nafta uneven integration (tb para confirmar asimetrias)

50 INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

50

Int’l. Journal of Political Economy, vol. 33, no. 3, Fall 2003, pp. 50–71.© 2005 M.E. Sharpe, Inc. All rights reserved.ISSN 0891–1916 / 2005 $9.50 + 0.00.

CLEMENTE RUIZ DURÁN

NAFTALessons from an Uneven Integration

The North American Free Trade Agreement (NAFTA) was the first freetrade agreement between the United States, Canada, and a developingcountry, and it was the most ambitious anywhere in the world amongcountries with such extreme differences in income and development butwith a geographical proximity that allows integration to take place be-yond the trade factor. It could be argued that, more than a trade agree-ment, NAFTA is a pathway to regional integration. It could provide,therefore, an opportunity to understand the relationship between effi-ciency impacts on sector output and employment, the growth rates ofnational income and productivity, and the distribution of income withinand among countries.

Ten years after its enactment, the whole region has undergone a trans-formation: new and larger linkages have emerged in goods and servicesproduction, there has been reallocation of productive capacities, and la-bor markets have become more integrated. No other region in the worldhas witnessed such a transformation; indeed, one of the largest migra-tion processes in world history has taken place between Mexico and theUnited States. Debates over the process have been many, but the pro-ductive effects of migration have not yet been analyzed. In this article,the discussion is centered on the emergence of interactions among thethree countries, how they have changed routines and the whole eco-

Clemente Ruiz Durán is Jesus Silva Herzog Professor at the Graduate School ofEconomics of the National Autonomous University of Mexico (UNAM), MexicoCity, Mexico.

FALL 2003 51

nomic organization of production, and how these new patterns of trade,investment, and migration could affect the future of the region.

The NAFTA Debates: What Was Expected?

In the early 1990s, before the enactment of NAFTA, an important dis-cussion developed on how integration was going to affect nationaleconomies, and, in fact, there was little talk of interactions. Pioneer-ing work by the Institute for International Economics in Washington,DC, set the initial parameters for discussion: trade and employmenteffects. Hufbauer and Schott (1993) used a methodology that made theAmerican net employment gain a linear function of the U.S. trade sur-plus with Mexico, and they predicted it would continue to grow atrates similar to the recent past. Others, such as Lustig, Bosworth, andLawrence (1992), argued that direct economic effects of NAFTA wouldbe small for both Mexico and the United States. The CongressionalBudget Office put together the different pieces of the puzzle, conclud-ing that

despite the variety of methodologies used and the shortcomings individualNAFTA modeling efforts may have, when taken as a group, the results ofthese efforts almost uniformly show that NAFTA will have a small butbeneficial effect on the US economy, the preponderance of evidence fromthe modeling efforts points in the same direction—that some economicsectors would benefit from NAFTA while others may benefit less or evensuffer some losses but on balance the gains for the US economy will begreater than any potential losses. (1993: 5)

A parallel debate fueled by the Economic Policy Institute argued thatNAFTA was going to cost the United States many jobs. Faux and Lee(1992) argued that a large deficit in the U.S. trade balance with Mexicowould generate a huge “net job loss,” and investment flows from theUnited States to Mexico would mean plant relocation and job reduction.Yet the real insights to be gained from international factor movementsrelate to the growing cross-border dynamics of labor markets and pro-duction sharing. Robinson et al. (1992) and Levy and van Wijnbergen(1992) were the first to note that economic dislocation in Mexican agri-culture could easily lead to an increase, rather than a decrease, in un-documented immigration to the United States. Similarly, with the NorthAmerican auto industry as a case study, Hunter, Markusen, and Ruther-ford (1995) focused on the international coordination of production, pric-


ing, and sales by multinational enterprises. In an example of complexpositive cumulative causation, a dynamic relation can emerge wherebyinternational investment flows are increased to take strategic competi-tive advantage of sectors facing economies of scale, thereby bringingabout what Hinojosa-Ojeda and McCleery (2004) described as cumula-tive causation in the tradition of Myrdal.

NAFTA: Summing up the Effects

Although debate was broader in scope, most of the literature on NAFTAhas centered on how trade adjusted to the new tariff scenario and howthis affected employment. Little has been discussed about factor mobil-ity and how the latter has reshaped the whole North American economy.The assumptions of the different models can be summarized as follows:tariff reduction and obstacles removal were going to increase intraregionalexports and enhance investment flows across countries, with positiveeffects on production and employment. This process was expected to besequential in nature:

(1) It was expected that there would be a positive intraregionalgrowth in exports of all three economies, with the mostcompetitive sectors becoming the leaders. This path could bedepicted as follows:

δ Xij > 0 (1)

where i and j are Canada, Mexico, or the United States, with i ≠ j;and X is exports.

