Editorialists Gone Wild: The Post on Nafta

If anyone still thought that the Washington Post editorial board could discuss trade in a rational manner, today's editorial on NAFTA proved them wrong. The Post argues the case that NAFTA not only was a net benefit for the U.S. (possibly true, but distribution matters, we'll come back to this) but that "the impact of NAFTA seems to have been both larger and more positive in Mexico than in the United States."

Is that so? Well the Post tells us that "Mexico's gross domestic product, now more than $875 billion, has more than quadrupled since 1987." That's not exactly right. If we pay a quick trip to the IMF website, we find that Mexico's real GDP in 1987 was 1,030 billion pesos. The IMF projects 2007 GDP as 1,895 billion pesos (inflation adjusted), an increase of 84.0 percent [corrected 12-6]. That is considerably short of quadrupling.

How on earth does the Post get that Mexico's GDP quadrupled when it actually only grew by 67.6 percent? Well, they may have taken the growth in nominal GDP. If we don't adjust for inflation then we can conclude that Mexico's GDP quadrupled over the last twenty years. Of course, no reasonable person would ever assess growth without first adjusting for inflation since it has no meaning. If we don't adjust for inflation, Zimbabwe's economy, wracked by hyperinflation of several thousand percent annually, is the fastest growing economy on the planet. If the Post editorial writers use a consistent measure, we can expect to see warm praise for Zimbabwe's extraordinary growth on the editorial pages in the near future.

The Post also notes the fact that the poverty rate fell by 10 percentage points in the second half of the nineties. Yes, but it soared in the first half of the nineties due to the 1994 peso crisis. This is not a good story.

The most basic measure of economic performance, per capita GDP, was dismal in the post-NAFTA period, growing just a 1.5 percent a year, a slower pace than the growth rate in the U.S.. Developing countries should have more rapid growth than rich countries, as Mexico did in the period before 1980. Successful developing countries, like South Korea and Taiwan have managed to sustain per capita GDP growth of near 6 percent for decades. Of course China has been growing even more rapidly for the last two decades. NAFTA clearly has not made Mexico a success story.

In fairness to the Post editorial board, there has been a concerted effort to mislead the public on the success of NAFTA by those who know better. For example, the World Bank published a bogus study on 2005 that purported to show that Mexico's growth rate increased because of NAFTA (see CEPR's analysis here). But, gullibility is an excuse, not a virtue.

The Post is correct in saying the harm to U.S. workers attributed to NAFTA is probably overstated, since its effect simply was not every large. However it is reasonable to believe that NAFTA, along with the larger pattern of trade of which it is a part, has contributed to the growth in wage inequality. The Post asserts that this inequality is primarily attributable to technology, not trade. That argument is getting ever harder to make, since the pattern of growth of inequality bears no obvious relationship to the advance of technology. (Inequality increased most in the 80s, a period of limited technological advance. During the boom years in the late 90s, there was little change in measures of wage inequality.) This is why so many economists, including former adherents of technology story (e.g. Paul Krugman and Frank Levy) now emphasize institutional explanations for the growth in wage inequality.

NAFTA was about putting non-college educated workers in direct competition with their low-paid counterparts in Mexico, while maintaining the protection for the most highly paid professions (investment bankers, doctors, lawyers, editorial page writers). This redistributes income upward. The effect of NAFTA itself was limited since it was a small part of a much larger trade agenda, but its opponents are not foolish to identify it as a cause of pain.

--Dean Baker

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