When I first started to become interested in economics it seemed to me that Ricardo's argument of comparative advantage is unanswerable. Any country that has high tariff barriers to protect its main industries is in danger not only of inflicting higher consumer prices than otherwise on its own population, but the industries concerned have little incentive to become as efficient as those in the world outside.

However, as Joe Stiglitz frequently points out (in, for example, Globalization and its Discontents), a number of countries which have protected some of their industries have done well out of it. America did so 150 years ago, and several Asian countries did so in the 1980s and 90s in order to break into some key industries such as cars or computers. However, it is incumbent on governments and business to ensure that the industries concerned become as efficient as those in the outside world as quickly as possible so that consumer prices can be brought down and tariffs removed in order to forestall competitive protectionism by other countries. Otherwise, retaliatory bouts of protection by one country after another can bring about widescale recession from which is almost impossible to emerge, unless followed by inflation which results in massive losses of cash savings and increased unemployment all round.

Generally speaking, however, it is unwise for a country to depend on tariff protection of certain industries unless it is pretty certain that it can reach the productivity of competitors in other countries fairly quickly. What does that mean? Except in those countries which have high transport costs of resources and final products due to location, the important factors are human ones—educational and cultural. It is being increasingly realised that it is the cultural ones which are the most important. People can educate themselves very quickly when they have a need to and if the tide is flowing their way. All the great engineers in England's industrial revolution in the 19th century did so without benefit of school or university. In the computer revolution of the last few decades, the early innovators and entrepreneurs were self-taught simply because the schools and universities couldn't adapt their curricula for many years until long after the sector was well established.

So, if it isn't educational, it is more likely to cultural. This is much more complex because culture can't be changed overnight—it is the product of decades of tradition at least, and usually centuries. The culture involves matters such as what Francis Fukuyama and David Putnam call 'social capital' (the degree of trust between individuals and groups), a sufficiency of property rights embedded in legislation, an uncorrupt system of justice, individualism, enterprise and habits of old-fashioned hard work. If a country's cultural 'formula' lacks some or all of these to any significant extent then it is in danger of never catching up. This applies whether it protects itself behind tariff barriers or whether it goes in the opposite direction of joining a free trade area. In the latter case, a country which attracts industries from other countries by some bait such as cheap labour, or temporary low taxes, hopes that its culture will be forced to change in the right direction.

But the pre-existing culture has to be fairly close to what is necessary if the free trade area trick is to work. It worked in the case of Ireland when it joined the European Union some 15-20 years ago, but it has hardly worked for Spain and Portugal and hasn't done a great deal for Italy either, even though the country was already partially industrialised. It looks as though it worked for Canada when it joined NAFTA, but didn't work in the case of Mexico. Despite a huge upsurge in the number of American factories established in Mexico and a high rate of growth of 8% for the first ten years, it looks as though its culture was not sufficiently versatile to adapt quickly enough, and many of the same industries are now taking off again—this time for China (where labour costs are not significantly cheaper those of Mexico).

Before I follow with the first few paragraphs of an article about Mexico from today's Financial Times, I'll mention that there's another interesting item in the same paper today. China is coming under a lot of criticism from other Asian countries for the way it is scooping up export markets in the rest of the world. They are saying that it's about time the renminbi ('the people's coin' or the yuan) is revalued upwards. However, China cannot afford to do this just now because it would raise consumer prices to its own people and would cause immense unrest because unemployment would rise -- even as millions of people from the countryside are still pouring into the cities looking for work. The result is that the large Chinese exporting corporations are acquiring large quantities of dollars ($100 billion from America alone) which is tending to keep up the value of the renminbi.

Keith Hudson

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MEXICO'S LOST DECADE

As investment switches to China, the opportunities created by NAFTA are under threat

Free trade with the US and Canada did not spur wider economic reform, and limited progress towards creating prosperity is in danger of stalling

John Authers and Sara Silver

Every day a long, anxious queue forms outside the Mattel toy factory on the outskirts of Tijuana. the job-seekers, mostly women, come from as far away as the distant southern frontier with Guatemala in search of work in maquiladoras—factories that assemble imported components for export. Tijuana, the city of 1.2m across the US border from San Diego, had until a few years ago offered plenty of them.

