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NAFTA and the Peso Crisis
NAFTA Is More Important Today than Before the Peso Crisis
Chris De Long, Brad De Long, and Sherman Robinson
Open the newspapers, and read the conventional wisdom: that the Mexican
peso crisis of winter 1994-1995 has dashed the hopes for Mexican development
raised by NAFTA; that the rationale for NAFTA has vanished because the peso
crisis caused the "rapid unraveling of the Mexican economic achievements
But the conventional wisdom is dead wrong. The case for NAFTA is much, much
stronger after the peso crisis than before.
The political rebellions and assassinations and the economic distress that
Mexico has suffered in the past year and a half raise the stakes at risk
in U.S.-Mexican relations, and make the NAFTA a more advantageous gamble
for the United States.
The first thing to recognize is that the direct benefits NAFTA offered Mexico
were very limited. NAFTA did offer a material increase in Mexico's access
to U.S. markets today, but U.S. markets were already largely open. NAFTA
offered two more important benefits to Mexico: the first was the U.S. promise
that no sudden wave of U.S. protectionism in the future would bankrupt Mexico's
businesses and destroy the jobs of Mexico's workers.
The second, and more important, benefit to Mexico was that NAFTA tied the
continuation of Mexican reform to a formal international agreement. After
NAFTA, it is much harder for any Mexican government to abandon its reform
program. In all developing countries the value of neo-liberal reforms depend
on their actual and on their perceived permanence. For governments struggling
to sustain growth, the worst trap of all is to enact policy reforms that
hurt politically powerful interests, but to fail to reap any benefits because
foreign investors and domestic businesses fear that the policy reforms will
prove transitory. NAFTA has helped and will help Mexico avoid this trap.
The direct economic costs and benefits of NAFTA for the U.S.? The direct
effects were always small, and always honestly estimated as small. The Mexican
economy is the size of Los Angeles's. Increased trade with Mexico is probably
a small net plus for the U.S. economy. But increased trade with Mexico is
not going to significantly raise or lower the standards of living of large
groups of Americans (save for some living in Texas, Arizona, New Mexico,
The indirect benefits for the U.S. are large. Mexico sits on the U.S.'s
southern border. Mexico is not going away. The U.S. will have an easier
time, and be a better country, if Mexico rapidly becomes a middle-income
staunchly-democratic country than if it remains the low-income semi-democratic
country it is today. A richer Mexico provides more opportunity for Mexicans
at home, and so reduces the stresses placed on the U.S. by migration. Government
officials in a richer Mexico are harder for narcotics traffickers to bribe.
A NAFTA that strengthens Mexico's pro-growth reforms advances the U.S. national
In the wake of the peso crisis, foreign investors find Mexico less attractive;
thus the guarantee of Mexican access to the U.S. market is more important
in helpng Mexico draw on foreign capital to boost its productivity and its
standard of living.
In the wake of the peso crisis, the political tendencies that argued for
reform in Mexico--as opposed to business-as-usual for the system that has
retarded Mexico's political and economic development for half a century--are
weaker. So the commitments to fundamental reform embodied in NAFTA have
given reformers what may become a crucial edge.
In the wake of the peso crisis it is clear that Mexico is not going to have
as easy a time becoming an industrial democracy as we had hoped three years
ago; America's interest in Mexico's stability and development has become
greater, and the forward push given Mexico by NAFTA should loom larger in
Thus every single argument for NAFTA has become stronger and more important
as a result of the winter 1994-1995 peso crisis.
This piece is adapted from an article appearing in the May-June 1996
issue of Foreign Affairs. An edited version appeared in the Los
Angeles Times on July 25, 1996
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Associate Professor of Economics Brad De
Long, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax