Past, Present, and Future of NAFTA

On Wednesday I attended a conference on Linking Agriculture, Development and Migration: A Critical Look at NAFTA Past, Present and Future in D.C. It was organized by a host of organization working on trade related issues. The conference was pretty interesting in the sense that almost all the speakers showed some form of discontent with the current NAFTA deal, which was crafted in 1994. The main reasons for discontent was that NAFTA has not been deliver what it was supposed to as per the initial agreement. It was hoped that NAFTA would bring prosperity and increase trade volume in all the three countries but evidences from all the three countries point to the other direction. Almost all the speakers were complaining about job loss, increase in poverty rates, internal and external displacement, destruction of countryside economy, widening inequality, and increasing poverty, among others.

US Congresswoman Marcy Kaptur (D-OH) was very critical of the current NAFTA deal. While arguing that since NAFTA was sealed the US trade deficit has soared to $1 trillion and shift of low-skilled jobs, she also argued that current model of trade agreement is clearly not working. She argued that renegotiation is essential to encompass genuine concerns about agriculture subsidies and cross-border migration. She did not sound protectionist but was arguing in a way to protect American interests, both agricultural and financial. I was wondering why she only mentioned trade deficit and did not talk about capital account surplus contributed by big US financial institutions operating in Mexico.

Meanwhile, Victor Quintana, deputy of the state of Chihuahua, Mexico was more vociferous and critical about the unfair NAFTA deal. He argued that NAFTA has done more harm than good to the Mexican economy. True, on the surface trade volume has increased by manifolds but this does not depict the true picture of the economy. He gave pretty objective and justifiable arguments against the unfair trade deal, which many argue was signed to benefit big corporate business and transnational companies. He was also arguing for renegotiation of the original deal keeping in mind the real dynamics rather than the ideological/theoretical issues forwarded by influential interest groups. His main points were that after NAFTA:

• Mexico lost food sovereignty; per capita food production was 11% lower than 20 years before

• There was no integration in real sense because there was no complementary investment (investment flowed from US to Mexico but benefits went back to the US)

• Trade has benefited a small number of companies and group of people; inequality is rising rapidly

• 80% of the agriculture business is controlled by big transnational companies; indigenous people are stripped off farming

• Lost two million jobs in the countryside- completely opposite results than what was expected

• Now 70% of the rural population lives in poverty

The most insightful stuff came from Peter Julian, MP from Canada. He provided a compelling argument for overhauling the current NAFTA deal to accommodate the ground realities facing all the three economies. He revealed that big corporate businesses were gaining in such an astronomical amount that they themselves found it difficult to divulge yearly earnings and profits from the deal since 1994. He said that his team in Canada had to fight for the information on earning earned by a handful of big businesses. It appeared that only big businesses were gaining from the deal. He constantly repeated Saving NAFTA from cheerleaders, which reminded me of Dani Rodrik’s popular paper “How to Save Globalization From Its Cheerleaders.” Also see this one. Some of the effects of NAFTA on the Canadian economy are as below:

• Decline in permanent jobs; increase in temporary jobs with no pension and health insurance…”non-family instability” in rise

• Rise in family debt (almost 150% since 1989)

• Farm income decline by 78%

• 20% of the wealthiest people earn half of all income earnings in Canada

• Upper middle class has seen status quo in income earning. Meanwhile, middle class has lost one week of income since 1989

• Lowe middle income group has last 2 weeks of income earning

• The poorest quintile has lost one and a half month of income earning

• 300,000 Canadians are homeless

The other speaker was a Mexican senator Yeidckol Polevnsky who was even more critical of the NAFTA deal. Since she spoke in Spanish, I had to use a microphone transmitter… it was not cool at all! She argued that since the trade deal, Mexico lost competitiveness (earlier its ranking was 31, now it is 58…source?), increased poverty level (48% before NAFTA, now it is 52%), increased illegal migration from Mexico, and benefits went to big companies only. She seemed to be the ultimate pessimist /nationalist among the speakers. She repeatedly argued that there is no playing field in trade right now and competitiveness is skewed in transnational companies’ favor.