(2) Intraregional export growth was going to bring an increase inintraregional investment, mainly in the export sectors, therebymodernizing productive capacities, primarily in Mexico, throughthe introduction of new technologies:

δ Invij / δ X

ij > 0 (2)

where Inv represents investment in a country.

(3) Increased investment was going to bring about positiveeffects on production (GDP):

δ GDPij / δ Inv

ij > 0 (3)

FALL 2003 53

(4) Increased production and economies of scale were expectedto have a positive impact on employment:

δ E ij / δ GDP

ij > 0 (4)

All of these effects could be summarized in an elementary diagram(Figure 1), where it is shown how exports could create a positive cumu-lative effect on the rest of the economy.

Learning Regions in North America, Through ChangingPatterns of Trade and Investment

During the period from 1994 to 2003, it can be argued that NAFTAbecame the most successful trade agreement in the global economy, in-creasing the size of its intraregional transactions by 84 percent (Table1),1 increasing exports between the NAFTA countries from US$354 bil-lion to US$651 billion, and increasing their share of total exports from48 to 56 percent. Imports followed the same path, going from US$342billion to US$631 billion, even though their regional share remainedstagnant in the range of 36–37 percent of total imports.

Uneven development in exports and imports reflects a basic contra-diction within the integration paradigm, as two-thirds of foreign pur-chases are extraregional. This could be explained by the continued

Figure 1. NAFTA Expected Effects


restructuring of the U.S. manufacturing industry, which began to relo-cate during the 1980s and would continue its process of relocation mainlyin the less innovative sectors, where there are more standard and repeti-tive processes involved2 and where value added is declining. Relocationcould not be avoided in the global economy,3 as multinational corpora-tions are willing to take advantage of economies of scale wherever theyexist. Hence, if they are inside NAFTA, they will reallocate their invest-ment within the region but will also continually monitor the optionsworldwide of investing wherever it is more profitable. The consequenceof this strategic investment planning has been to create a very competi-tive environment in the region, as all investments are evaluated con-stantly in order to asses their competitive edge.4 During the period1994–2003, there was a positive evaluation of the NAFTA region bymultinational corporations that led to an overall increase in investmentflows and to a significant reshaping of productive capacities within theregion.

Capital flows were bidirectional. U.S. investment more than doubled

Table 1NAFTA: Intraregional Trade Growth (percentage of total)

Intraregional Intraregionalexports, share imports, share of Net integrationof total exports total imports effect

A B C = A – B

1992 43.52 35.99 7.531993 45.88 36.80 9.071994 47.96 37.33 10.631995 46.02 37.72 8.301996 46.97 39.01 7.951997 48.80 39.89 8.911998 51.25 40.28 10.961999 54.32 40.39 13.932000 55.67 39.58 16.102001 55.46 39.35 16.112002 56.55 38.08 18.472003 56.00 36.80 19.20

Source: Author’s estimates based on World Trade Organization, “International TradeStatistics” (2004), table A.3.

FALL 2003 55

in Canada, and there was almost a fourfold increase in Mexico, whileflows from Mexico and Canada more than doubled their investmentposition in the United States (see Table 2).

The restructuring of manufacturing under NAFTA led to a change inthe trade pattern within the region that resulted not only from the in-creased integration but also from the emergence of new relations amongproducers. Clustering emerged in the region as a way to improve com-petitiveness. The largest of these clusters was the auto industry, wherestrong linkages developed among producers. Thereby, autos became themost traded good and constituted one-fourth of total trade of the region.The logic behind this clustering was to take advantage of economies ofscale within the region, with low-end products to be produced in thesouth and high-tech inputs to be developed in the north. Specializationthrough clustering led to a learning process in the value chain, with low-end producers developing new skills that helped them to upgrade andenter some new activities. This was the case with auto parts manufactur-ers in the automotive industry. This allowed Mexico to come into the

Table 2Investment Position of NAFTA Countries in the Region (millions of dollars)

Canada United States Mexico

2003

Canada — 102.255 n.a.United States 192.409 — 61.526Mexico n.a. 6.680 —

1994


Change in Investment Position


Source: Author’s estimates based on U.S. Bureau of Economic Analysis, “U.S. DirectInvestment Position Abroad on a Historical-Cost Basis, 1994–2003” (www.bea.gov/bea/di/usdpos/pos_03.htm), and “Foreign Direct Investment Position in the UnitedStates on a Historical-Cost Basis, 1994–2003” (www.bea.gov/bea/di/fdipos/fdipos-03.htm).


high-tech part of the industry, with the development of research facili-ties, as in the case of Delphi, which became the second-largest employerin the country.

