Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
January 1993
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NAFTA: The Good, The Bad, and The Unknown

Well, there’s good news and bad news about the North American Free Trade Agreement (NAFTA). The good news is that the costs of adjusting to it will be insignificant (assuming it is ratified and takes effect and further assuming you are not a Mexican rain-fed corn grower). The bad news is that the benefits are not anything to get excited about either. That’s the bottom line that emerged from a series of papers presented at a Brookings Institution Conference in April 1992, which are now published, along with comments from other conference participants, as the current volume.

The book’s chapters are six papers from the conference—covering general equilibrium models, labor issues, industry, agriculture, non-trade issues, and effects on the non-NAFTA countries—plus a very nice and comprehensive summary chapter by the editors. The papers break no new ground in data analysis, but are intended to be surveys of extant literature. Comprehensive surveys they certainly are—to the point that after reading details of a number of the same studies for the third time in as many chapters, a reader (this one, at least) might wish there had been some heavy-handed editorial intervention.

The theme of “no pain, (almost) no gain” is one that runs throughout the paper. One major reason for this conclusion is that NAFTA is not, after all, really a free trade agreement. If it were, it would be one page (or one sentence) long; instead, it is hundreds of pages and, judging from President Clinton’s rhetoric about amendments, still with ample growth potential. The “sensitive” sectors (e.g., agriculture and automobiles) with potential for significant pain for producers and gain for consumers will continue to be treated delicately. And in other sectors, tariffs are already low—6 percent on average in the United States and 13 percent in Mexico. The maquila (assembly) sector in Mexico already allows the shifting of unskilled labor-intensive production, further undermining the incentives for large new shifts. From the viewpoint of other, more efficient producing countries, trade diversion (crowding out of their exports to the North American market by Mexican exports) is likely to be quite small (a fraction of a percent) for the same reason—not much will change. The Central American and Caribbean countries will presumably continue to enjoy their preferential market access, which will not be greatly compromised by a drop in already minimal US tariffs.

Furthermore, many of the changes that could otherwise amplify NAFTA’s effects are things that would happen anyway. As Tim Josling argues, the Mexican Government will for its own reasons continue to dismantle the marketing, trade, and land tenure system that has protected agriculture but put it in a straitjacket. Robert Crandall argues that the same is true of industry. And in the United States, the industries that would be hurt by free trade with Mexico are dying anyway from other competitive pressures.

In keeping with the theme, Robert Pastor concludes that the cries of alarm over noneconomic issues are also misplaced. There is no good reason to expect polluters to flock to Mexico. Pollution control technology is low-cost and hard to unbundle from production technology. The effects along the border are likely to be to reduce the concentration of polluting maquiladoras. And within Mexico, pollution control will gradually improve with higher incomes from NAFTA. Still, as Gustavo Vega-Canovas argues, it is neither likely nor desirable that a low-income country would adopt pollution control standards as stringent as those of the developed world.

On political issues, Mr. Pastor sympathetically quotes Hector Aguilar Camin, a prominent writer reportedly close to President Salinas, in a Friedmanesque argument that the greater economic liberty from the NAFTA will inevitably lead to greater political freedom. Probably true, but once again one wonders if NAFTA is really a significant factor in Mexico’s economic and political liberalization.

There are a few discordant notes in the overall symphony of rather neutral conclusions in the papers—some quite optimistic and some alarmist. Among the latter is Carlos Primo Braga’s expression of fear that NAFTA’s maze of new rules of origin and other nontariff restrictions may be a step forward, rather than backward, along the road to managed trade perdition. I suspect Jagdish Bhagwati would agree, though the argument here involves a fair amount of crystal ball gazing.

Some of the other studies indicate strong positive or negative results from NAFTA, but there is reason for those in the economic profession to be somewhat uneasy—not because of what they show, but rather how they show it. Virtually all of these rely on dynamic effects, particularly capital and labor flows, to reach their conclusions of big gains or losses. The problem with these models is that they have, as Raúl Hinojosa-Ojeda and Sherman Robinson euphemistically put it, “no discernable roots in trade theory.” Consequently, they rely on the use of such artificial devices as Keynesian multipliers (to estimate long-run growth), a fixed ratio of employment to trade volume (to estimate employment effects), and a fixed quantity of investment (so that increased investment in Mexico must come from a corresponding reduction in US investment) with a fixed labor-capital ratio. Although they do point out some of these weaknesses, the authors treat these models with more seriousness than they deserve, mainly because so few offer anything better. But therein lies the source of my unease. If the only way to show a significant impact is through dynamic effects, which are not (or cannot be) well modeled, we seem to be left with Hamlet without the Prince. The authors never reach this conclusion, but the overall corpus of evidence shows as yet little basis for optimism, pessimism, or even neutrality about the effects of NAFTA—only agnosticism.

