Economic Integration, Environment, and Development:

Mexico Before and After NAFTA

Kevin P. Gallagher

Global Development and Environment Institute Tufts University

www.ase.tufts.edu/gdae

Overview of Presentation

• To what extent has economic integration affected levels of environmental degradation in Mexico?

– Is there an Environmental Kuznets Curve for Mexico?

– Is Mexico a Pollution Haven?

• Implications for assessments, theory and policy

• Suggestions for further research

Composition of Mexican Exports, 1981 to 2000

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Fra

ctio

n o

f to

tal E

xpo

rts El Pacto

Apertura

NAFTA

Manufactures

Oil

Agriculture

`

Environmental Kuznets Curve

0 5000 10000 15000 20000 25000

GDP per Capita

250 -

200 -

150 -

100 -

50 -

0 -

Pol

lutio

n p

er ca

pita

Environmental Kuznets Curve

• Scale Effects: if pollution per unit of output is constant but the scale of output increases then pollution will increase as well

• Composition Effects: if pollution per unit of output remains unchanged but the sectoral composition of the economy shifts toward cleaner or dirtier economic activity

• Technique Effects: reductions in pollution per unit of output due to technological change and transfer and/or rising incomes

Problems with the EKC

• Empirical evidence is relatively weak– Limited to criteria air pollutants in developed countries– Turning points much higher than original estimates– Doesn’t hold for single country trajectories

• Damage leading to turning point could be irreversible or too costly to clean up

• Drawing single-country development lessons from cross-sectional evidence is questionable

EKC for SOx?

R2 = 0.6653

1,500,000

1,700,000

1,900,000

2,100,000

2,300,000

2,500,000

2,700,000

2,900,000

4700 4800 4900 5000 5100 5200 5300 5400 5500 5600 5700

Income

Po

llu

tio

n

EKC for Carbon Dioxide? 1970 -2000

0

20,000

40,000

60,000

80,000

100,000

120,000

3,500 4,000 4,500 5,000 5,500 6,000

GDP per capita

Car

bo

n D

ioxi

de

Em

issi

on

s

Is Mexico a Pollution Haven?

1988 1994 1998Mexico

production 30.1% 23.1% 26.5%employment 7.9% 6.3% 5.9%

USproduction 17.0% 15.1% 14.7%

employment 11.3% 11.2% 11.2%

Share of Dirty Industry in National Manufacturing

• Y variables (84-99 and post-NAFTA)– Growth in Mexican exports– Growth in Mexican production– Growth in Mexican export share of US

consumption

• P variables– Marginal abatements costs in the US– Gap in Mexico/US pollution intensity

Yit=β1+β2Pit+…

Mexican environmental policy has been inadequate

• Established key environmental laws and institutions

• Spending on environmental policy shrinking• Plant-level environmental inspections declining• “Side-agreement” institutions extremely limited

Real Spending on Environmental Protection in Mexico

0.00

50.00

100.00

150.00

200.00

250.00

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

1985

=10

0

Plant-Level Environmental Inspections in Mexico

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Num

ber

of In

spec

tions

Side Agreement Limited

• $3 million budgeted for Mexico dwarfed by economic costs of environmental degradation

• Serves as interesting “pilot project” for serious effort– Citizen submissions– Research– Technical cooperation (PRTR)– Funds for clean development (FIPREV, NAFEC)

• Environmental components of trade agreements post-NAFTA are weaker than NAFTA”S

Potential Economic Costs of Waiting for Kuznets in Mexico

GDP per capita Turning Point Year Damage Costs to Turning Point

(r=.06) (r=.03)

$7,500 2028 79 114$10,000 2057 105 194$15,000 2097 119 279

($US billions)

Economic Costs of Future Environmental Damage due to increases in Criteria Air Pollution in Mexico

Summary of Findings

• No EKC-like relationship in Mexico (at least for now)

• Mexico is not a pollution haven for pollution-intensive US manufacturing firms

• Mexican government is not adequately addressing the market failures resulting from economic transformation

• International institutions not filling gap made by integration process

Implications for Assessment

• Ex-post analyses have ex-ante lessons: liberalization won’t automatically improve or worsen the environment.