I was curious and asked a question about what exactly “renegotiation” means and whether the revision, if any to be done in future, would be a step backward from the current deal? Well, Congresswoman Marcy Kaptur went before the session was over, so I did not hear US lawmaker’s perspective firsthand. The MP from Canada directly addressed my question and argued that the rise in inequality, job losses and skewed results in favor of a select few big businesses was a testament of the fact that the deal was already a step backward. He was essentially saying that the deal made countries worse off than they were before the deal. So, he wanted to renegotiate NAFTA to accommodate these genuine concerns and realities and come up with a viable, pragmatic solution. Victor Quintana argued that renegotiation should accommodate protectionist policy space to stop exploitation and ensure that the livelihood of countryside is kept alive by aiding corn, rice, and beans production. The Senator from Mexico offered more gloomy arguments saying that NAFTA has been a disgrace and horrible to Mexican economy as a whole. She was critical of a deal which would allow secondhand vehicles to be sold in the Mexican market, irrespective of quality and safety standards.

The first session seemed as if the whole session’s purpose was to denounce NAFTA deal. I do share the feeling that NAFTA is not working but we also cannot brand that it is not totally working. But as a whole, it is true that inequality is increasing, select few are gaining astronomically, and the poorest are the hardest hit. A comfortable policy space should be left for domestic policy maneuvering in any future renegotiation. As always: to ensure fairness, we should protect the deals from the cheerleaders!

I will write about interesting stuff that emerged in other sessions when I am not busy. I will try to find some time during my internship tomorrow to write something more about the other sessions.

Building and strengthening institutions in MENA

This paper highlights the necessity for building and strengthening economic and political institutions to create as many as 100 million new jobs in the next decade to accommodate the increasing number of entrants into the labor force in the Middle East and North Africa (MENA) regions. Past inefficient institutions have now made it difficult to manage massive labor force in the region, raising concerns for potential social instability and high youth unemployment. Successful reforms are possible if we build a strong link between democratic governance and market economies, the paper suggests. This includes privatizing the inefficient state-owned monopolies, decentralizing political and economic power, strengthening democratic governance, reforming the increasing labor market and regulations, and stimulating small-level private initiatives, among others.

This reform paper from the Center for International private Enterprise states that for sustained growth and development, the region must reform its economic and political institutions. High on agenda are: responsive governance and vibrant private sector.

Highlights:

• Building market institutions

• Developing political institutions

• Strengthening the rule of law

• Empowering women and youth

• Creating space for the private sector

• Improving access to information

• Enabling private sector input

• Combating corruption

Something more on MENA from the paper:

• GDP growth rate was 6.3% in 2006

• FDI was $24.4 billion in 2007- a 40% y-on-y increase and 3x larger than in 2004

• Morocco experienced drought in 2007, the only country to suffer from drought in MENA in 2007

• The region ranks bottom in political freedom and governance indicators

P.S.: Today I am attending a conference on "Linking Agriculture, Development and Migration: A Critical Look at NAFTA Past, Present, and Future" in D.C. I already attended one session and will attend one more in the afternoon. Interesting stuff about NAFTA and how policy makers from the US, Mexico, and Canada feel about the current trade agreement. Check back later for a summary of the conference proceedings. Pretty novel and justifiable ideas have been floated. High on agenda and buzz words are: Inequality, and Renegotiation.

Farmer's debt relief in India

The Indian government has recently decided to cancel the entire debt of small farmers that will cost it around $15 billion (IRs 600 billion). The farm loan relief is to be offered to all farmers with less than two hectares of land. It is an ambitious program and if it works as planned, then it will provide a huge relief to the debt-crunched poor farmers in rural India, which will help stimulate the rural economy. It is going to be a long shot. It will help farmers free from grips of the feudal societies, reduce suicides rates, and most importantly stimulate rural economy and reduction in poverty. The newest budget has made a great leap forward in social welfare spending, with 20%  increase in education and 15% increase in health expenditures. Along with the loan waiver for the selected group, the government has also decided to  give a 25% rebate for all farm loans regardless of farm size or loan distress.

With growth rates at 8.7% and rising inflation, critics have labeled the new ambitious welfare program a "populist pre-election budget" and have speculated that it will put upward pressure in price level. Though this new move from the government has received some applause (including from me!), some economists are worried about rising fiscal deficit and inflation, competitiveness in the banking sector, and rising inflation. However, this program is supposed to be more effective than previous ones because rebates are to be distributed directly to the targeted groups. Unlike in the past when banks were used as intermediaries to achieve such socio-political goals, this time the exchequer would directly distribute rebates to the genuinely distressed ones.

