WorldCity Business Magazine

A tale of two countries

by Mary Dempsey

Why has free trade worked so well for developing countries in Asia, but not for Latin America’s emerging markets?

Vietnam and Mexico embraced free trade pretty much at the same time. Now, more than a dozen years later, Vietnam and the majority of its people have seen rapid and sustained advances. In Mexico, by contrast, exports have taken off but economic growth has been up and down. Poverty remains widespread, the education and health-care systems have not made great strides and the benefits of globalization continue to elude much of the population.

“Integration into world markets creates opportunities, but it also creates risk,” according to the United Nations’ annual Human Development Report. “Participation in trade creates losers as well as winners, and it brings with it adjustment costs.”

The report, subtitled “International cooperation at a crossroads: Aid, trade and security in an unequal world,” examines a long list of factors to determine how and if trade has improved the world. Overall, the report gives its blessing to trade, but it notes that free-trade pacts must be fair and come in tandem with social programs.

“If openness, as measured by the ratio of trade to GDP, were an indicator of human development progress, Latin America would be an unmitigated success story,” the report says. “The region has led the world in trade liberalization. However, outcomes have been disappointing.”

The case of Vietnam proves that the best results come when inequalities are addressed before the move into free trade, not after.

Since the late 1980s, when it introduced market reforms, Vietnam has posted average GDP growth exceeding 5 percent a year a remarkable performance. Imports and exports have risen more than 20 percent annually over the last decade and exports’ contribution to GDP has doubled, according to U.N. figures. Vietnamese producers gained access to new markets and new technologies to the country.

“During the 1990s, income poverty levels fell from 58 percent to 28 percent, life expectancy increased by six years and child mortality was cut in half,” says the U.N. report.

In Mexico during the same period, export rates swelled 26 percent and most of those exports were value-added products such as automobiles and electronics. Mexico now accounts for half of all manufactured exports from Latin America. Despite that, economic growth percapita from 1990 to 2003 averaged just more than 1 percent, real wages have not improved, and unemployment is higher now than in 1990.

The report lists several reasons for the divergent outcomes:

There were greater inequalities in Mexico before trade barriers were dropped.

Like Mexico, Vietnam had high levels of poverty, but it had much better rates of school enrollment and literacy and higher life expectancy than countries at its level of development. It was able to provide more social programs for its population because it had higher tax revenues than Mexico. “Mexico has an average income five times the level of Vietnam but a lower tax revenue-to-GDP ratio of 13 percent, which is comparable to Uganda,” according to the U.N. report.

The scope and speed of trade liberalization is important.

Export growth in Vietnamwas driven by millions of small producers.Restrictions affecting the agricultural sector such as caps on rice exports and fertilizerimports were lifted. Behind the NorthAmerican Free Trade Agreement, Mexico’seconomy was opened at an astonishing rate.That benefited large, irrigated commercialfarms. Small farmers had to compete withimports, including subsidized U.S. corn.

Vietnam has been more successful in diversifying its exports.

In the late 1980s, itsexport sector was built around oil shipments toJapan and Singapore. In the 1990s, there was aconcerted effort to diversify and manufacturedgoods make up a third of exports. In Mexico,meanwhile, products that are listed as high-technologyare often maquiladora goods assembled from imported components so theycan be re-exported. There is limited local valueadded and little in the way of skill and technologytransfer. The emphasis on a low-wagelow-skill export sector has made Mexico vulnerableto competition from China.

The U.N. report looks at life expectancy, literacy levels, GDP, the quality of education, whether girls go to school, AIDS rates, crime and violence, poverty levels, water quality, access to technology and other factors. The annual report card also weighs exports and imports as a percentage of GDP and whether exports are primary goods and commodities or manufactured products and high-technology products. The result is a “Human Development Index” covering 177 nations.

The top five countries in the 2005 index are Norway, Iceland, Australia, Luxembourg and Canada. The United States is No. 10. Chile is the highest ranked Latin America country, at No. 37.

Although the report celebrates reductions in poverty levels globally and other progress, it uses “depressing” to describe some of the results. And it notes that inequality remains at shocking extremes. “The world’s richest 500 individuals have a combined income greater than that of the poorest 416 million,” it notes.