How not to globalise

With US firms unwilling to pay even minimal taxes, NAFTA has hardly helped create the necessary infrastructure in Mexico for the enhancement of trade.

India recently (on May 21) signed a ten-year Bilateral Investment Promotion and Protection Agreement (BIPPA) with Mexico granting Most Favored Nation (MFN) status to each other, waking up finally to the unique opportunities that Mexico as a member of the North American Free Trade Agreement (NAFTA) can afford us into the other member markets (the US and Canada) as well. As much economic reach and resources (mutual flow of investments as well as free repatriation of funds by investors) as India might anticipate from this, equally important are the hidden side benefits "" the lessons that it can learn from the special Mexican experience in NAFTA, its trials and tribulations as a developing country straddled in a Free Trade Area with two of the world's most developed economies. This is especially relevant, now that India is fast integrating into the global economy and caution is vital even amidst the near 10 per cent year-on-year growth. For hasn't it been very easy for the ruling establishment as well as the reining media to forget, be oblivious to, the plight of the masses.

NAFTA, when it came into being on Jan 1, 1994, was sold as the magic formula that would improve the three economies and especially raise the impoverished Mexican one. It began by calling off the majority of tariffs from many categories traded among the US, Canada and Mexico, and agreeing to gradually phase out other tariffs over a 15-year period. The treaty also outlined the removal of investment restrictions among the three countries and protected intellectual property rights (patents, copyrights and trademarks). Provisions regarding worker and environmental protection were brought in.

Whereas trade has increased dramatically amongst the three nations, up about 130 per cent between 1994-2004 and investments have tripled into Mexico "" much hyped by its promoters including many of the world's largest corporations, NAFTA opponents "" including labor, environmental, consumer and religious groups ""argue that the effects have been devastating to peasants in Mexico. NAFTA has been criticised for allowing large US agricultural subsidies (averaging about $10 billion annually to the corn sector alone, a figure ten times the total Mexican annual agricultural budget) to artificially depress corn prices in Mexico by more than 70 per cent since 1994. As a result, of the 15 million Mexicans who depend on the crop, many can no longer afford basic healthcare and other necessities while the labour demanded of them has increased. Some 2 million Mexicans have been forced out of agriculture, and many of those that remain are living in desperate poverty (meanwhile, corn-based tortilla prices having climbed by 50 per cent).

Further, NAFTA's service-sector rules allowed big firms like Wal-Mart to enter the Mexican market and, selling low-priced goods made by ultra-cheap labour in China, to displace locally-based shoe, toy and candy firms. Tens of thousands (an estimated 28,000) small- and medium-sized Mexican businesses have been eliminated. An over-supply of workers, combined with the crushing of union organising drives as government policy, has resulted in sweatshop pay running sweatshops. Wages along the Mexican border contrary to what was promised have actually been driven down by about 25 per cent from $5 per day (which was not a living wage) to only $4 since NAFTA, reports a Carnegie Endowment study. NAFTA essentially annexed Mexico as a low-wage industrial suburb of the US. Capital could flow freely across the border to low-wage factories and Wal-Mart-type retailers, but the same standard of free access would be denied to Mexican workers. NAFTA has ensnared Mexico in the "mercantilist fallacy" and given it "trade without development".

Much of Mexican agriculture "" and the backbone of Mexico's rural economy "" consisted of campesinos who farmed small plots of land (called ejidos) that were permanently deeded to Mexico's peasant farmers by the land reforms at the core of Mexico's post-revolution 1917 Constitution. In preparation for NAFTA, Mexico was required to amend its Constitution to allow foreign ownership of land. This undermined the ejido system, allowing plots to be sold or, in most cases, seized by creditors. NAFTA also required the elimination of programs that small farmers had relied on "" price floor guarantees, low-interest loans and subsidies for fuel and fertiliser. After living with NAFTA for more than a decade, many Mexicans now realise that the Zapatistas "" whose January 1, 1994 uprising was timed to coincide with NAFTA's start date "" had a critique that applied beyond Mexico's indigenous peoples when they warned that "NAFTA is our death sentence." The harsh suffering explains why so many desperate Mexicans, lured to the border area in the false hope that they could find dignity in the US-owned maquiladoras there (though bodies of scholarship have pointed to and examined the proliferation of human rights abuses in these industries), are willing to risk their lives to cross the border to provide for their families. There were 2.5 million Mexican illegals in 1995; 8 million have crossed the border since then. In 2005, some 400 desperate Mexicans died trying to enter the US.

Of course there is the very lame point that Mexico is suffering an adjustment typical of international trade theory, and that sectors with competitive advantage (mainly horticultural products and tropical fruits) have greatly benefited from the agreement, while others (like the corn sector) have not. That Mexico did not invest in the necessary infrastructure (such as efficient railroads and highways) to compete. Yet, NAFTA rules forbade Mexico from adopting the policies that could have harnessed the inflows from enhanced trade and investment to create permanent gains for its economy. With US firms unwilling to pay even minimal taxes, NAFTA has hardly helped create the necessary infrastructure for the benefits of enhanced trade to accrue to the people. Ciudad Juarez Mayor Gustavo Elizondo, whose city is crammed with US-owned low-wage plants, expressed it plainly: "We have no way to provide water, sewage and sanitation workers. Every year, we get poorer and poorer even though we create more and more wealth."

Not that we know of no other way with economic and social integration! There is the EU for instance "" their "social charter" calling for decent wages, health care and extensive retraining in all member nations. "Before then-impoverished nations like Spain, Greece and Portugal were admitted, they received massive EU investments in roads, health care, clean water and education. The implementation of democracy, including worker rights, was an equally vital pre-condition for entry into the EU."

As already suggested, India is now poised both for high growth as well as a very pro-active globalisation. Taking a cue from the Mexican experience, our policymakers will have to minutely finetune the social and economic framework so that we are able to take all sections along. Cautious preparedness is the need of the hour. India anticipates engagement with NAFTA through Mexico; it should also look for keys to fruitfully globalising in the Mexican experience.