The arithmetic of NAFTA became more complex, as is reflected inthe evolution of the U.S. balance of payments, where the U.S. deficitwith the rest of the region rose from a low of $5 billion in 1992 to $96billion in 2003, and the overall current account deficit grew from $13billion in 1992 to $53 billion, constituting 3 percent of the global U.S.deficit in 1994 and 10 percent in 2003. In this case, the deficit was theresult of the relocation of plants to Mexico and Canada. However, thisdoes not mean that the United States was somehow becoming less com-petitive. Rather, it would appear that U.S. companies were taking ad-vantage of free trade in order to benefit from greater economies of scalewithin the region, not only in the U.S. territory. This was an unexpectedoutcome of integration, and it contradicts the surplus hypothesis of theinitial models put forth by trade analysts, as the latter were consideringtrade without factor mobility and clustering. Once one incorporates bothfactors into the analysis, it becomes clear that success cannot be measuredby a single variable, as clustering is mainly an interactive process withmultiple outcomes. Consequently, changes in patterns of trade resultednot simply from the tariff reduction but from a more complex process,whereby investment flows and relocation of capacities become the deter-minants of trade flows. Figure 2 shows how, in the global process, U.S.manufacturing capacities have moved in the direction of the NAFTA re-gion, while other types of investment were relocated outside the region.

Reallocation of productive capacities among the new partners andthe increased trade were expected to strengthen growth in the region,but the result was uneven. The United States and Canada increased theirgrowth rates from 1.5 and 2.6 percent, respectively, during the period1988 to 1993 and to 3.5 and 3.3 percent, respectively, from 1994 to2003. While Mexico reduced its growth rate from 3.4 to 2.8 percent, thisuneven result shows that external forces do not have the same effect ondifferent sizes of economies, and that growth requires a domestic com-ponent to take advantage of the new environment characterized by greaterforeign direct investment and trade. The missing link was the lack ofinvestment growth in Mexico, necessary in order to take advantage ofthe new investment opportunities that accompanied liberalization. TheWorld Trade Organization recognized that this could happen in its An-nual Report of 1998, in which it indicated that “mounting evidence sug-

FALL 2003 57

gests that the greatest benefits of trade liberalization do not accrue im-mediately but over time, through stimulating investment and economicgrowth” (1998: 42), and concluded that it is necessary to consider theduration of the investment process to achieve desirable levels of income.In the North American case, free trade seems not to have the related gainsassumed in traditional theories, mainly due to the lack of linkages be-tween the export sector and the rest of the economy. The American andCanadian economies seem to have stronger linkages between their exportsectors and their domestic activities than those in Mexico’s economy. Thisis why there are differential output effects within the same region. All ofthis affects not only trade and growth perspectives but also the employ-ment outlook that has become critical in the case of Mexico.

How NAFTA Affected Labor Market Behavior

Within the NAFTA region, a total of 21.9 million new jobs were createdin the nonagricultural sector during the period 1994–2002 (Table 3),with 16 million in the United States, 3.4 million in Mexico, and 2.4million in Canada. What seems paradoxical was that most of the newemployment originated from the nontraded goods sector, while in thetraded goods industries, there was a decline. This pattern could be ex-

0

50,000

100,000

150,000

200,000

250,000

300,000

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000

Total 2003

Total 1994

Manufacturing 2003

Manufacturing 1994

Relocation forces

For

ces

of re

stru

ctur

ing

Figure 2. U.S. Investment Position in and Outside NAFTA

Extraregional

Intr

areg

iona

l


Table 3NAFTA: Job Creation and Destruction, 1994 to 2002 (thousands)

Canada Mexico United States Region

Total 2.422 3.452 16.050 21.924

Goods-producing sector 660 1.163 –217 1.606

Construction 154 749 1.621 2.525Manufacturing 506 414 –1.762 –843Durables 383 255 –648 –10Nondurables 123 159 –1.115 –834

Services-producingsector 1.762 2.289 16.267 19.662

Utilities 5 42 –93 –46Trade 352 911 1.939 3.202Wholesale trade 126 n.a. 405 n.a.Retail trade 226 n.a. 1.534 n.a.Transportation andwarehousing 106 339 523 968

Finance, insurance,real estate,and leasing 62 61 980 1.103

Finance and insurance 70 –50 682 702Real estate and leasing –8 111 298 401Professional, scientific,technical services;business, building, andother support services 577 86 4.492 5.155

Educational services 87 202 748 1.037Health care andsocial assistance 239 150 2.644 3.034

Information, culture,and recreation 163 –8 657 812

Accommodation andfood services 197 –29 1.886 2.054

Other services 36 512 944 1.492Public administration –63 24 2.238 2.199

Source: Statistics Canada, Labour Force Survey Estimates (LFS), by North AmericanIndustry Classification System (NAICS), Sex and Age Group, annual (persons unlessotherwise noted) (22440 series), CANSIM table 282-000. Instituto Nacional deEstadistica, Geografía e Informática, “Sistema Nacional de Cuentas Nacionales 1993a 2002”; and U.S. Bureau of Labor Statistics, “Employment, Hours and earnings fromthe Current, Employment Statistics Survey,” national (available at http://data.bls.gov/outside.jsp?survey=ce/).

