NAFTA and Convergence in North America: High Expectations, Big Events, Little Time

"The rest of the paper is organized as follows. The next section uses times series techniques to identify the impact of NAFTA on the income gap between Mexico and the United States. To deal with the big-events little- time problem, we apply two time series methods. First, we follow Harvey in conducting a structural time series exercise that might be able to separate transitory effects (such as the tequila crisis) from the long-term effects expected from NAFTA.19 Second, following Bernard and Durlauf, we apply cointegration analysis to see whether there is an observable process of income convergence between the United States and Mexico.20 We do this recursively to test for any structural change in the equilibrium condition between U.S. and Mexican GDP using quarterly data from 1960 to 2001. We find that the debt crisis in the early 1980s and the tequila crisis temporarily interrupted a process of economic convergence, which resumed after 1995. Convergence after Mexico´s trade liberalization in the late 1980s and after NAFTA might have been faster prior to the debt crisis. However, given that other Latin American economies also grew quickly during this period, we also provide econometric annual estimates of the differences between Mexico-specific and Latin American income effects. These results indicate that Mexico´s performance between 1986 and 1993 was not that different from the average Latin American economy, but it was significantly more positive after NAFTA, with the obvious exception of 1995."