But in the past two years 540 maquiladora plants have left Mexico, with some sectors—toys and garments prominent among them—decamping en masse in search of cheaper labour, especially in Asia. They have taken 200,000 Mexican jobs with them and Tijuana, once a centre for toys and garments and now the biggest producer of electronics in the Americas, has been badly affected. Mattel is the last outpost of Mexico's toy industry.

When the North Atlantic Free Trade Agreement (NAFTA) came into being close to a decade ago, almost everyone believed Mexico would gain jobs. The leaders of Canada, Mexico and the US promised a new era of economic prosperity, allowing Mexico to leap from the Third World into the First. US critics warned of the impending "sucking sound" as Mexico's low wages and lower environmental standards drained the northern nations of good jobs. Carlos Salinas, then Mexico's president, said Nafta would provide the growth needed to employ the expanding workforce.

Ten years on, more than half of Mexico's population still lives in poverty. Polls show that unemployment, which has risen sharply in the past two years—and most rapidly in the export-driven sectors NAFTA was supposed to swell—is the most important issue in next week's congressional elections.

Most alarmingly for Mexicans, the evidence that they failed to improve their competitiveness during the first decade of NAFTA now seems overwhelming. Annual manufacturing productivity growth reached 8 per cent in 1994 but was down below 3 per cent last year. Last year, China overtook Mexico as the largest exporter to the US after Japan, causing consternation south of the border.

Daniel Romero, head of the National Council for the Maquiladora Export Industry, says "China has done this without even targeting the US market. They are still much more interested in the huge internal market. The situation could become much worse once they turn their attention to the US."

NAFTA's architects believed, according to Jorge Carrillo of the Colegio de la Frontera Norte, a university in Tijuana, that joining Nafta was a "sufficient condition" for economic growth. Once involved in a free trade area, the argument went, Mexico would be forced to free up its internal economy. At first the argument seemed justified. Exports boomed from $51.8bn in 1993 to $166.4bn in 2000, almost entirely spurred by the increase in exports to the US, which rose from $42.5bn to $147.6bn over the same period, foreign direct investment also grew, helping to pull Mexico through the devaluation crisis of December 1994 and the ensuing banking crisis that led to more than half of the nation's banking assets being written off. By 2000, Mexico seemed the perfect example of development through trade.

But according to Luis Rubio, head of CIDAC, an influential Mexico City think-tank, and a supporter of free trade, the problem was that Nafta was seen "as an end in itself, rather than as a means"—and should have been the start of a process of opening the nation's economy, as it was in Canada. "The idea was to use NAFTA to industrialise Mexico, but that vision simply vanished in the crisis of 1994," he says.

Rogelio Ramirez de la O, an independent economist with the Ecanal consultancy in Mexico City, suggests that the mistake was to over-emphasise macroeconomic stability and tight budgets. While understandable in the wake of numerous crises of the previous quarter century, this meant that nothing was done to ready industry for tougher international competition.

"It's a story of shortsightedness," he says. "The reason we were enthusiastic in the early 1990s was because Mexico could be seen as a reliable manufacturing partner, and integrate itself with the US. It's performed, and it exceeded what was expected until 2000, but then something else was needed."

The maquiladora sector, for example, flourished after NAFTA, allowing Mexicans earning a few dollars an hour to assemble US components into finished products. Cars made in the US and Canada, it was argued, would compete more effectively against Asian imports if wiring harnesses, window glass and upholstery were made in Mexico.

That low-wage model has limitations, however. Many countries have even cheaper labour. Employment in the maquiladoras did soar, reaching almost 1.3m in 2000, but according to John Christman, an expert with the Global Insight consultancy in Mexico City, the industry is now unlikely to recover that employment level until at least 2008. More tellingly, better-paying manufacturing jobs that support entire families are fewer now than when the agreement was signed.

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Financial Times 1 July 2003