Posted on: Thursday, December 18, 2003

World Bank researchers say Mexico lags Canada, U.S. despite trade pact

By Harry Dunphy
Associated Press

WASHINGTON — Ten years of the North American Free Trade Agreement have spurred economic development in Mexico, but the country has not caught up with its partners, the United States and Canada, the World Bank said yesterday.

To achieve that, the bank's study says, Mexico needs to invest more in innovation, education, telecommunications and institutions to control corruption and establish law and order in some parts of the country.

"NAFTA has had positive effects in Mexico, but they could have been better," said David de Ferranti, the World Bank's vice president for Latin America and the Caribbean, who presented the analysis.

"Free trade definitely brings new opportunities, but the lessons for other countries negotiating with the United States are that free trade alone is not enough without significant policy and institutional reforms."

NAFTA was a trade pact signed in 1993 by the United States, Canada and Mexico to increase trade, generate jobs and stimulate their economies.

The World Bank report was released in advance of the pact's 10th anniversary on Jan. 1.

The main lesson of the study, its authors said, is that a free-trade agreement is not a substitute for a development strategy, but is a single element in a broader development framework.

"NAFTA definitely further plugged Mexico into the most dynamic economy in the world, but the country's development across the 1990s, including the NAFTA period was unequal," said Guillermo Perry, the bank's chief economist for Latin America and the Caribbean.

The report notes some unequal effects from the agreement, including that northern and central states grew faster in the 1990s, modestly reducing income gaps with the area around Mexico City, while poorer southern states grew more slowly because of low levels of education, lack of infrastructure and poor quality of local institutions.

The 346-page report estimates that without NAFTA, Mexico's global exports would have been 25 percent lower, foreign direct investment 40 percent lower and Mexico's annual per capita income of $5,920 in 2002 down to $5,624.

"One key conclusion from careful evaluation of the impact of NAFTA is that the treaty does not suffice to ensure economic convergence in North America," the report said. "Mexico still suffers from important gaps that constrain its ability to catch up with its northern neighbors."

Daniel Aldermen, a co-author of the report, said, "When comparing levels of innovation and technological progress, we found that Mexico not only lags behind its NAFTA trading partners but is lagging behind the typical country with Mexico's economic characteristics."

He said Mexico trails countries that seem to be outstanding in terms of their level of investment in research and development, including South Korea and even China and India.