FALL 2003 59

plained by the relocation of industries outside the region, as exemplifiedby the manufacturing sector, in which the United States lost almost 2million jobs, two-thirds of which were from the nondurable goods sec-tor and one-third from durables. Within the goods-producing sector, jobswere created primarily in construction in the three countries. This pro-cess shows that export industries were not creating sufficient jobs, ei-ther because of relocation of firms or because of the competitivenessparadigm within NAFTA that forced manufacturing firms to reduce per-sonnel as a way to maintain low unit costs.

The service-producing sector was the leader in job creation underNAFTA. The leading activity was professional services, with 5.2 mil-lion new jobs created. This can be explained by the emergence of moreindependent activities as a result of the restructuring of the labor mar-ket, particularly with casual employment on the rise. The second largestjob-creating activity was trade, with 3.2 million new jobs, due mainly tothe boom in retail trade throughout the whole region. The third activitywas health care and social assistance (with 3 million new jobs), a sectorthat is becoming increasingly important, as there is a rising demand forhealth services to attend people at home or in nursing institutions. Ex-pectations are that demand in this area will continue to increase. Thefourth activity was public administration (2.2 million new jobs), withgrowth that comes mainly from the restructuring of the public sector inthe United States, where regional and local governments have becomemore important in the delivery of public services. New niches of employ-ment also emerged in the accommodation and food services industry (2million), as new outdoor activities are on the rise in North America, and ineducational services (1 million), where there is an increasing demandfor new professionals in lifelong training for a more mature society.

One of the main problems arising from this new integration processhas been the incapacity of Mexico to create paid employment. Duringthe period from 1994 to 2002, the labor force increased by 1.3 million ayear, while total remunerated employment growth averaged 533,000 peryear. This huge gap has been filled by informal markets and migration,resulting in a deteriorating social environment. One positive aspect ofthis imbalance has been the strength of labor market growth in the UnitedStates, at a rate of 1.7 million new jobs per annum. These new U.S. jobshave been absorbing an increasing number of migrants, mainly fromMexico.

Leading export sectors in the United States, Canada, and Mexico were


not, however, the ones to stimulate overall employment; their contribu-tion was marginal. Of the total of new jobs created, the leading sectors’share was only 2.81 percent in the United States, 0.77 percent in Mexico,and 20.51 percent in Canada. In fact, in some of these sectors, the im-pact on job creation has been negative, mainly in Mexico (primary metalindustries, industrial machinery and equipment, leather and leather prod-ucts, food and kindred products, chemicals and allied products, fabri-cated metal products, and stone, clay, and glass products) and the UnitedStates (paper, chemicals, farms, and transportation). In Mexico, the lead-ing export sectors underwent some restructuring, as in the glass andprimary metal industries; while, in the United States, the chemical in-dustry suffered the new technologies syndrome, and the lumber indus-try is one of those traditional sectors that had not been able to modernize.What is clear from this comparison of job creation is that the sectorscreating additional jobs were outside of the new export industries. There-fore, it could be argued that these export sectors are not labor intensive,as was assumed in the original NAFTA debates.

Canada and Mexico maintained a policy of competitiveness via lowwage growth. This is a self-defeating strategy, as it weakens one’s do-mestic market and does not allow capacities for taking advantage ofeconomies of scale, which was one of the main issues in the NAFTAdebates. This led to a process in which markets and macro policies actagainst one another, instead of reinforcing the integration process. Onehypothesis here is that these divergent paths derive from labor marketbehavior: Canada and Mexico have been pushing integration based onlow wage policy, while the United States has had an innovation policythat encourages real wage growth. NAFTA faces, therefore, the preva-lence of two competitiveness paradigms, one based on low cost and theother based on innovation.5 Because the first option is self-defeating, inthe long run, the only viable competitiveness strategy among partnerswill be through innovation. Paradoxically, labor productivity has beengrowing in Mexico at a faster pace than in Canada. From this, it ensuesthat Mexican workers are not getting their share of this increase in pro-ductivity (see Figure 3 and Table 4).

