Does Mexico still need NAFTA?

Darryl McLeod, Econ 3235 Fall 2017

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Why has Mexico underperformed?

Darryl McLeod, Econ 3235 Fall 2017ECON 3235/6470 Fall 2017 2

Why has Mexico not exceled?

Darryl McLeod, Econ 3235 Fall 2017ECON 3235/6470 Fall 2017 3

Mexico is nothing if not resourceful: the “day of the dead” celebration

that Spectre was fictional but…

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Tenoch Huerta in Sin Nombre & Spectre

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At Q2 the modern sector is profitable, at Q1 it is not, … See discussion of Figure 1 in Krugman, Rise and Fall of Development

Eonomics see last page

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Garment factories have higher fixed costs leading to increasing returns

• Home production (H is formal education):

• Factory production: (F is fixed cost)

• Key assumption: b much larger than a so real wages higher .

1α α−=T aQ H L

1FTQ F bH Lα α−= +

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h

Figure 8Market size poverty trap

real wage

h* Wage-

profitabilitythreshold

Traditional cottage-home

production dominates

(low wages- no fixed costs)

Poverty Trap ends: Modern Factory

production dominates

Factory with fixed cost F

Cottage-home Production

aFw = (1 - a)bh - rF

βCw = a(1 - β)h

-rF

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Additional MFA quotas ends poverty trap, allows factories to pay higher wages than traditional firms

h

An export quota poverty trap Figure 7

real wage

_

Lh(X )_

Hh(X )

TD home lowQ = Q +X

TQ = Q + Xhome highD

aFw = (1 - a)bh - rF

βCw = a(1 - β)h

-rFECON 3235/6470 Fall 2017 9

S-shaped Poverty Trap with increasing then decreasing returns creates two steady states, k* low and k* high (not growth rate the same at both, a typo?) BSIM Ch 1p, 76

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Demand side Poverty Trap Figure 5a Price, costs LRAC curve for Modern Industry

Figure 5a Demand-side poverty traps

Demand curve for closed economy….

MC = AC for traditional cottage industryP= MC MC t

MC factories marginal cost lower for modernindustry, has fixed costs too.

QA Quantity of output per firmWith inelastic demand, modern firms cannot compete (unless they outlaw competition-- perhaps with import tariffs or quotas + barriers to entry, expensive & hard to get business licenses or import permits)

with monopolistic competition Deardorff, Stern & Brown, 1993?

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Demand side Poverty Trap Figure 5b Price, costs LRAC curve for Modern Industry

Figure 5b Demand-side poverty traps

Demand curve for Open economy….

MC = AC for traditional cottage industryP= MC MC traditional

marginal cost lower for modern MC factoriesindustry, has fixed costs too.

Quantity of output per firm QFT Quantity of output per firmWith more elastic demand in open economy, modern firms can compete, but average firm size increases and producitivy growsreducing employment (perhaps) and making traditional firms uncompetive, but costs fall and productivity of those still employed, average firm size after free trade is larger, economies of scale coverfixed and lower LRAC as traditional no fixed cost firms exit.

with monopolistic competition Deardorff, Stern & Brown, 1993?

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Closed economy

demand side poverty Traps: evidence from Hsieh, Chang-Tai,

and Peter J. Klenow. 2010. "Development Accounting."

American Economic Journal: Macroeconomics, 2(1): 207-23, page

221, Figure 9

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References

Amirapu, A., & Subramanian, A. (2015). Manufacturing or services? An indian illustration of a development dilemma. Center for Global Development Working Paper, (408).

Krugman, P. (1994). The fall and rise of development economics. Rethinking the development experience, 39-59.

Murphy, Kevin M, Andrei Shleifer, and Robert W Vishny. 1989. “Industrialization and the Big Push.” Journal of Political Economy 97 (5): 1003-1026. (cited by 2195)

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