TTU economics professor studies free market reform in Mexico and Venezuela

Free market reforms affecting traded goods, capital and labor markets in Mexico and Venezuela have done more to hurt than to help most workers and their families in those countries.

That’s the conclusion of Jon Jonakin, a Tennessee Tech University economics professor, who was awarded a non-instructional research grant from the university and spent spring semester 2007 studying how the two countries’ economies have responded to orthodox liberalization policies that were implemented there in the 1980s and 90s.

His findings are outlined in a paper titled “Labor and Its Discontents: The Consequences of Orthodox Reform in Venezuela and Mexico.”

“The positive results projected by many orthodox economists just aren’t there,” Jonakin said.

Instead of experiencing falling income inequality, greater job creation and increased wages for the relatively abundant less-skilled workers — as many orthodox economists projected prior to the reforms — just the opposite has often happened in both countries.

“Both countries have instead experienced increases in precarious informal work that guarantees no employment benefits, falling real wages for less-skilled workers, rising income inequality, higher unemployment and — in the case of Mexico — emigration,” he said.

He estimates that Mexico’s manufactured exports rose from 4.3 percent in 1990 to 21.5 percent by 1995, while at the same time, the number of manufacturing workers declined by about 1 percent each year.

By 2005, more than 11 million Mexicans — about 6.2 million unauthorized — lived in this country. That means, at a minimum, 12 percent of Mexico’s labor force resides in the United States, Jonakin estimates.

In terms of net earnings of foreign exchange, “the most effective export Mexico produced — or rather induced — under the orthodox market reforms was the labor effort of its undocumented emigrant workforce,” he said.

The reason is that greater foreign direct investment flows initially expanded the ‘maquila’ industries and generated immediate jobs — but few upstream linkages to intermediate goods production, Jonakin said.

A ‘maquiladora’ is a factory that imports materials and equipment on a duty-free or tariff-free basis for assembly or manufacturing then re-exports the assembled product, usually back to the originating country, he explained.

A flood of Chinese manufactured imports forced many of Mexico’s domestic manufacturing firms to close, and “in spite of exponential increases in manufactured exports in Mexico, the trade balance remained negative and manufacturing employment fell,” Jonakin said.

In Venezuela, petroleum extraction is a capital-intensive industry requiring skilled labor — but it’s not an industry with job growth potential.

“In 1997, when extractive and mining activities accounted for more than 23 percent of Venezuela’s gross domestic product, only 1 percent of the country’s labor force was employed there, and that share remained largely unchanged from 1989 to 1999,” Jonakin said.

As in Mexico, much FDI was used in Venezuela to purchase private — and especially state-owned — firms in the service sector.

In the case of telecommunications, airlines and port operations firms, the work forces were offered forced buy-outs or were summarily dismissed, Jonakin said, often before potential private sector buyers were approached.

Large drops in employment followed the privatization of these firms, and many workers who were rehired became classified as ‘temporary’ workers.

In Venezuela, “the rate of poverty rose from 44 percent in 1988 to 66.5 percent in 1989, and curiously worsened in the mid- to late-1990s, even during periods of growth,” Jonakin said.

“It was in large part due to the failures of free market reforms and their negative impact on people’s lives that Hugo Chavez was elected president of Venezuela in 1998,” he continued. “He subsequently began to reverse many of the earlier policies.”

Jonakin concludes that the patterns revealed in Mexico and Venezuela are representative of the negative impacts that free market reforms have had elsewhere in Latin America.
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