Does Mexico still Darryl McLeod, Econ need NAFTA? Does Mexico still need NAFTA? Darryl McLeod, Econ

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  • Does Mexico still need NAFTA?

    Darryl McLeod, Econ 3235 Fall 2017

    ECON 3235/6470 Fall 2017 1

  • Why has Mexico underperformed?

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

    https://drodrik.scholar.harvard.edu/links/mexican-paradox

  • Why has Mexico not exceled?

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

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

    that Spectre was fictional but…

    ECON 3235/6470 Fall 2017 4

  • Tenoch Huerta in Sin Nombre & Spectre

    ECON 3235/6470 Fall 2017 5

  • 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

    ECON 3235/6470 Fall 2017 6

    http://rrojasdatabank.info/krugman1994.pdf http://class.povertylectures.com/Krugman_FALL&RISE_DEV_ECONOMICS.pdf

  • 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

    1F TQ F bH L

    α α−= +

    ECON 3235/6470 Fall 2017 7

  • h

    Figure 8 Market size poverty trap

    real wage

    h* Wage-

    profitability threshold

    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

    a Fw = (1 - a)bh - rF

    β Cw = a(1 - β)h

    -rF

    ECON 3235/6470 Fall 2017 8

  • 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 )

    T D home lowQ = Q +X

    TQ = Q + Xhome highD

    a Fw = (1 - a)bh - rF

    β Cw = a(1 - β)h

    -rF ECON 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

    ECON 3235/6470 Fall 2017 10

    http://class.povertylectures.com/BarroandSala-i-Martin2004Chapter1part1.pdf

  • 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 industry P= MC MC t

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

    QA Quantity of output per firm With 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?

    ECON 3235/6470 Fall 2017 11

  • 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 industry P= MC MC traditional

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

    Quantity of output per firm QFT Quantity of output per firm With more elastic demand in open economy, modern firms can compete, but average firm size increases and producitivy grows reducing 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 cover fixed and lower LRAC as traditional no fixed cost firms exit.

    with monopolistic competition Deardorff, Stern & Brown, 1993?

    ECON 3235/6470 Fall 2017 12

  • 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

    ECON 3235/6470 Fall 2017 13

    http://klenow.com/DevelopmentAccounting.pdf http://klenow.com/DevelopmentAccounting.pdf

  • 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)

    ECON 3235/6470 Fall 2017 14

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2623158 http://scholar.harvard.edu/shleifer/publications/industrialization-and-big-push

    Does Mexico still need NAFTA? Why has Mexico underperformed? Why has Mexico not exceled? Mexico is nothing if not resourceful: the “day of the dead” celebration that Spectre was fictional but… Tenoch Huerta in Sin Nombre & Spectre 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 Garment factories have higher fixed costs leading to increasing returns Slide Number 8 Additional MFA quotas ends poverty trap, allows factories to pay higher wages than traditional firms 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 Demand side Poverty Trap Figure 5a Demand side Poverty Trap Figure 5b 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 References