Critics have argued that it will hamper competitiveness in the banking sector and temper incentives in the market. If you are a farmer and you think that the government is going to give debt relief after some years, then naturally you will be less interested in paying off loans. A distressing form of moral hazard? Meanwhile, if banks know that their loans to farmers are going to be written off in some years, then the quality of the credit market would go downhill. More here, and here

This line of argument is completely valid but one has to consider historical factors and the ability of the farmers before arguing against these new reformative measures by the state. If you look at more than 800 million poor farmers from the rural areas, it is not difficult to realize that they have not been touched by rising economic growth Indian has achieved for the past two decades. The enormous revenue generation in recent years has to be redistributed efficiently so that the poor people do not feel left out. And, given the status quo, the poor farmers would in no way be able to pay off bank loans and loans from landlords (remember the age-old Adhi system, or sharecropping, in rural India). Without debt cancellation, the poor farmers would pass on debt (principal plus exorbitant interest) to their children, thus making debt servicing a generation phenomena. When will they get rid of this vicious cycle? Neither they can do it on their own nor the market would come up with a solution. The government has to step in to break the cycle and relive the farmers from long overdue debts that is holding their progress and keeping them and their families in poverty for years.

Though I believe that market is the best solution in the long run, in cases like this the state has to take a lead role to make sure that the real market forces work as they should in a level playing field. Without correcting the centuries old feudal system, including generation-passing debt structure in rural areas, it is hard to imagine that markets would find a solution to this issue. Markets did not work until now, and if the government plans to intervene then we should support it. I think it will have similar effect, though in varying proportion, as that of a stimulus package in the US. The rural economy needs to be freed from clutches of feudal regressive market structure, corrected immediately, and stimulated to help people fight poverty. There might be some problems and frauds cases of eligibility, but I don't think this move will seriously dampen market incentives. It is a corrective measure and this one is to be done in such a way that implementation bypasses the corrupt state administration.

We can find similar kind of problems in other South Asian nations, including Nepal. Recently, the Nepali government had decided to reserve jobs for marginalized groups in all state ranks. Considering the historical, cultural, and caste-based discriminated job market, I think it is a good move. Still wonder why? Read this article.

Collier on the bottom billion at the TED

What can we do to help the bottom billion? Prof. Paul Collier says, "a combination of compassion and enlightened self interest." More here.

Why compassion? Because the bottom billion are deprived of credible hope

Why enlightened self interest? Because economic divergence plus global integration would be "a nightmare for our children."

I have been particularly interested in Collier's work after reading his book The Bottom Billion. It is so simple, rich, and amazing with all the historical roots to the miseries of Africa and the present day bad governance designed by bad leaders- there are too many traps in Africa! I wish these simple ideas were translated into action in Africa. Also check out the Center for the Study of African Economies, which produces The Journal of African Economies.

...“It requires compassion to get ourselves started, and enlightened self-interest to get serious.”

...What happened the last time we got serious? Well, it was the reconstruction of Europe after WWII via the Marshall Plan. Why did the US get serious? We were worried about the spread of Communism. So what did we do?

...There’s a huge natural resource boom taking place - Uganda and Ghana have both discovered oil, and Guinea has a huge discovery of iron. “These new revenue flows dwarf aid.” In Angola, new oil revenues are $50 billion a year - total aid flows to the bottom billion nations is $34 billion a year.

“If your governance is good enough, there’s no resource boom.” That’s happened in places like Norway, Australia, and Canada. “The resource curse is entirely confined to a threshold of governance.” Nigeria is a great example of what can go wrong if you don’t have enough governance. You need a level of governance around where Portugal was in the 1980s.

..new democracies don’t have these checks and balances - they’re “instant democracies”.

Inequality in Nepal

By Kamal Raj Dhungel in The Kathmandu Post:

...Three years ago the government estimated that Gini coefficient of Nepal was 0.47. This was the highest among SAARC countries, with Pakistan having the lowest 0.31.

