Effects, US Congressional Research Service (CRS) Report.
[iv] Gordon H. Hanson (2010) Why Isn’t Mexico Rich? NBER Working Paper 16470.
[v] Mark Weisbrot and Stephan Lefebvre, February 2014, Did NAFTA Help Mexico? An Assessment After 20 Years.
[vi] Villareal and Ferguson, Op.cit.
[vii] Ed Brown, Francisco Castaneda, Jonathan Cloke and Peter Taylor, Towards financial geographies of the unbanked: international financial markets, ‘bancarizacion’ and access to financial services in Latin America, The Geographical Journal, Vol. 179, No. 3, September 2013.
[viii] Honohan, Patrick (2007) Cross-Country Variation in Household Access to Financial Services, Prepared for the World Bank conference on Access to Finance, March 15-16, 2007.
[ix] Global Financial Development Report 2014: Financial Inlcusion, IFC/MIGA/World Bank.
[xi] Stephen Haber & Aldo Musacchio (2013) These Are the Good Old Days: Foreign Entry and the Mexican Banking System, Harvard Business School Working Paper 13-062, January 10, 2013.
[xii] Santiago Levy and Michael Walton, Ed.s (2009) No Growth Without Equity? Inequality, Interests, and Competition in Mexico (Basingstoke: Palgrave MacMillan/Washington: World Bank).
[xiii] IMF (2013) Mexico: Staff Report For The 2013 Article IV Consultation, IMF Country Report No. 13/334, November 2013.
[xiv] Eduardo Bolio, Jaana Remes, Tomás Lajous, James Manyika, Morten Rossé and Eugenia Ramirez (2014) A tale of two Mexicos: Growth and prosperity in a two-speed economy, McKinsey Global Institute.
[xv] Santiago Levy and Michael Walton, Op. cit.
[xvi] Stephen Haber & Aldo Musacchio, Op.cit.
[xvii] Santiago Levy and Michael Walton, Op. cit.
[xviii] Andreas Waldkirch (2010) The Effects of Foreign Direct Investment in Mexico since NAFTA, The World Economy 33 (5): 710-745.
[xx] Eduardo Bolio et al, Op. cit.
[xxiii] Santiago Levy and Michael Walton, Op. cit.
[xxiv] Dev Kar (Jan. 2012) Global Financial Integrity Report; Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy.
[xxv] Ehtisham Ahmad, Michael Best and Caroline Pöschl (2012) Tax Reforms in the Presence of Informality in Developing Countries: Incentives to Cheat in Mexico, LSE Asia Research Centre Working Paper 56, November 2012.
[xxvi] John B. Judis (2008) “Trade Secrets,” The New Republic, April 9, 2008.
[xxvii] Mark Weisbrot and Stephan Lefebvre, Op. cit.
[xxix] OAS (2013) The Drug Problem in the Americas: Studies, Chapter 4 – The Economics of Drug Trafficking, OAS.
[xxx] Brianna Lee (2014) Mexico’s Drug War, Council on Foreign Relations, , Updated March 5, 2014.
[xxxi] Méndez, Alberto (2007) “Las drogas destruyen…al maíz”, Excelsior, cited in Viridiana Rios (2008) Evaluating the economic impact of Mexico’s drug trafficking industry, Paper presented at the Graduate Students Political
Economy Workshop, Institute for Quantitative Social Sciences, Harvard University, Spring, 2008.
[xxxii] Resa Nestares, Carlos (2003) El valor de las exportaciones mexicanas de drogas ilegales, 1961-2000, Colección de Documentos, Universidad Autónoma de Madrid. Madrid.
[xxxiii] OAS (2013), Op. cit.