Poverty and Inequality in Mexico after NAFTA

Gerardo EsquivelEl Colegio de México

Structure of Presentation

What has happened to poverty and inequality in Mexico after NAFTA?

Is any of these patterns explained by or associated to NAFTA?

Is NAFTA associated to these patterns?• It is difficult to separate out effects from the

currency crisis of 1994/95 from those of NAFTA.

• Many effects of Mexico’s trade liberalization could have shown up since the mid-1980s when the Mexican economy began to open up.

• We know very little about the effects of Trade Liberalization on poverty and inequality

What do we know about Trade Liberalization and Poverty and Inequality?

Two recent surveys on these issues:

Winters, McCulloch and McKay (2004)

Goldberg and Pavcnik (2007)

Trade Liberalization and PovertyFrom Winters et al. (2004):“Thus while there are many causes for optimism that trade liberalization will contribute positively to poverty reduction, the ultimate outcome depends on many factors, including its starting point, the precise trade reform measures undertaken, who the poor are, and how they sustain themselves. Even within most of the individual causal channels that we have identified, the outcome will vary from case to case.”

Channels? : Growth and/or Employment

Globalization and InequalitySeveral alternative channels:

Increase in returns to skill-intensive occupations (indirect effect of TL)Stolper-Samuelson effectsGlobal production sharing (outsourcing with different skills mix)Skill-biased technological changeQuality upgrading by firms

NAFTA and Inequality in MexicoThree issues have been studied in some detail:

Skilled-Unskilled wage inequality [Robertson (2004), Esquivel and Rodríguez-López (2003), Chiquiar (2008)]

Income Distribution within regions [López Cordova and Borraz (2007), Chiquiar (2008)]

Regional Inequality [Messmacher (2001), Esquivel et al. (2002), Sánchez-Reaza and Rodríguez-Pose (2004)]

Skilled/Unskilled Wage Ratio

Skilled/Unskilled wage ratio 1994 vs 1988

Skilled/Unskilled wage ratio 1994 and 2000

The role of technological change

Globalization and within-state inequality

Regional Inequalities

Summary (1)There is no empirical evidence suggesting that there was an increase in poverty and/or overall inequality in Mexico after NAFTA.

Reductions in poverty and in overall inequality could be associated to NAFTA, but there is no conclusive evidence about this.

The skilled/unskilled wage ratio increased after the trade liberalization process, but declined after NAFTA (?). The increase in the wage ratio has been explained by technological progress (which could be trade-induced).

Summary (2)More open regions in Mexico are less unequal than closed ones and income inequality has fallen faster in the more open regions since NAFTA.

There is ample evidence suggesting that NAFTA explains the increase in regional disparities in Mexico that has been observed in the past few years.

These two points together suggest that the problem with globalization or integration in Mexico, is not any of these issues by itself. Instead, the problem seems to be the initial heterogeneity across Mexican regions that has led some regions to remain closed or not as integrated as the rest of the country.

Poverty and Inequality in Mexico after NAFTA

Gerardo EsquivelEl Colegio de México