Why CAFTA Could Be Bad

So there's talk now of expanding NAFTA to include the Central American nations. Proponents argue that it will bring the benefits of free trade to Central America and push the sort of growth that seems to have helped Mexico, the United States, and Canada.

I think it's a really bad idea.

For one thing, of the 52 states that are considered to be "Severely Indebted" by the World Bank, ten are in the Americas, with three of those being in Central America. This is incredible because the Latin American states make up the largest number of Severely Indebted states outside of the former Communist Bloc and Africa. Both of those groups have come out of imperial control within a human lifetime. Latin America has had no such restrictions on its state building, most of which were independent by the end of the 1820s.

In other words, these states have failed to properly build up an infrastructure that can support modernization and growth. Panama and Belize are both severly indebted. Honduras and Guatemala are low-income economies even considered next to such luminaries such as Mexico and the Solomon Islands.

These are places with nothing to offer except labor. However, the labor is not supported by anything near an adequate banking system. So while the labor has to leave home to work (perhaps to Mexico, perhaps to a regional factory) there is no way for the wages to return home. As anyone who has studied Mexico's economy knows, remittances back home are a huge part of the Mexican economy. Without the ability to send money back home, the labor will either leave the people at home in further destitution, or it will have to uproot entire families to workplaces. When American money (because it will be American money) hits the Central American economies, it will completely distort the local economies. Inflation will hit very hard as more money flows into the economy. One would expect that new money into the economy would further local investment, however, this requires some sort of educated middle or upper class to invest that money. In general, the new money will not come to the middle or upper class (what there is of a middle or upper class), it will come to the laboring class. Additionally, local investement presupposes that there will be something to invest in; namely, there is very little industry out there to support.

How is this different from Mexico? Mexico was lightyears ahead of the rest of Central America when it joined Nafta. It has an educated class. It also has a middle class, albeit one that can barely support its pretentions (cf. work of Marie Francois).

CAFTA will be bad for the Central American nations. In addition, it will bring nothing worthwhile to America in the long run. In the meantime, the United States should invest in helping to bail the Central American states out of their debt, as well as further infrastructural development.


Jack Lessl said…
a pro-Cafta editorial