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NAFTA and Mexico's Economic Performance

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  • Aaron Tornell
  • Frank Westermann
  • Lorenza Martínez

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 cannot be blamed on either the North American Free Trade Agreement (NAFTA) or the other reforms that were implemented, but on the lack of further judicial and structural reform after 1995. In fact, the benefits of liberalization can be seen in the extraordinary growth of exports and foreign domestic investment (FDI). The key to the Mexican puzzle lies in Mexico’s response to crisis: a deterioration in contract enforceability and an increase in nonperforming loans. As a result, the credit crunch in Mexico has been far deeper and far more protracted than in the typical developing country. 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.

Suggested Citation

  • Aaron Tornell & Frank Westermann & Lorenza Martínez, 2004. "NAFTA and Mexico's Economic Performance," CESifo Working Paper Series 1155, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1155
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp1155.pdf
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    References listed on IDEAS

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    1. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2003. "Export versus FDI," NBER Working Papers 9439, National Bureau of Economic Research, Inc.
    2. Nora Lustig, 2001. "Life Is Not Easy: Mexico's Quest for Stability and Growth," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 85-106, Winter.
    3. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, May.
    4. Aaron Tornell & Gerardo Esquivel Hernández, 1997. "The Political Economy of Mexico's Entry into NAFTA," NBER Chapters,in: Regionalism versus Multilateral Trade Arrangements, NBER-EASE Volume 6, pages 25-56 National Bureau of Economic Research, Inc.
    5. Aaron Tornell & Frank Westermann, 2003. "Credit Market Imperfections in Middle Income Countries," CESifo Working Paper Series 960, CESifo Group Munich.
    6. Assaf Razin & Ashoka Mody & Efraim Sadka, 2003. "The Role of Information in Driving FDI Flows; Host-Country Transparency and Source-Country Specialization," IMF Working Papers 03/148, International Monetary Fund.
    7. Gelos, R. Gaston & Werner, Alejandro M., 2002. "Financial liberalization, credit constraints, and collateral: investment in the Mexican manufacturing sector," Journal of Development Economics, Elsevier, vol. 67(1), pages 1-27, February.
    8. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    9. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-328, August.
    10. William Maloney & Daniel Lederman & Luis Servén, 2005. "Lessons from NAFTA: For Latin America and the Caribbean," IDB Publications (Books), Inter-American Development Bank, number 345, October.
    11. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
    12. Martinez, Lorenza & Werner, Alejandro, 2002. "The exchange rate regime and the currency composition of corporate debt: the Mexican experience," Journal of Development Economics, Elsevier, vol. 69(2), pages 315-334, December.
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    Cited by:

    1. repec:rre:publsh:v47:y:2017:i:3:p:243-269 is not listed on IDEAS
    2. Aghion, Edouard, 2011. "NAFTA and its Impact on Mexico," MPRA Paper 36529, University Library of Munich, Germany.
    3. Pablo Mejía-Reyes & Reyna Vergara-González, 2015. "Are more severe recessions followed by stronger recoveries? Evidence from the Mexican states employment," ERSA conference papers ersa15p1223, European Regional Science Association.

    More about this item

    Keywords

    boom-bust cycles; currency mismatch; lending booms; real exchange rate; FDI; credit market imperfections and volatility;

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