• Need to move beyond asking whether economic integration is “good” or “bad” for environment

• Need more sector-based analyses to pinpoint environmental effects

Implications for Theory

• The role of the nation-state in the economic integration process

• Need for a pro-active state in addressing negative environmental externalities that coincide with the integration process

Implications for Policy

• Without the proper environmental institutions and policies in place, liberalization may worsen environmental conditions

• Strong environmental policy is justified on economic grounds

• Strong environmental policy will not deter foreign investment flows to developing countries

• Strong environmental policy will not cause developed country firms to flee their countries (nor shed jobs)

• Substantial international financing can supplement developing country environmental goals

Need for Further Research

• Need for time series data on levels of pollution

• Complement “top down” analysis with a “bottom up” approach that examines individual firms and sectors

• Firm-level case studies on location decisions, technology use and transfer, and environmental compliance

P=S+C+T

• P = level of pollution

• S=ScaleSit=Pib(Ymt/Ymb -1)

• C=Composition

Cit=Pib((Yit/Yib) – (Ymt/Ymb))

• T=Technology?

1984 to 1998(tons)

PTscale 12,966.11composition -2,813.20

net 10,152.91

SOxscale 23,614.27composition -14,152.79net 9,461.48

NOxscale 15,965.74composition 181.22net 16,146.96

NET Pollution in Mexican Manufacturing

Harmonization IndexPollution per unit of output in Mexico divided by US equivalent

0.1

1

10

100

Rubber Pulp andPaper

Automotive Chemicals Beverages Iron andSteel

Aluminum Cement

Ord

ers

of

mag

nit

ud

e

Cleaner than in US

End-of-pipe technology

Textiles

Iron and SteelCapital intensity

Pulp and Paper?

Core technology

Labor intensity

Assembly?

The Economics of Pollution Intensity: A Hypothesis

Environmental Kuznets Curve for Mexico?

75

100

125

150

175

200

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Po

lluti

on

: 19

85=1

00

Soil Erosion (tons)

Solid Waste (tons)

Water Pollution (mill.M3)

Air Pollution (tons)

Table 7.1: Pollution Intensity of the Mexican Economy

60

80

100

120

140

160

180

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year

1985

=100

soil erosion

solid waste

water pollution

air pollution

Criteria Air Pollution in Mexican Manufacturing

(84-98) 88-98 94-98

PTscale 12,966 9,998 18,426composition -2,813 -3,117 -1,878net 10,153 6,881 16,548

SOx

scale 23,614 18,209 33,559

composition -14,153 -16,330 -2,274net 9,461 1,879 31,284

NOx

scale 15,966 12,311 22,689

composition 181 -2,787 2,390net 16,147 9,525 25,079

net pollution (tons)

Table 5.4: Changes in Net Pollution, 1984 to 1998

Is Mexico a Pollution Haven?

Table 4.3: Regression Results

Dependent Variables

84-99 B p values adj R 2B p values adj R 2

Growth in Mexican Exports 0.679 0.387 0.04 -0.00007 0.303 0.19Growth Mexican Production -0.119 0.792 0.03 -0.00005 0.139 0.001Growth in Mexican Export Share of US Consumption 0.399 0.648 0.04 -0.00006 0.496 0.14

post-NAFTA

Growth in Mexican Exports -3.82 0.577 0.04 -0.003 0.637 0.03Growth Mexican Production -1.204 0.401 0.03 0.00006 0.603 0.04Growth in Mexican Export Share of US Consumption -3.845 0.548 0.03 -0.003 0.592 0.003

N 27 27

Model 1Independent Variable:

Abatment Costs

Model 2Independent Variable:

Mexico-US intensity ratio