Diaspora Productive Effects on the Region

One of the most important effects of low growth in Mexico and thehigher growth in the United States and Canada has been the growing

FALL 2003 61

presence of Mexico’s diaspora in the United States. Data from the U.S.Justice Department show that during the period 1989–2001, approxi-mately 14 million persons migrated to the United States, of which 3.7million came from Mexico and 360,000 from Canada. Migration to theUnited States from its NAFTA partners accounted for about 10 percentof the U.S. population increase during the period between 1989 and2002. The NAFTA debates avoided the thorny issue of migration, as itwas expected that as trade would increase, domestic production wouldexpand and would generate greater employment opportunities and bet-

Table 4NAFTA: The Low Cost Competitiveness Paradigm Hourly CompensationCosts for Production Workers (in U.S. dollars)

United States Canada Mexico

Manufacturing1994 17.19 16.10 1.652002 21.33 16.02 2.38Food and beverages and tobacco1994 15.12 14.90 2.012002 18.44 14.20 2.36Textile, apparel, and leatherproducts

1994 10.62 9.60 1.932002 14.35 n.a. 1.89Textile mills products1994 12.01 11.59 2.452002 15.73 12.37 2.42Apparel1994 9.54 8.25 1.442002 13.06 n.a. 1.60Transportation equipment1994 24.88 19.68 3.922002 29.68 19.45 4.99Electronic and otherelectric equipment

1994 16.19 15.56 2.032002 21.12 15.28 2.45

Source: U.S. Bureau of Labor Statistics, “Hourly Compensation Costs for ProductionWorkers in Manufacturing, 30 Countries or Areas and 40 Manufacturing Industries,Selected Years 1975–2002” (available at www.bls.gov/fls/flshcind.htm).


ter conditions internally, thereby creating disincentives for people toemigrate from their homelands. Low growth of output and employmenthas led to diminished expectations in Mexico, thus favoring greater im-migration to the United States and Canada.6

Migration dynamics unleashed a debate that focused on the assimila-tion of migrant workers in the host economy (learning process) and onthe convergence of their earnings with those of domestic workers (Borjas1994a; Borjas et al. 2002; Ethier 1986; Benjamin, Gunderson, and Riddell2002). However, this analysis has stopped at the micro level. To date, nomacro analysis has been undertaken to study its sequential effects on thewhole economy. The hypothesis in this article is that low growth in ahighly populated country leads to emigration. Although lowering socialpressures in the short run, emigration represents a loss of human capital,leading to a reduction of potential output in the home country. As thehost economy increases the size of human capital through immigration,it acquires additional inputs that generate a larger GDP. This hypothesisis based on the well-known theory of human capital (Mankiw, Phelps,and Romer 1995), where growth (∆Y) is postulated to be a function ofboth physical capital accumulation (Kp) and human capital (Kh), as ex-pressed in the following formula:

∆Y = (∆Kh, ∆Kp) (5)

100

110

120

130

140

150

160

170

180

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Inde

x 19

93 =

100

.0

México

USA

Canadá

Figure 3. NAFTA: Productivity Growth

MexicoUSACanada

FALL 2003 63

Tabl

e 5

Can

adia

n a

nd

Mex

ican

Dia

spo

ra in

NA

FTA

Mig

rant

popu

latio

n to

Uni

ted

Sta

tes

(mill

ions

of

pers

ons)

Mex

ican

dias

pora

to

Uni

ted

Sta

tes

(mill

ions

of

pers

ons)

Can

adia

ndi

aspo

ra t

oU

nite

d S

tate

s(m

illio

ns o

fpe

rson

s)

Can

adia

nan

dM

exic

andi

aspo

ra(m

illio

ns o

fpe

rson

s)

Can

adia

nan

d M

exic

andi

aspo

rash

are

in U

.S.

popu

latio

nin

crea

se (

%)

U.S

. ann

ual

popu

latio

nin

crea

se(m

illio

ns o

fpe

rson

s)

Can

adia

nan

dM

exic

ansh

are

ofto

tal

mig

ratio

n(p

erce

nt)

1989

1.0

91 0

.405

0.01

2 0

.417

38.3

1990

1.5

36 0

.679

0.16

8 0

.847

55.1

2.79

30.

419

91 1

.827

0.9

460.

014

0.9

6052

.53.

36 2

8.6

1992

0.9

74 0

.214

0.01

5 0

.229

23.5

3.40

6.7

1993

0.9

04 0

.127

0.01

7 0

.144

15.9

3.36

4.3

1994

0.8

04 0

.111

0.01

6 0

.127

15.8

3.18

4.0

1995

0.7

20 0

.090

0.01

3 0

.103

14.3

3.32

3.1

1996

0.9

16 0

.166

0.01

6 0

.181

19.6

2.80

6.5

1997

0.7

98 0

.147

0.01

2 0

.158

19.8

3.36

4.7

1998

0.6

54 0

.132

0.01

0 0

.142

21.7

3.20

4.4

1999

0.6

47 0

.148

0.00

9 0

.156

24.2

3.18

4.9

2000

0.8

50 0

.174

0.01

6 0

.190

22.4

3.14

6.1

2001

1.0

64 0

.206

0.02

2 0

.228

21.5

3.11

7.3

2002

1.0

64 0

.219

0.02

0 0

.239

22.5

3.06

7.8

Per

iod

1989

–200

213

.851

3.76

30.

