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The World Bank on NAFTA: Wrong Numbers Lead to Wrong Conclusion (The Center for Economic and Policy Research)

On the occasion of the tenth anniversary of the North America Free Trade Agreement (NAFTA) the World Bank released a study entitled Lessons From NAFTA for Latin America and the Caribbean Countries:  A Summary of Research Findings.  The study, collecting information from a number of previous works, assessed the impact of the trade pact, primarily on Mexico. A new paper by the Center for Economic and Policy Research, called NAFTA at 10: The Recount, calls into question the basis for some of the study’s findings.

A disproportionate amount of public attention was devoted to a short section of the World Bank study that presented an econometric test of the impact of NAFTA on the rate at which Mexico’s per capita GDP converged with the level of per capita GDP in the United States. Based on this test, the section concluded that NAFTA increased Mexico’s GDP by approximately 4-5 percent over eight years; or approximately 0.5 percent annually.  But it turns out that the report’s conclusion was based on the wrong data. How did this happen?

Wrong Numbers: It turns out that the study’s most touted finding – that NAFTA had a positive effect on per capita Mexico’s growth was based on the World Bank using the wrong data. We mean really wrong.   For instance, the numbers used as US GDP was simply wrong, with a number used that is more comparable to Portugal’s GDP, not the US’.  When accurate data sources are used, NAFTA is seen to have had a negative impact on Mexico’s growth rate. While this is not conclusive evidence that NAFTA slowed Mexico’s growth, it is clear that there is no evidence to support the World Bank study’s much-cited conclusion that NAFTA increased Mexico’s growth rate.

Wrong Conclusions: The World Bank plays a key role in setting precedents for development policy globally.   Its research shapes the debate and gives developing countries an indication of what Washington expects from them.  When the World Bank uses bad numbers and a misguided methodology to recommend the NAFTA process to other developing countries, it potentially sets other countries on a Mexico-like path of slow growth, insufficient creation of good jobs, and destruction of rural livelihoods.  In this, as in other instances, the World Bank’s interventions into the trade debate do more to muddle than to clarify the issues at stake.

Full CEPR Report

NAFTA at Ten Fact Sheets