John Nash

Motorola, in the 1950s, was the first company to develop a cellular telephone system. In 1984, when the company began efforts to sell in the budding Japanese market, it had a significant technological lead over Japanese producers. But Japan’s initial standards, drafted by a board made up of representatives of Japanese producers, excluded Motorola’s products. Only after stringent intervention by the US Government were the standards amended to allow use in Japan of any of three technologies, including Motorola’s. At this point, Japan’s Ministry of Post and Telecommunications became the vehicle for fending off Motorola—who was, by then, operating as a joint venture with a Japanese partner. Assignments of regional concessions, of radio frequencies, and so on, Ms. Tyson explains, were systematically used to retard Motorola and to allow Japanese companies to make up Motorola’s technological lead.

By presenting several such cases, Ms. Tyson achieves her first objective: to plead the partisan case of US high-technology companies. These incidents, she concludes, mean that “foreign intervention … exists and it works to the competitive disadvantage of American producers” (p. 253). What sort of policy, then, does Ms. Tyson recommend? Though she repeatedly refers to herself as a “cautious activist,” she counsels little caution in this book. As to trade policy, she recommends that “the nation’s trade laws be used to deter or compensate for foreign practices that are not adequately regulated by existing multilateral rules” (p. 13).

Ms. Tyson, however, has little faith in multilateral rules: “All too often, the choice between self-serving unilateralism and cooperative multilateralism does not exist” (p. 13). “Self-serving unilateralism” is almost always the bottom line. For example, Ms. Tyson concludes that the GATT’s rules about subsidies are inadequate. She sketches her recommendations as to what the rules should be, but then concludes: “If the final Uruguay Round proposals do not satisfy these requirements, as seems likely at this time, the United States should reserve the option of exercising national CVD [countervailing duties] relief against foreign high-technology targeting programs masquerading as precompetitive R&D [research and development] or regional subsidies” (p. 285).

Ms. Tyson’s domestic policy would begin with subsidies for selected products and technology. But the US Government would intervene much more directly than that into US business. For example, she argues that part of the present plight of the US commercial aircraft industry is that several times in the past an American company chose to develop an aircraft that turned out to be the wrong one—as market realities evolved. Ms. Tyson criticizes the US Government for failing to intervene “to head off these decisions and to coordinate the industry at this critical juncture” (p. 215). The “how to” is not specified.

In sum, this book is a forceful call for governmental help for US high-technology companies, and Ms. Tyson is an aggressive critic of past policies. But why does she keep calling herself a cautious activist? Nothing she presents in this book provides any basis for caution. The idea behind this repetition seems to be that if the reader can be conditioned to accept that Ms. Tyson is naturally cautious about such things, he or she will be more inclined to accept her case for intervention in favor of high-technology companies. “Cautious activist,” it turns out, is the hi-tech version of the old political bromide, “Argument weak, speak louder.”

J. Michael Finger

On seeing a tome of a thousand-odd pages on renewable energy, many people working in the energy field would be struck by a sense of déjá vu. Twenty years ago, with the first of the “energy crises,” renewable energy began to be vigorously promoted as the way to escape the “limits to growth.” Multinational oil companies seemed to be positioning themselves to redefine their missions as “energy supply,” with strategic acquisitions of many non-oil resources and even some renewable energy interests. Power utilities promoted themselves as energy service companies, and many found themselves required to buy in energy generated by renewable sources such as windmills. But then oil prices dropped from historic highs and many of those organizations returned to their core business.

Because essentially the same renewable energy technologies were considered then as now, what requires one to take a second look? Clearly, one reason is the combination of substantial technical progress, the cost reductions, and the wealth of operating experience that have accumulated since 1973. Another is that renewable energy is now seen as the way of ensuring environmental sustainability generally and not just resource adequacy and security. Specifically, renewables do not increase the atmospheric load of greenhouse gases and help avert the threat of global warming.

This volume was prepared as an input to the United Nations Conference on Environment and Development, held in Rio de Janeiro, Brazil, in June 1992; it was commissioned to “assess the technical and economic prospects for making fuels and electricity from renewable energy sources.” The objective of the report, which is implicit in the method used, is to provide reassurance that high economic growth can be accommodated using a combination of renewable energy and energy efficiency. In fact, a major finding is that not only is a “renewables-inten-sive” future technically possible but renewable energy also will cost less than that usually forecast for conventional fuels; and its use will bring environmental and other benefits at no additional cost.