359

4.12

329

.841

.26

10.

0A

vera

ge19

89–2

002

0.98

90.

269

0.02

60.

294

26.2

3.17

9.1

Sour

ce:

Est

imat

es b

ased

on

U.S

. Dep

artm

ent

of H

omel

and

Secu

rity

, Off

ice

of I

mm

igra

tion

Stat

istic

s, “

2003

Yea

rboo

k of

Im

mig

ratio

n St

atis

tics,

Sept

embe

r 20

04,”

tab

le 2

(“I

mm

igra

tion

by R

egio

n an

d Se

lect

ed C

ount

ry o

f L

ast

Res

iden

ce F

isca

l Yea

rs 1

820–

2003

”);

and

U.S

. Cen

sus

Bur

eau

“Sta

tistic

al A

bstr

act

of t

he U

nite

d St

ates

200

3,”

tabl

e 2

(“Po

pula

tion

1960

to

2002

”), p

. 8.

Year


In a full employment context, the increase of inputs would bring aproportional increase in GDP. Yet, real-world output is always belowpotential. Excess capacity is prevalent in North America, where, forinstance, at the end of the first quarter of 2004, estimates of capacityutilization7 were 64 percent for Mexico, 76.5 percent for the United States,and 83.5 percent for Canada. In the case of human capital, employmentmultipliers do not allow, in all cases, full advantage to be taken ofexisting human capital. Once capacity utilization is recognized, thengrowth becomes a function of physical capacity utilization and also ofthe degree of utilization of human capital, so that growth (∆Y) couldbe expressed as follows:

∆Y = f ((β ∆Kp ) + (∆ Kh – (∆ Kh – α ∆Kp )) (6)

where Y = GDP; Kh = human capital; Kp = physical capital; α = employ-ment multiplier; and β = degree of physical capital utilization.

In accordance with this simple specification of the growth process, ina closed economy where human capital is underutilized, unemployment,underemployment, or the informal economy will become its character-istic features, and output will be below its full employment level. All ofthis will generate social tensions; and the final output will depend on theinstitutional framework that could allow for either a “soft landing” (i.e.,institutional frameworks where there are unemployment benefits) orsocial deterioration (i.e., informal markets).

In an open economy scenario, unemployed workers can migrate so asto reduce social tensions in the home country and increase growth po-tential in the host economy. This migration option could be described asthe Ω effect. If we extend the analysis to two open economies, growthwill be determined not only by domestic human and physical capital butalso by migration. Hence, migration would be positive for the hosteconomy or country of immigration (i) and negative for the homeeconomy or country of emigration (e), as shown below:

Yi = f (Kh, Kp, + Ω) (7)

Ye = f (Kh, Kp, – Ω) (8)

Human capital mobility allows a GDP exchange among both econo-mies, as the economy with emigration will face a reduced level of pro-duction (lost product), while the host economy will increase its GDP(earned product). This model allows us to introduce migration as animportant factor in the determination of macroeconomic performance

FALL 2003 65

(the evolution of GDP), thereby broadening the microanalysis that hasbeen developed around migration (Zimmerman and Bauer 2002).8

Recognizing the important role that migration plays in the growthprocess, we can now estimate the “lost” and “earned” product amongthe North American economies. In the Current Population Survey, theU.S. Bureau of Labor Statistics estimates the number of employed Mexi-can emigrants active in the American labor force for 2003 at 11.2 mil-lion with remunerated occupations.9 In order to obtain the diaspora GDPestimate (earned output), average labor productivity (U.S. GDP perworker) was estimated, and it was applied to the migrant Mexican laborforce figures, to get its GDP share; the same procedure was followed tomeasure Mexico’s lost output. Estimates for the United States are shownin Table 6, where the effect of the Mexican diaspora entails a signifi-cantly larger GDP due to immigration.

In much the same way, estimates of Mexican GDP lost due to thediaspora are shown in Table 7. The effect is a loss of almost one-third ofwhat could have been produced if all those migrants would have heldemployment in their own country. If this latter scenario would have beenrealized, GDP per capita could have reached US$7,000, a 15 percentincrease above the prevailing value of slightly over US$6,000 in Mexico.

