Distorted World Bank Report on NAFTA and Labor

Vol. 7, No. 1

January, 2004

by Peter Bakvis
ICFTU/Global Unions Washington Office

World Bank researchers have plumbed new depths in producing shoddy and tendentious analyses, misrepresenting findings and drawing unjustified conclusions in a report released by the Bank on 17 December entitled "Lessons from NAFTA for Latin America and the Caribbean Countries". Apparently intent on proving that the North American Free Trade Agreement (NAFTA)has been a godsend for Mexico despite reams of evidence to the contrary, the authors of "Lessons from NAFTA" have not hesitated to contradict their own data or put forward unsubstantiated assertions in their determination to demonstrate that NAFTA is the free trade model that all of Latin America should imitate.

In terms of both the shoddiness and the anti-labor bias of the "research", this World Bank study rivals the IMF's research paper of last April (published in the "World Economic Outlook"), which claimed that Europe could virtually eliminate unemployment by deregulating its labor markets to US levels. An impartial analysis of the data used by the IMF showed this claim to be completely unwarranted.

In the press release announcing "Lessons from NAFTA", the Bank does conclude that "free trade alone is not enough without significant policy and institutional reforms". However, contrary to most academic analyses of the impact of NAFTA on Mexico, the report denies that NAFTA has had any significant negative impact: "NAFTA has had positive impacts in Mexico but they could have been better", according to a World Bank vice-president. The Bank produced this report two weeks prior to the tenth anniversary of the introduction of the free trade agreement between Canada, Mexico and the United States.

Many of the unwarranted assertions about the positive effects of NAFTA concern labor. The press release states that real wages in Mexico have recovered their 1994 levels and the report itself claims that "real wages have recovered rapidly from the 1995 collapse and the poverty rate has followed a similar path" (p.viii). In fact, data presented in the report say nothing of the sort. One of the report's tables (p.vii) shows that real wages have fallen between 1994 and 2001 according to two different methods of calculation. In addition, one of the two poverty indicators presented in the same table shows an increase, not a decline, in poverty rates during the post-NAFTA period.

A graph presented in another part of the report (p. 167) further shows that Mexican real wages have declined relative to US wages since 1994. The wage data series presented in the Bank's paper conveniently end in 2001 or 2002. Academic analyses have shown that the real wage decline in Mexico has intensified in 2003 (see for example "NAFTA's Promise and Reality" produced by the Carnegie Endowment for International Peace, 2004).

The World Bank's glowing assessment of the impact of NAFTA extends to the employment situation. The Bank's press release states that the labor market in Mexico "recovered relatively quickly after the tragic adjustments of the 1994 Tequila crisis". However a chart (p. 167) shows unemployment rising sharply starting in the year 2000, something the report acknowledges only fleetingly when it refers in passing to "the increasing flight of jobs out of Mexico to cheaper venues" (p. 192) . Mexican government data have confirmed that employment in the maquiladora zones, which the report implies are the showcases of NAFTA's success, has declined from 1.3 million in 2000 to 1.0 million in 2003. The 350-page report neglects to mention this major collapse of maquila employment.

Despite the assertion of the Bank's press release that "there is little evidence of adverse impacts of NAFTA on workers", the report itself does admit that growth of real wages "was not that remarkable after NAFTA" (p. vi). The report then makes the standard neo-classical economist's assertion that wages will automatically increase if labor productivity were to increase, but once again the facts contradict the authors' pre-conceived opinions. Labor productivity growth in Mexico has rapidly outpaced productivity growth in both Canada and the US since the introduction of NAFTA in 1994, yet the real wage gap between Mexico and the other two countries widened during this period (see the previously mentioned Carnegie Endowment publication). Obviously, wage convergence will not take place purely through increased productivity and the magic of the marketplace, as the authors assert.

Having (falsely) identified slow productivity growth as the culprit of low wages and incomes, the authors of "Lessons from NAFTA" then blame Mexican workers and unions for not adopting the same open attitude to technological change and outsourcing as their Swedish counterparts: "There is a lesson to be learned from the Swedish labor unions who have consistently embraced a policy of open trade regimes, encouragement of technological adoption, and outsourcing of low productivity jobs despite their short run costs in worker dislocation" (p. 192). The report forgets to mention (or perhaps the authors did not know) that Swedish workers who lose their jobs through "worker dislocation" or for any other reason receive unemployment insurance benefits equivalent to 80% of their former wage for a minimum of one year, and potentially for much longer periods. There is no unemployment insurance program of any kind in Mexico.

Not content with making this completely out-of-context comparison between Mexican and Swedish labor conditions, the Bank's economists affirm their anointed right to speak on behalf of Swedish unions a few pages later (p. 195) when they declare: "Swedish labor unions understand the fundamental fact that Swedish forestry workers earn more than those in Brazil and Chile, not because of labor legislation, but because of a higher degree of mechanization combined with a dynamic knowledge cluster that encourages constant innovation and increasing labor productivity". The implication is that Swedish unions would be ready to scrap all of the protection that Swedish labor legislation provides to workers in their country. One wonders if Sweden's representative in the World Bank's board of directors endorses this assertion.

Just in case the report's bias against any kind of protection for workers is not clear enough, the authors make the unsubstantiated claim that the toothless NAFTA side agreement on labor, known as the NAALC, may lead to "wage rigidities" or other dangerous consequences: "There is no guarantee ... that NAALC cases will not be abused as trade barriers in the industrialized countries" (p. 195). The report offers not a shred of evidence to back up the assertion. In fact the report's analysis of NAALC confirms that its only mandate is "to ensure enforcement of existing labor protections" and that NAALC has no real enforcement powers since "no submission had progressed past the minister to minister consultation stage" since NAALC went into force in 1994 (p. 194, 197).

Further sections of "Lessons from NAFTA" present similarly rosy, and similarly contorted, assessments of NAFTA's consequences for other groups in Mexican society. The report's press release asserts that "Mexican farmers, including those at the subsistence level, were not adversely impacted by NAFTA as had been widely feared". The report itself states: "Contrary to some predictions, NAFTA has not had a devastating effect on Mexico's agriculture" (p. xiv).

According to Mexican government figures, employment in agriculture declined from 8.1 million in 1993 to 6.8 million in 2002, a decrease of 16%. The Carnegie Endowment study (previously cited) considers that "agricultural trade liberalization linked to NAFTA is the single most significant factor in the loss of agricultural jobs in Mexico". Perhaps because the World Bank's researchers were referring to expected agricultural job losses much greater than 16% (they do not identify the "some predictions"), they now consider that a loss of only 1.3 million jobs in the sector means that NAFTA has been an unqualified success for Mexican farmers.

The full 350-page version of Lessons from NAFTA for Latin America and the Caribbean Countries is available on the World Bank's web site.

Apparently the first lesson that the World Bank wants Latin America to draw from NAFTA is "Learn English", since they have made the report available just in English. Only a 30-page summary is available in Spanish.

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