North America's Second Decade

Robert A. Pastor

From Foreign Affairs, January/February 2004

Summary:  In just ten years, NAFTA has created the world's most formidable free trade area. But in the absence of true partnerships and multilateral institutions, movement toward further regional integration has slowed. The United States, Mexico, and Canada have many common interests; they need to pursue them in common ways.

Robert A. Pastor is Professor of International Relations and Director of the Center for North American Studies at American University. He is the author of Toward a North American Community: Lessons from the Old World for the New.

There was a moment early in the Fox and Bush administrations when North American leaders appeared to accept this point. In February 2001, Fox and Bush jointly endorsed the Guanajuato Proposal, which read, "After consultation with our Canadian partners, we will strive to consolidate a North American economic community whose benefits reach the lesser-developed areas of the region and extend to the most vulnerable social groups in our countries." Unfortunately, they never translated that sentiment into policy (with the exception of the symbolic but substantively trivial $40 million Partnership for Prosperity).

All three governments share the blame for this failure. Bush's primary goal was to open the Mexican oil sector to U.S. investors, while Chretien showed no interest in working with Mexico. Fox, for his part, put forth too ambitious an agenda with too much emphasis on radical reform of U.S. immigration policy. His proposal called for raising the number of legal temporary workers and legalizing millions of undocumented ones. Bush's initial response was polite, but he soon realized he could not deliver (reportedly in part because his adviser Karl Rove reminded him that two out of three naturalized Mexicans vote Democratic). The illegal immigration issue remains unsolved. Ultimately, however, it is more symptom than cause: the only way to reduce illegal immigration is to make Mexico's economy grow faster than that of the United States.

MIND THE GAP

For North America's second decade, there is no higher priority than reducing the economic divide between Mexico and the rest of NAFTA. A true partnership is simply not possible when the people of one nation earn, on average, one-sixth as much as do people across the border. Mexico's underdevelopment is a threat to its stability, to its neighbors, and to the future of integration.

The EU experience is instructive here as well. From 1986 to 1999, the per capita GDP of the EU's four poorest countries rose from 65 percent to 78 percent of the average for all member states, thanks to free trade, foreign investment, and generous annual aid (.45 percent of EU GDP). Good policy on the part of aid recipients -- and the fact that aid was conditioned on such policies -- also made an important difference. Admittedly, not all EU aid money has been spent well, and North America can learn from the EU's failures as well as its successes. North America should avoid excessive bureaucracy and concentrate aid on areas such as infrastructure and postsecondary education, which have a strong multiplier effect on the rest of the economy. But two basic lessons stand: growth in one country benefits the others, and limiting the volatility of the poorest helps all.

Mexico needs a new development strategy, partly financed by its North American partners. To reduce the development gap with the United States by 20 percent in the next ten years, Mexico will need to achieve an annual growth rate of 6 percent. At that rate, closing the gap entirely will take decades, but a sustainable strategy that results in small annual reductions will have an important economic and psychological effect. Such growth will require a new, labor-intensive strategy and significant public investment.

Although Mexico as a whole has benefited from NAFTA, free trade and increased foreign investment have skewed development and exacerbated inequalities within the country. Ninety percent of new investment has gone to just four states, three of them in the north. These border states have grown ten times as fast as states in Mexico's south and have become a magnet for migrants from those poor regions. The border area would seem to have a disadvantage in attracting foreign investors: labor is three times as expensive as it is in the south, annual workforce turnover is 100 percent, and congestion and pollution are chronic. But roads from the border to the south are in terrible shape, and other infrastructure is even worse. The World Bank estimates that Mexico needs to spend $20 billion per year for the next ten years to overcome this infrastructure deficit.

To correct this disparity, the three governments should establish a "North American Investment Fund" that would invest $200 billion in infrastructure over the next decade. Washington should provide $9 billion a year, and Canada $1 billion -- but only on the condition that Mexico matches the total amount by gradually increasing tax revenues from 11 percent to 16 percent of its GDP. Fox has tried unsuccessfully to institute fiscal reform in the past, but the offer from Mexico's neighbors might help him persuade his Congress to accept this and other reforms. (The U.S. contribution would be much less than European aid to its poorest member states and only one-half of the amount of the Bush administration's aid to Iraq. The return on an investment in Mexico, moreover, would benefit the U.S. economy more than any aid program in history.) A new agency is not necessary: the World Bank or the Inter-American Development Bank should administer the funds. Ultimately, improved roads and infrastructure would attract investors to the center and south of the country, and income disparities and immigration would decline as a result. The reforms would also make Mexico more competitive with China.