PROFMEX-Consorcio Mundial para la Investigación sobre México

I. Introduction: This volume provides dramatic evidence that the impact of global economic liberalization cannot be understood without focusing on specific regions, industries, and social groups at particular times and places. So unbalanced and asymmetrical is the current process of international economic integration--involving major restructuring of industries, households, and institutions--that each locality has its own path. Such differences tend to be lost in national averages. The interaction of these separate paths of development leads to a process of structural change that goes beyond general models based on "first-best” assumptions. Such models tend to hypothesize cost-less movements from one "equilibrium" to another, and implicitly assume that winners will compensate losers. The preceding chapters illustrate the kind of practical problems that besiege each locality day by day. They show the need for new policies and decisions that will make the process of integration workable. This comes as no surprise to decision-makers at the local level. But where systems interact, local policies must be coordinated with national and international decisions to avoid unexpectedly chaotic results. This calls for an intervening analysis to provide a framework in which parts can be seen in terms of the whole. Approaches are called for in which the good of the whole only can be achieved by accommodating the interests of the few.

The goal of this volume is to go beyond the presentation and testing of general hypotheses about integration to take an iterative approach to the impact of globalization by looking at selected regions and identifying key issues that call for attention. Whether one is concerned with general policies or specific regional problems, it is hoped that the common orientation used in these case studies as well as their particular findings will be useful. Some of the salient findings force a widening of the scope of future analysis, as well as more in-depth examination of particular problems, issues that are addressed in this introductory chapter. The approach is to provide a new framework to accommodate regional disparities in order to address the problems which arise not only from inertial demographic forces, but from changing resource endowments, technology, and tastes, as well as the external forces of economic, social, and technological, change. The model in chapter 1 on the "political economy of open regionalism" provides a common perspective—one which views each region as an open developing economy needing to foster cooperation among its member units. But each case study that follows reveals the complexity of the process of growth with structural change caused in part by economic liberalization and integration. That process goes well beyond the dimensions of the introductory model, opening up new avenues for exploration as well as illustrating the need for sharper analysis of specific relationships in the next stage of research. [1]

The three North American economies of NAFTA offer almost too wide universe from which to take the first samples. [2] The regions selected for observation represent three general categories: major metropolitan areas (New York, Mexico City, and Toronto); border regions north and south (Cascadian; San Diego/Tijuana; Arizona/Sonora); and lagging regions (Oaxaca; Newfoundland.) This chapter examines the key findings of each of the cases in that order. Perhaps the first and most important finding, true of all cases, is that the direct impact of trade and economic liberalization is swamped by the endogenous forces of demographic change, macroeconomic cycles, and shifting technologies (which would evolve with or without "globalization" but which are speeded up by economic integration.)

But there is a second finding, sharply evidenced by exchange rate” meltdowns" like the Mexican peso crisis of 1994/95. The new technologies have integrated financial markets even faster than those for goods and (non-financial) services. This sudden "silent" integration of financial markets carries with it consequences for real trade and investment. Open international markets impose iron laws on monetary and fiscal policy and limit the degrees of freedom of macroeconomic decision-makers. Even wage policy is vulnerable to more fluid trade and migration patterns. Hence the resulting structural changes in production and employment reflect more flexible real and financial markets rather than government fiat. In fact, decision-makers find themselves limited by international events in today's world, even at the cost of lost autonomy, autarchy, monopoly, and monophony power. They are forced to accept as given the exogenous forces which blow, like trade winds, beyond the action of any principality or power. Meanwhile it islet to regional decision-makers to deal with the local impact of national policies on specific firms, industries, and income groups. The irony of globalization is that development economic decision-making has been forced to shift from the national to testate and local level and to sub-regional institutions.

The first step is to draw back from easy generalizations and focusing on specific persons and places—while at the same time remaining committed to the overall goal which is to achieve "gains from trade, finance, and development” The goal of policy is to ensure that those gains are as consistent as possible with social equity and environmental sustainability. This is particularly important for marginalized sub-regions, income groups, and economic activities which are either left behind in the process or adversely-affected by globalization. The evidence indicates that even though the process of evolution may be prolonged by astute fiscal transfers and growth-oriented public and private sector support and remittances, most will eventually need to transform or die. In the case where the needed transformation calls for resources that can only be mobilized in the public domain—where the funding of externalities is resistant to the profit motive—new incentives and patterns of public/private sector cooperation (joint ventures) may well be needed. This appears to be essential to sustain growth with equity even for the most privileged subregions, including those on the forefront of the new technologies such as Silicon Valley.

Some generalizations may be made about the chapters. They are introductory in nature, holistic, and heavily descriptive. The choice of regions to be studied was more arbitrary than scientific, tending to make use of research groups that were already committed to analysis of the area concerned (so as to take advantage of their enormous accumulation of knowledge, skill, and insights into regional peculiarities yet with a global vision), indicating the need to go further in the next phase and to add regions such as the Texas/Mexico border region; a Midwestern U.S. urban area; a southeastern U.S. region; one of the western Canadian provinces (such as Alberta); more leading and lagging regions from Mexico, not to mention cases from the broader Caribbean Basin and South America. In addition, it is important to go beyond this hemisphere for comparison and contrast with the sub-regional impact of integration in Europe, Asia, the Near East, and Africa.