Renewable Energy is an excellent sourcebook of technology assessments, case studies, and operating experience on all the major renewable energy sources. Practitioners, research and development policymakers, utility planners, and those involved with technology transfer will all profit from dipping into it; it has a wealth of material collected by the “Who’s Who” of renewable energy. It will also provide data and assessments that will feed into strategic work.

The work, however, has a few shortcomings. One is that it is not fully integrated. The twenty-two reports of the technologies are individualistic and differ in nature—some are technology assessments, others case studies. There seems to be no comprehensive matrix that guided the overall study, and the studies are not strongly related to the “scenario” described in Chapter 1. Another shortcoming is that the role of policy is left unclear. Because the report is optimistic about the low costs and additional benefits of renewable energy, it seems to undermine its own caveats about “strenuous efforts” and “accelerated policies.” General economic and institutional reform would seem to be sufficient, no case has been made for additional specific action. Finally, the report does not pursue the strategic questions systematically: how can one ensure that the costs of depletion (including overexploitation of renewable resources) and environmental impact are adequately reflected in decisions? How should research and development in renewables be supported and at what level? Are there financial, institutional, or other barriers to the efficient use of renewable energy sources; how might they be overcome; and what would that cost?

Kenneth King

This lengthy book is a collection of the author’s earlier essays, published between 1973 and 1990, addressing the broad question of the consequences of population growth for economic development. The reference to poor countries in the title may be misleading, as most of the essays make reference to these countries only in the tables and regression analyses. Instead, the focus of the book is on the advantages of population density that have accrued to some middle-income and more developed countries, and broadly on the ability of societies to cope with, and sometimes take advantage of, the economies of scale that can accompany population growth.

Reference to poor countries is generally restricted to observations about how government mismanagement may be more of a barrier to their economic prospects than is high fertility and rapid population growth. That view may be correct, but the statistical analyses offered in this book neither confirm nor negate it. What is missing is any penetrating analysis of population and development interactions in today’s poor countries.

A major contribution is to remind readers of the need for research on the consequences of population growth, such as the interactions of high fertility and extreme poverty in the rural areas of the poorest societies; the negative (and possibly positive) effects of additional children on their own siblings, other members of their community, their larger society, and the world as a whole. Some calculations suggest that preventing unwanted births among the poorest people of the globe could contribute more, at lesser cost, to reducing global environmental problems than will costly, high-technology approaches in the industrial countries. Such issues demand further analysis. Professor Simon has worked continuously in these areas for two decades. If his work seems at times unnecessarily tendentious and argumentative, it is perhaps the inevitable result of espousing unpopular views. He differs with those who argue for public provision of family planning to the poor on a purely voluntary basis. Analysis of the consequences of population growth for the poor, something this book’s title seems to promise but does not deliver, deserves the high priority that Professor Simon urges for it.

Professor Simon argues at several points that the risks of coercive population policies are greater than the gains that might accrue from public family planning programs that fill unmet need. This caution in defense of liberty deserves consideration, but failing to help those in need who can be helped must also be avoided. There is plenty of room for public and private action to address unmet need, since one out of four women in developing countries say they want no more children, or want to space future births, yet lack access to effective means to control their fertility. The success of programs in such poor countries as Bangladesh and Zimbabwe attest to the utility of helping families too poor to purchase these services and too ill-served by limited availability of private sector outlets for modern contraceptives. Professor Simon tilts too far against a proper role for government in support of the needs of the poor.

William McGreevey

What chance would you give a country that in the mid-1980s was classified by the United Nations as one of the 20 poorest in the world; that has a legacy of almost half a century of armed conflict; that for long had (and some would say still has) an outmoded political system; that is up against a US trade embargo; a country whose biggest export market collapsed in 1990; to whom foreign aid—never abundant anyway—has dried to a trickle; that has had virtually no access to international capital markets; and which, until recently, had few friends in the world?

Well, in 1991, Vietnam’s economy grew at an average annual rate of about 10 percent (compared with 3 percent in 1986); its exports hit a record, topping $22 billion; and foreign investors poured in more than $1.2 billion—more, that is, than they did in India or Korea. Its agricultural achievements have been particularly admirable. From a situation of near famine in 1986, Vietnam has now become the world’s third largest rice exporter, after Thailand and the United States. It also looks set to become a substantial oil producer. Vietnam, in short, has not merely turned around, but is booming. This highly readable little book is about how it all happened.