Table 6Mexican Diaspora Estimated Effects on U.S. GDP

Step 1Mexicans in the U.S. labor force (thousand of persons) 11.151

Step 2U.S. GDP (million of dollars) 10,987,900Average U.S. productivity (in dollars) 79,812

Step 3Mexican diaspora estimated GDP 889,979Diaspora share in U.S. GDP (percent) 8.1

Step 4Diaspora remittances to Mexico (millions of dollars) 13,266

Step 5Diaspora net contribution to U.S. GDP (millions of dollars) 876,713Diaspora net share in U.S. GDP (percent) 8.0

Source: Author’s estimates based on data from the U.S. Bureau of Labor Statistics andBureau of Economic Analysis, U.S. Department of Commerce.


Another type of analysis has been realized under the hypothesis oflabor surplus (Borjas 1996), where the positive effect of Mexican mi-gration comes from lower wages, rather than from the increased pro-duction. However, the problem with microanalysis is that it assumes thebenefits for the host country as a product of lower costs rather than theresult of an increase in human capital.10 A discussion of the macroeco-nomic effects of the diaspora restores the Keynesian perspective in whichmacroaggregates are incorporated into the analysis to avoid losing theglobal interaction among micro agents. Analysis based on purelymicroeconomic foundations has focused on the impact of migration viacost reduction, which remains an incomplete analysis and leads to inap-propriate policy recommendations in which the whole burden of adjust-ment falls on labor. With macro analysis, the basic hypothesis is that asfar as there is human capital mobility, there will be an exchange of pro-duction levels between regions, with earnings for the host economy andlosses for the home economy, as can be observed in Figure 4.

Policy recommendations based on this new type of analysis bringforth the need to formulate macroeconomic policies in an environment inwhich migration is important. This is due to the simple fact that the hosteconomy increases its output largely at the expense of the home economy.Long-term discussion has to involve these redistributive implications, per-

Table 7Mexican Diaspora Estimated Effects on Mexico GDP

Step 1Mexicans in the U.S. labor force (thousands of persons) 11.151

Step 2Mexico GDP (million of dollars) 626,602Average Mexico productivity (in dollars) 15,421

Step 3Lost GDP due to diaspora (millions of dollars) 171,959Share of Mexico GDP (percent) 27.4

Step 4Diaspora remittances to Mexico (millions of dollars) 13.266

Step 5Net loss due to diaspora (millions of dollars) 171,946Loss share of GDP (percent) 27.4

Source: Author’s estimates based on data from the INEGI, U.S. Bureau of LaborStatistics, and Bureau of Economic Analysis, U.S. Department of Commerce.

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haps along the lines as found in the European Union, where, at least, it hasbeen recognized that compensatory transfers are required in order to im-prove living conditions in the migrant countries (Spain, Portugal, Italy,and Greece) and, by so doing, reduce emigration. Hence, it could be ar-gued that the acceptance of intercountry transfers is a recognition of thepositive effects of migration on countries with low population growth.

Some Preliminary Conclusions: The Need for a DiscussionAgenda

The optimistic expectations that NAFTA would have created a virtuouscircle of increased production and employment have not been fulfilled.Canada and the United States were unable to pull the Mexican economyonto the same growth path, because the multiplier effects of the exportsectors are much lower than expected in the less developed areas ofNorth America. There are no clear-cut linkages that could really de-velop a network of growth, and there are no policies in the region thatattempt to develop them. Emphasis has been given to enhance the so-called competitiveness edge via two different approaches. For the UnitedStates and, to a lesser extent, Canada, the competitiveness edge has largelybeen an innovation approach, while in Mexico, it has essentially been acost approach. Prevalence of these two different approaches to competi-tiveness reduces the possibility of a smooth pathway to further integra-tion, as the first encourages human capital development, while the other isbased on a low wage policy. If the objective is further integration, there

Figure 4. Diaspora Effect on Potential Output

Home Economy Host EconomyKh

KpKp

Kh

ΩΩ

Kp = physical capital accumulation Kh = human capital Ω = migration


must be a change toward an innovation strategy that emphasizes the ideathat the only long-term solution to further integration is the creation of aknowledge-based region where all participants would be able to improvetheir standard of living. Innovation revalues the role of human capital inthe development process and introduces the idea of high-quality jobs.

An agreement also has to be reached on how factor mobility affectsgrowth. A larger role needs to be accorded to this analysis due to the factthat capital and labor mobility has increased tremendously during thelast decade, but little importance has been given to its impact. In fact,higher growth has been the result of factor mobility. U.S. output is 10percent larger thanks to the migration effect, while Mexico has suffereda loss of about 30 percent of its pre-emigration potential output. All ofthese effects need to be discussed in a systematic way, so as to reach aconsensus on how different factors can be combined to identify a policymix that could generate more balanced growth within the whole region.

