Feb 032011

Many proponents of the North American Free Trade Agreement (NAFTA) which came into effect in 1994 argued that it would stimulate Mexico’s economic development, leading to an increase in employment, and (in due course) higher wages. This would have a beneficial effect for the entire workforce but the effect would be most pronounced among the poorest 20%. It would help reduce the differential between their incomes and those of the middle income earners.

Opponents of NAFTA argued that free trade would have the opposite effect and would lead to a widening gap between the haves and the have-nots.

Which argument is right? Has the gap widened or narrowed?

Research addressing this question reveals the complexity of the issue. Complicating the situation is the economic instability which followed the passage of NAFTA as well as the significant urban–rural and regional inequality that persists in Mexico. Available data suggest that inequality increased during the 1980s and again slightly between 1996 and 1998 but inequality then declined until 2002. This decline appears to have continued. A chart published last year in The Economist (11 September 2010) shows a decline in Mexico’s Gini coefficient (ie a decline in inequality) of almost 1% between 2000 and 2006.

Researchers conclude that the giant gap between rich and poor will not decline naturally as the economy grows, but will require specific policy actions.

The overall impact from the global economic downturn which started in 2008 is not yet clear but past experience suggests that the gap tends to decline during economic hard times. Some economists argue that a trend of a widening gap between rich and poor was already evident in the years prior to NAFTA. If so, this suggests that globalization and Mexico’s support for free trade are not the only factors responsible for the apparently growing disparities of wealth in the country.

Even if the disparities are widening, it does not necessarily mean that the poor are getting poorer. It is perfectly possible that their real incomes (and standards of living) could increase, by say 10%, while those at the top increase by 15%. Both groups would therefore be getting richer, even though the gap between them widened. On the other hand, it is possible that both could be getting poorer, with the gap increasing or declining. Clearly, income data are difficult to analyze and we should be very cautious to avoid making any overly-simplistic statement about the poor getting poorer.

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