With Latin America Thriving, Nafta Might Keep Marching South

The 1980s were not kind to Latin American economies. Debt crises, ballooning inflation, and slow growth were endemic throughout much of Central and South America. The Caribbean didn't do much better. But in the 1990s, Latin America has been one of the world's fastest-growing regions.

Economists Gary C. Hufbauer and Jeffrey J. Schott of the Institute for International Economics in a new study use seven criteria to gauge the preparedness of countries to maintain free-trade and open-investment policies--the sort that turned around Mexico's economic fortunes and eventually led to last year's North American Free Trade Agreement (NAFTA) with the U.S. and Canada. Their measures include price stability, budget discipline, market-oriented policies, and a functioning democracy. The key finding: Chile, Venezuela, Barbados, and Trinidad and Tobago all rank equally or higher on a scale of "readiness criteria" than did Mexico at the start of NAFTA talks in 1990. Close behind are Paraguay, Uruguay, Bolivia, Colombia, and Jamaica. Brazil, with high rates of inflation and indebtedness, is rated a poor risk (chart).

Because of the region's mostly favorable economics, the pair recommend expanding NAFTA throughout Latin America and the Caribbean rather than negotiating separate bilateral agreements, which take time and could add a confusing set of divergent free-trade rules. And for the U.S., the economists foresee substantial benefits from a Western Hemisphere Free Trade Agreement (WHFTA): an increase in average annual U.S. exports from $24 billion during the 1989-91 period to $106 billion in 2002, expressed in constant dollars. Without WHFTA, exports would still climb to $70 billion, reflecting the region's improved economic outlook.

There would be one downside from WHFTA: In a worst-case scenario, 6.7 million workers in the U.S. would see their wages decline by 8.7%. Even without the WHFTA, however, this group--6% of the U.S. workforce--stands to lose 3.7% in wages because of increasing international competition. The U.S. workforce as a whole, however, would benefit from a slight increase in jobs and wages as a result of the hemispheric trade pact.

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