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