CAFTA Not Likely to do Better Than NAFTA

By Mark Weisbrot

This article was published in the following news outlets:

Knight-Ridder/Tribune Information Services - December 18, 2003
Chicago Tribune - Dec. 19, 2003
Philadelphia Inquirer - Dec. 24, 2003
Kansas City Star - Dec. 28, 2003
Fort Worth Star Telegram - Jan. 4, 2004
Garden City Telegram - Jan. 5, 2004
Aventura News - Jan. 7, 2004
Grand Forks Herald - Jan. 12, 2004

NAFTA, CAFTA, do we hafta? That was one of the slogans that thousands of demonstrators brought to Miami last month, as they protested the ministerial meeting of the Free Trade Area of the Americas. After having trouble bullying some of the bigger South American countries into an agreement that is mostly pain and little gain, Washington has decided prey upon the small and the weak.

This week's agreement is with Nicaragua, El Salvador, Guatemala and Honduras -- the misnamed "Central America Free Trade Agreement." It's not really about free trade, since it will -- as did NAFTA -- help ratify an increase in the most costly form of protectionism that exists today. That protectionism is not for workers, but for the pharmaceutical industry.

The economic distortions created by patent monopolies are many times greater than those caused by the sugar quotas, for example, that CAFTA is supposed to phase out. So for all the Econ 101 reasons that economists oppose quotas or tariffs -- just multiply that by 20 or 30, and you have the reasons why CAFTA is likely to reduce overall economic efficiency by increasing protectionism.

What about the overall economic impact on Central America? The agreement comes as NAFTA approaches its ten-year anniversary, and of course this is the main argument for CAFTA. NAFTA has been put forth as a success story. The World Bank gave its qualified endorsement this week, releasing a report just as CAFTA was signed: "Lessons from NAFTA for Latin American and Caribbean Countries."

"NAFTA has had positive effects in Mexico but they could have been better," said David de Ferranti, World Bank Vice President for Latin America and the Caribbean. That is much too generous. The most basic measure that economists have to evaluate the success or failure of economic policy is the growth of income per person. This ignores distribution; but from a purely economic point of view, if the economy grows there is at least the possibility that everyone can improve their living standards.

By that measure, NAFTA is a terrible economic failure. From 1994 through 2003, the Mexican economy has grown by only 11 percent per person. This is less than on fourth the rate of growth that Mexico experienced in the 1960s and 1970s.

This is the relevant economic comparison, for anyone who wants to honestly evaluate Mexico's experience with NAFTA. Of course, the reforms that NAFTA embodied in an international treaty did not begin in 1994 -- they started in the early 1980s. But if we take the longer view, it looks even worse: from 1980 to the present, income per person in Mexico has grown by about 19 percent. This compares to 93% for the 1960-1979 (somewhat shorter) period.

In other words, there is no economic evidence that the NAFTA model is a success. In fact it appears that past performance, when the Mexican government had a much larger role in the economy, was much more successful -- in spite of any inefficiencies. The same is true for the region as a whole. Replacing development policy with a mere opening up of the economy to international trade and investment, as these agreements seek to do, simply has not worked.

Many Latin American leaders are aware of this problem, and they are also aware of the growing discontent with the region's long-term economic failure. That is why Washington has ended up signing an agreement with those who are too weak to resist. Even Costa Rica, the most developed of the five countries negotiating, dropped out this week -- leaving four countries with a combined total of 2.8 percent of Latin America's income. Ironically, it is a region that was devastated by decades of bloody civil war -- especially in Guatemala, El Salvador, and Nicaragua -- that was either caused, aggravated, or prolonged by Washington's intervention.

These agreements have also lowered wages and salaries for the majority of U.S. employees, as even the research of pro-trade economists clearly demonstrates. After 40 consecutive months of manufacturing job losses, some Republican strategists are wondering aloud whether they want to try and squeeze this agreement through Congress in an election year. They might ask President Bush: NAFTA, CAFTA, do we hafta?