The original question that I chose to explore for my research project is, "How has international trade affected growth in Mexico and Canada over the same time period?"

In the book, The Dynamics of North American Trade and Investment, Clark W. Reynolds writes, concerning the North American Free Trade Agreement, "One certain implication is dawning in all three countries, given the large and growing amount of exchange between Canada and The United States, and between the United States and Mexico, Mexico is bound to have a major impact on the North American economy, both directly through bilateral exchange and indirectly as changing relations with one North American neighbor affect the other through the FTA.

According to the economist Richard E. Caves, trade liberalization increases efficiency and competitiveness in previously sheltered economies which favors trade growth in both directions (increased exports and imports of similar products for a given sector in each country). This is substantiated by Caves from Canadian evidence: as imports rise, so does investment in the threatened (oligolopolistic) industries with attendant increases in exports and productivity._The economist Richard Harris feels that investment flows, due to increased trade between Mexico, the United States, and Canada are expected to expand in both directions, since exports of complex services and manufacturing call for expenditures on distribution as well as production. He also feels that the ability of each country to respond to domestic and international pressures by improving the competitiveness of its production, raising the education levels of its youth, and improving the technical skills of its population depends increasingly on relations with its continental neighbors.

Given those general statements about the benefits of trade I want to inventigate the economic history of Canada and Mexico to assess the potential impact of NAFTA on their economies. More specifically I want to investigate other changes that need to happen in Mexico to take advantage of freer trade.

I will use two growth models to explain the growth rate observed in the two countries. First, I will use the Sources of Growth model to examine how the Canadian economy has grown over the past twenty years. This model expands on the simple Harrod-Domar model which looks only at changes in capital and labor. The sources of growth model is based on the Neo-classical growth model and relates increases in output to increases in inputs of capital, skilled and unskilled labor, and other variables, lige technological change and institutional changes.

The production function takes the following form in this model:

Y=f(K,L,R,A)

Y=output or national product

K=stock of capital

L=size of the labor force

R=stock of arable land and natural resources

A=increases in the productivity or efficiency with which inputs are used. More specifically international openess of the economy._

Next, I will use the Dual Model of Economic Growth developed by Oscar Lewis to examine the situations that have contributed to the growth in Mexico.

Based on those conceptual frameworks I expect to find the following relationships in the data I have obtained: First, I expect to see a positive relationship between the rate of growth, (change in GDP per capita, measured over time), and the rate of domestic investment. Also, I expect to find a positive relationship between the rate of growth and secondary school enrollment. And finally, I will expect to find a positive relationship between the rate of growth and the openess of the economy.

On the following two pages, I have produced flow chart representations of the two models of growth.

The source of my data is the World Bank, World Tables 1995. I was able to find complete data except for some secondary school enrollment figures for both countries for several years, which were not available. What I have done for the purpose of this project is to extrapolate in the few areas where the data was unavailable.

I use a twenty year time series, and investigate the relationships between explained and explanatory variables by means of graphic models.

I will represent the explained variable oeeconomic growthî by means of the rate of growth of real GDP per capita.

I will represent the explanatory variables by means of:

- investment as a percentage of GDP to represent the accumulation of physical capital and infrastructures.

- secondary school enrrollment as to represent investment in human capital.

- exports as a percentage of GDP to represent oeopenessî of the economy (an institutional variable)

Mexico had been a primary export economy before 1950 --its growth was export led by the production of agricultural commodities and oil. According to the Structuralist School (Raul Prebisch) Mexico had to be considered an economy in the periphery of the world international system. As such its international terms of trade (export prices divided by import prices) would have been falling in the long run. This trend would have induced a growth policy based on industrial-import substitution --protecting domestic manufacturing from outside competition.

Looking at the data it is clear that this phenomenon has occurred in Mexico between 1950 and 1970. During that period Mexico's economy grew even when its international terms of trade were decreasing. The growth was driven by an industrialization process protected from external competition.

But this is just one part of the story. Let us now look at Mexico with the perspective of the Dual Model of development. The empirical premise of this model is that the growth of the modern sector is financed with resources supplied by the traditional sector. The peasantry is paid a very low wage, and manufacturing --in the modern sector-- invests the savings from the low wage into domestic production. From the graph, it is quite clear that before the late 80s, as the modern sector increased domestic savings and investment, (again, financed by the savings in wages), GDP per capita was growing. This was happening at the same time that rural populations were moving into urban areas--as rural Mexico could not create more jobs and therefore generate surplus labor. This rural urban migration was induced by wage stagnation of workers in the rural areas which helped to finance manufacturing in the modern sector.

Canada, began its economic development process much sooner than Mexico, and soon it moved from the periphery to the center with all the rest of the industrialized nations. The GDP per capita is nearly five times that of Mexico in Canada.

From my graphs, in Canada, savings and investment have a positive relation to GDP per capita growth. This savings and investment were not created through lower wages for unskilled workers.

The international terms of trade in Canada, as was the case in Mexico, also had a negative relation to GDP per capita. Ttrade openess, however, had a positive relation to the rise in GDP per capita. So, it is clear that openess to international trade has plaid a more important role in Canada than it did in Mexico.

Although Mexico has a much greater population than that of Canada, it has lagged behind in terms of growth as measured by GDP per capita because it had been a closed economy due to industrial import substitution, but more importantly, because of exploitation of the rural labor force. In the dual economy, the companies with control of the capital have benefited from wages low to finance savings and investment in the modern sector.

In Canada, on the other hand, because it has been more open to trade, its growth has been steady, and continues to grow today. Exports are still an important factor in growth of GDP in Canada, and its exports are in high demand because Canadian have invested in the technology to become more efficient and competitive within the world economy. Mexico still has quite a distance to travel to become competitive technologically with the rest of the world.

_Reynolds, et. al., The Dynamics of North American Trade and Investment: Canada, Mexico, and the United States, 1991, Stanford University Press, Palo Alto, Ca.

_Gillis, et. al., Economics of Development, third edition. p. 47. 1992, New York.

investment has affected the