The burden of adjustment has fallen on labor markets. Disequilib-rium among sectors has been resolved through employment reduction,and when factor mobility is considered, migration has turned out to bethe main mechanism of adjustment. Trade liberalization and the freetrade agreement have proven to be insufficient to enhance economicperformance, even with capital mobility within the region. What hasnow become clear is that external factors could help; but, as far as thereare no endogenous forces that could reinforce growth, external factorswill not solve the long-term problems faced by these economies. Whathas also become evident from the analysis is that market adjustmentalone will not lead to full employment of existing resources. Adjust-ment requires public action to coordinate the effort. For that purpose,there has to be public recognition that the three countries have to de-velop an institutional framework so as to discuss long-term problemsbased on strategic planning.

Governments have to be aware of the need for strategic planning forseveral reasons. One starting point could be to address the problem oflong-term demographics facing the three countries in the near future, asthere will be a need for further migration to compensate for the declin-ing birthrate and the aging of the population in Canada and the UnitedStates. In this context, how the three economies face labor market inte-gration will become critical and surely cannot rely solely on the role ofthe market to achieve further integration with a narrowing gap in thestandard of living.

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One of the main areas of debate will be on the precise pattern of thenew productive integration in the three countries. The auto industry hasbecome the leading sector, but no other area has realized a similar ef-fort. It has to be mentioned that recently, most of the foreign direct in-vestment has been pouring into the service sector, mainly in the financialsector. Patterns of specialization will define the trends of labor marketabsorption and will also define the outlook for productivity growth. Undertoday’s framework, workers will be able to capture some of the gainsonly on the margin. For this reason, common rules for productivity shar-ing will be required; otherwise, social tensions could increase through-out the region.

The main questions that need to be addressed are as follows: (1)how far is North American society willing to proceed if the treaty is togo beyond the initial stage based on market integration, and (2) whatare the conditions needed to put in place a transfer mechanism to fos-ter structural change in Mexico and Canada? This discussion has notarisen among academics or in any institutional forum. The proposalhere is to discuss how large the transfer will need to be to reduce thegap in per capita GDP among the three NAFTA countries. If economicwelfare is to be one of the aims of the treaty, analysis has to broaden soas to include how institutions in the area are working for this purpose. Itis clear that Mexico requires a modernization agenda of all the existinginstitutions, but the problem is how to coordinate the effort of discus-sion in such a way that the three countries could be involved. NAFTAdiscussion was held under the stimulus of trade gains and to avoid lossesfor the different participants. It is now necessary to find the new stimu-lus that could direct the region toward a new stage of integration.

Notes

1. Intraregional trade within NAFTA is just one-third of the intraregional tradewithin the European Union.

2. Discussions on the subject were held with members of the Education andLabor Force Committee of the U.S. House of Representatives.

3. Karen Helene Midelfart-Knarvik and Henry G. Overman (2002) discuss andsupport this idea in their paper on relocation and European integration.

4. The experience of the computing industry in Jalisco is a good example ofthis. U.S. transnational corporations decided to relocate their notebook capacities totheir plant in El Salto, Jalisco, in the 1990s but, as the chain value was reassessed,they decided to transform their operation in the region and transform the manufac-turing facilities into a large software development center.


5. An extensive discussion on innovation can be found in Innovation, the Miss-ing Dimension by Richard Lester and Michael Piore (2004). In this book, the au-thors provide an industry analysis of how innovation takes place and shed light onwhat innovation is about.

6. On the question of migration within NAFTA, Papademetriou (2003) pointsout that the negotiators did not include a migration scheme in the treaty.

7. Estimates were realized by the Instituto Nacional de Estadística, Geografía, eInformática in Mexico, the Federal Reserve in the United States, and Statistics Canada.

8. Zimmerman and Bauer (2002) compiled four volumes on the subject, but inall cases, the effects are analyzed in a microeconomic perspective, which includesdifferent areas of analysis: migrant’s situation, decision to migrate, family migra-tion, illegal migration, migration policies, assimilation of migration, and the role oflanguage and intergenerational problems, but in no case is there an analysis of theimpact of migrants on GDP.

9. See the U.S. BLS Current Population Survey Web page (www.bls.gov/cps/home.htm). Data are from June 2004, table 6, listing employment status of the His-panic or Latino population by sex, age, and detailed ethnic group.

10. The growth impact of migration in this paper suggests a different point ofview of how migration affects the U.S. economy and questions the moralist view ofSamuel Huntington (2004) that assumes that Hispanic migration entails a loss ofnational identity for the United States. In contrast, the facts show that Hispanicmigration has allowed the “American Dream” of upward mobility to continue, asthey have formed the base of the new American economy.

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To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.

nafta uneven integration (tb para confirmar asimetrias)

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