Editor's Summary

The North American Free Trade Agreement (NAFTA) entered into force on January 1, 1994. It will be almost ten years old when this issue of Economía begins circulating. A decade is a short time for development economists, but an eternity for citizens and politicians. Evaluations of NAFTA's impact are unavoidable, even if the evidence is limited.

This volume presents two contributions to that large and difficult task. On the whole, their message is optimistic: NAFTA seems to have raised productivity in Mexico and furthered the convergence of incomes within North America. Yet there are many caveats to this general result.

The first paper, by William Easterly, Norbert Fiess, and Daniel Lederman, begins by acknowledging what the authors call the "big events, little time" problem--namely, the difficulty of disentangling the effects of NAFTA given the many large changes that have taken place in the Mexican economy over the last two decades (unilateral trade liberalization, wholesale privatization, macroeconomic stabilization, and the 1994-95 tequila crisis, to mention just four). Their answer is to attack the question from as many fronts as possible and then see whether the assorted bits of evidence amount to a more or less coherent story. The paper thus looks at micro- and macroeconomic data; it uses time series, cross-section, and panel econometrics; and it studies both cross-national and purely domestic data (the latter consisting of evidence across Mexican states).

Easterly, Fiess, and Lederman arrive at a subtle set of conclusions. They find that Mexico has been in a process of convergence since the late 1980s, when it opened its economy. The tequila crisis interrupted this process, but it did not derail it. In fact, convergence seems to have sped up after 1995. That is the good news. The bad news is that Mexico and the United States do not seem to be converging to the same per capita income. The long-run differential could be as large as 50 percent, the authors estimate.

Why might future Mexican incomes be only half those in the United States? The results in the paper point to lasting institutional differences. Both time series and cross-country estimates generate this result, which is consistent with much recent evidence on the role of institutions in growth. This raises the extremely important question of whether NAFTA has also contributed to improving institutions, as defenders of the agreement have claimed. The evidence is mixed. Different indexes of institutional quality improved for Mexico in the 1990s--but they rose even more for Chile and several Central American countries, none of which enjoyed the benefits of NAFTA. Moreover, much of Mexico's improvement seems to have occurred after 1999, suggesting it may have resulted more from democratization than from the trade agreement.

What about the effects of NAFTA on productivity? After all, much theoretical and empirical work shows that the evolution of total factor productivity (TFP) is a main driver of growth and of long-run income differentials. The paper by Easterly, Fiess, and Lederman tackles the issue, as does the second paper in this volume, by Ernesto López-Córdova. Easterly, Fiess, and Lederman look at U.S.-Mexico productivity differentials by industry and find that "the NAFTA period was associated with a significantly faster convergence in manufacturing TFP levels." López-Córdova, by contrast, looks at plant-level data to characterize the evolution of manufacturing productivity between 1993 and 2000. Using estimated sectoral production functions, he decomposes manufacturing TFP growth into its possible sources: resource reallocations within and across firms and within and across industries. A striking first result is that 70 percent of the reallocation gains are explained by increases in the output share of more productive industries; firm-level gains account for the remaining 30percent; reallocation within industries has a negligible impact. A second important result is that industries with strong trade links account for almost all the productivity growth.

Trade seems to play a role in the process. Estimating the effects of trade policy on productivity is not easy, however, since...