Much of the story is, of course, about Vietnam’s economic policy revolution— notably, its acceleration of liberal reforms under the program of doi moi (economic renovation) from December 1986 on. The book provides an illuminating guided tour of the tortuous road to reform since 1975: the reunification of the country, the south’s absorption of the economic practices of the north (which closed the door to many of the south’s external economic links); the disastrous results of the Stalinist policies in the second half of the 1970s; the tentative reforms of 1981-85, under which the agricultural sector was partially freed; the coexistence, for a time (even after 1986), of central planning alongside market-type relations; and then the rapid liberalization of the price, wage, trade, and exchange systems, combined with market-oriented institutional reforms that bring us to the present.

But the book’s essential focus is not so much on what the reforms were or their effects, but how they took shape. As they were being devised, an intricate political drama was being played out in the background. The book traces the kaleidoscopic political changes that were part of this drama. It shows how economic policy failures created political pressures, which, in turn, catalyzed new policies. It tracks the constant see-sawing between the “reformists” and the “hardliners,” especially since the early 1980s, and the alternate fading in and fading out of personalities from each camp. And it analyzes how the Vietnamese communist party—which never really loosened its grip on the system—struggled with apparent contradictions such as pursuing more market-based economic approaches on the one hand, while maintaining the “socialist way of life” on the other.

At the end of the day—and even though the Vietnamese economy still faces many uncertainties and dangers— the reforms must be said to have been a success. Comparisons with what is going on in Eastern Europe and the states of the former Soviet Union will inevitably be made. And quite reasonably, too. For after all, Vietnam has also struggled with the horrendous legacy of rigid central planning—with distorted prices, triple digit inflation, bloated and inefficient state enterprises, shortages, mounting debts, a huge underground economy, a malign neglect of agriculture, and state control of foreign trade. It has, moreover, had to cope with the same sort of external shocks that have hit Eastern Europe in the wake of the collapse of the Soviet Union, and more besides.

Vietnam’s relative success in such circumstances raises many questions, some of them awkward, that must be faced. For instance, does it suggest that a sick, centrally planned economy can be transformed just with sound policies and very little external assistance? Does it throw any light on the “gradualism versus shock therapy” debate? Has Vietnam done much, in terms of economic policies or their implementation, that is different from what the countries of Eastern Europe and the former Soviet Union have done or are planning to do? If not, does it follow that they too, will boom; that it is just a matter of time? Does it matter that Vietnam is in Asia whereas most of the other former centrally planned economies are in Europe?

The book does not really come to grips with these questions. To be fair, however, some of them are beyond its scope; addressing them would call for a more in-depth scrutiny of economic policies and their application than this book attempts. But no such scrutiny would be complete without an understanding of the political context in which Vietnam’s economic reforms took place. In providing such an understanding, this book does scholars of the Vietnamese economy, of which there will be many more to come, a great service.

Vikram Khanna

Last November, a Cuban government delegation led by Jaime Crobot, Vice Chairman of the Council of Ministers and member of the Communist Party Central Committee, visited Hanoi. It was more than a routine courtesy call on a socialist brother country. Certainly, there were mutual assurances of solidarity, and

Vietnam promised shipments of rice to help alleviate food shortages in Cuba. Yet, perhaps the main item on the agenda was what Cuba could learn from Vietnam’s experience with transition from an economy modeled on the Soviet prototype to a modern market economy.

The authors of this book would agree that Cuba could do worse than take its cues from Vietnam. Indeed, that country provides a precedent for the apparent consistency of officially professed adherence to communism with private enterprise and private property. Cardoso and Helwege make a compelling argument that transition to a market economy holds out the only realistic prospect for peaceful change and eventual prosperity in Cuba. At the same time, they emphasize the arduousness of the road and call for government measures to meet basic social needs in health care and education, temper inequalities in income distribution, and protect the environment. They speak of the difficult choices that will have to be made to reconcile those objectives with the hard budget constraint and financial discipline essential to stability and sustainable growth.

The book makes excellent reading, not only for those concerned with Cuba but also for anybody interested in the broader issue of transition from a defunct economic system. The methodological approach of the book is one of its main virtues. It lays out the recent history and current status of the Cuban economy. It demonstrates that the economy is at a dead end and that business as usual cannot but fail. It explores different alternatives to restart the economy, with emphasis on its endowments and on the environment in which success will have to be achieved. All along, the book is a model of comparative economics. Whatever Cuba has tried or may attempt is put in the context of policies pursued by other Caribbean or Latin

American countries. Hence, the authors’ recommendation for Cuba is informed with the experience of failure and success elsewhere in the region. And it is, for that reason, all the more persuasive.

The authors also pay attention to political conditions. Their argument is unexceptional—that the United States and Cuba should end the cold war between them; that the rule of law must replace dictatorships of any stripe; and that a minimum of social justice must be secured. Otherwise, appropriate reforms would come to nought if the country were to succumb to chaos.

Erich Spitaeller

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