More on NAFTA and Mexico

Yesterday PGL provided us with a nice example of how simple theoretical trade models (such as the Stolper-Samuelson model) may tell us little about the actual effects of trade. His post reminded me of another good paper that attempted to take a close look at how the Mexican economy has fared since joining NAFTA: Aaron Tornell, Frank Westermann, Lorenza Martinez, “NAFTA and Mexico’s Less-Than-Stellar Performance“.

The paper quite convincingly points out that lots of things have happened to Mexico’s economy over the past decade, and it is difficult to attribute Mexico’s poor economic performance to NAFTA. From their abstract:

Mexico, a prominent liberalizer, failed to attain stellar gross domestic product (GDP) growth in the 1990s, and since 2001 its GDP and exports have stagnated. In this paper we argue that the lack of spectacular growth in Mexico… [is due to] the lack of further judicial and structural reform after 1995… The key to the Mexican puzzle lies in Mexico’s response to crisis: a deterioration in contract enforceability and an increase in nonperforming loans… The credit crunch has hit the nontradables sector especially hard and has generated bottlenecks, which have blocked growth in the tradables sector and have contributed to the recent fall in exports.

In brief, they argue that the Mexican economy has suffered from some serious problems with their domestic financial institutions, not from trade. A non-technical summary of the paper can be found here.

But the point I’d really like to make is not about whether trade is good or bad. Instead, I think that what this paper (as well as the one PGL cited yesterday) best illustrates is that the link between cause and effect is often not easy or obvious. Economies are constantly being affected by a myriad of economic forces, both external and domestic. As such, it is dangerous to casually say that any one particular economic force must be causing any one particular economic outcome. The world is extremely complicated, and there’s no reason to think that economic relationships are anything but extremely complicated as well.