...The Nepal Living Standard Survey (NLSS, 2003/04) also stated that the bottom 80 percent of the population earned 47 percent of total income; the richest 20 percent of the population earned 53 percent while the poorest 20 percent earned only 5 percent of income. 

...This shows that there is an extremely unjust distribution of income where the richest 20 percent earns more than half of the total income. The annual mean and median income of the richest 20 percent of the households accounted to Rs 156,486 and 112, 962 respectively, while the same for the poorest 20 percent accounted to Rs 37, 243 and 31,147 respectively. The mean and median income of the richest 20 percent of the households is 4.2 and 3.6 times more than those of the poorest 20 percent.

South-South FDI rising

Though South-South FDI is rising in recent years (particularly massive investment plans of China and India, China more so), a new report points out that political risks is a principal constraint to doing business in emerging markets. It is argued that South-based companies have higher tolerance than North-based companies to political risks.

...Foreign direct investment (FDI) originating in developing countries and destined for other developing countries is on the rise, but the growing development potential of this so-called “South-South” investment is inhibited by political risks, according to a new report by the Multilateral Investment Guarantee Agency (MIGA).

...Political risks are cited by South-based investors as a principal constraint to doing business in emerging markets. The MIGA review—“South-South FDI and Political Risk Insurance: Challenges and Opportunities”—looks at perceptions of political risk by companies based in emerging markets that are seeking to invest abroad, as well as challenges in mitigating those risks.

...FDI flows going to emerging markets are expected to reach US$535 billion in 2007, decline somewhat in 2008, and continue growing in the subsequent three years at an annual rate of 3-4 percent.

...FDI flows from emerging markets increased from US$12 billion in 1991 to US$99 billion in 2000,6 and are estimated to be around US$210 billion as of 2006.

...“South-South” FDI (investment outflows from emerging markets to other emerging markets) has been growing even faster, increasing from under US$5 billion in 1994 to over US$50 billion in 2000.

Remittances, poverty, and employment in South Asia

An interesting paper, authored by Prof. Sudhir K. Khatri, on the role of remittances in poverty alleviation and employment in South Asia. He argues that remittances have played a crucial role in lifting people out of poverty in Nepal, Sri Lanka, and Bangladesh, despite conflict and insurgency. Particularly, noteworthy is the discussion on who migrates and through which channel? He argues that the very poor people, who lack migration information and cannot pay the cost of migration, are usually left out of this cycle. So, despite poverty reduction is taking place due to increasing inflow of remittances, the incidence and intensity of poverty among the poorest is still as rigid as it was before. Also, he argues that workers who go to the Gulf countries remit almost 100% of their savings back home, while workers who go to the USA, the UK, and Australia, among others do not remit in the same proportion. More on remittances by Prof. Khatri here. Interestingly, this pessimistic-sounding paper from the IMF concludes that higher remittances has a negative impact on the quality of institutions in a country.

Notable stats and observations:

...a 10 percent increase of migrant flow from the sending country will lead to 1.6 percent decline in the share of people living on less than $1 a day.

...10 percent increase in the share of remittance in a country’s GDP can lead to a 1.2 percent reduction in poverty.

...the households receiving remittances increased from 23 to 33 percent in the same period, and the share of remittance in total household income increased from 26 to 35 percent during 1996 to 2003 in Nepal.

...migrants in Pakistan avoid investing in areas that they do not know (such as business) in favor of committing their resources to what they know best (namely land).

...restrictions on migration can increase inequality, as has been the case of the unskilled female migrants from Bangladesh who have been forced to use ‘illegal’ methods to migrate and thus become vulnerable to exploitation and subjected to gender income inequality.

...The group going to the Gulf States and Malaysia are the ones that remit the money back home since they cannot keep the money there indefinitely. They are the ones that sustain Nepal’s economy since they send back home 100 percent of the money they save. Those going to UK, USA, Canada, or Australia do not usually remit the money to Nepal.

...In Nepal also the poorest of the poor (20 percent of the population) are not in a position to migrate. Labour migration has taken place from areas that are relatively richer, because it also requires investment.

...One study on Sri Lanka suggests that out of the total income, remittance recipient families spend 56 percent on foods and 18 percent on education, which meets the basic needs of the families trying to move out of poverty.