Some localities seem to be more natural candidates for integration than others. This is not discussed in the chapters but there seems to be a pattern in which complementarities among component sub-units plus agglomeration economies from clustering of similar activities matter to the success of the integration process. The Ricardian international trade concept of comparative advantage suggests that under certain conditions all regions gain by trade. But if one allows factor movements as well as free exchange of goods and services it is quite possible to envision some locales (generally remote, underdeveloped, and with scarce resources) which may lose both labor and capital and return to a state of wilderness. There is also no evidence that all regions experience the same gains from trade, and some may even retrogress once all barriers to exchange (including those affecting migration and investment) are lowered. The assumption that all regions will grow and prosper with integration is not supported by the evidence to date—even among the cases in this volume.

In short, there is a lack of in-depth analysis of economic and social integration which results from the removal of barriers to exchange (i.e. movement toward "full exchange" of all goods and factors). But some of the chapters make important steps in the direction of the role of trade in their recent history. Most noteworthy in this regard are the studies of Toronto (which explicitly tests the relative importance of trade, technology, and domestic demand and finds that trade, while important, is in third place); New York (which deals with leading and lagging sectors in trade and their importance for both employment and fiscal stability); and Mexico City (which shows how the shift from import-competing production to serve a captive domestic market, to trade and investment liberalization, has dramatically impacted local manufacturing and reduced incentives to invest in the metropolis.) All of the studies touch on the restructuring that trade liberalization has caused, and especially those of the border regions—but here again the force of change is less that of intraregional exchange than of new patterns of competition with the rest of the world in which the region is required to participate.

Hence, it is necessary to go beyond the export-led growth model to one which includes attention to domestic demand and the related pattern of income distribution—both of which are affected by regional policy in response to national liberalization measures. This includes the creation of infrastructure, skill formation, and investment incentives. The tightness or slackness of local labor markets will be impacted by access to low-priced labor-intensive imports which compete with regional production. Local job markets reflects not only the decline of less-competitive sectors (and associated layoffs), but also job-creation in newly competitive activities, lagged patterns of demographic growth (especially important in Mexico, given its earlier high fertility rates), and migration trends (especially relevant to border regions north and south and to major metropolitan areas—which act as magnets for those in search of improved levels of living, and who feel themselves left behind by structural changes and dislocations in their place of origin Most of the chapters ask whether or not it is possible to stimulate domestic demand in a specific locale and to increase exports to the rest of the domestic economy and abroad. Sub-regional development policies must be undertaken in a non-inflationary manner, subject to the iron laws of macroeconomic policy under globalization.

One of the subjects requiring much more attention in future research is the role of finance as a vehicle for integration on a region-by-region basis. In all three countries capital markets have experienced increased national integration, liberalization, and globalization. To what extent does today's new capital market openness push transactions to the short end, especially in markets which are subject to greater risk from inflation, exchange rated evaluation, and other elements of instability (i.e. "emerging markets") that cause long-term borrowing to face extremely high real interest rates by any reasonable forecast? This could favor consumption-based lending (e.g. credit cards and other forms of consumer credit) over investment. Re-privatization and internationalization of the banking system in Mexico in the 1990s has already produced a tendency to move financial capital toward urban centers and away from regional financial institutions, tending to work against investment lending in outlying areas (and especially in lagging regions) although this remains to be studied in more detail. In principle the process of financial liberalization should broaden the degrees of freedom for trade and investment funding. It should even permit regions with greater growth potential to be "net borrowers" from the rest of the nation and abroad, raising what might be called "the region's current account deficit" be providing resources for increased investment and export expansion (as capital flows into the region in response to higher returns than elsewhere.)

Increased freedom of financial flows among regions should also make available working capital and investment in startups in response to new profit-making opportunities. This calls for what might be termed a "regional venture capital" response. However the institution of venture capital and related risk-taking tends to be concentrated in high-tech areas rather than in emerging market economies. For the latter, financial markets tend to be especially incomplete or unresponsive to the needs of small investors. They tend to have less collateral; more need for managerial and technical assistance, and impose higher transaction costs per unit of lending than wealthier borrowers in more developed regions. In this case positive externalities exist for regional policies that would facilitate financial market completion in particular localities, including access to investment in physical and human capital. There is an important role for the formation of sub-regional institutions both public and private that could bring about a broader distribution of the gains from growth.

The studies show that changes in the structure of economies matter importantly to their subsequent paths of growth and distribution. Dynamic comparative advantage can be much different from the static competitiveness of a region. This is why it is so important for decision-makers to look ahead and plan for change. The more open the economy, the more crucial it is to engage in some aspects of sub-regional planning, as decision-making on specific investments shifts from the national to the regional level, and as regions find themselves more rather than less-integrated with international markets. The role of sub-regional planning is less that of predetermining growth and setting targets and more that of exploring realistic options for structural change, as well as providing facilitating measures to maximize the locality's competitiveness and social well-being—as national and global environments change. The extent to which structural changes are due to new technologies, falling transport and communication costs, and institutional lowering of barriers to exchange remains to be studied on a region by region basis. The chapters refer to the importance of such factors, but in most cases there has not been the opportunity to go beyond observations—highly suggestive as they are.

Staples-based growth has been important to many regions at the outset of development (e.g. Arizona/Sonora; Cascadian), but for others growth has-been stimulated by manufacturing and services including those activities with new links to the rest of the world such as the NAFTA and Pacific Rim. San Diego/Tijuana, Toronto, and New York are all responding to the new stimuli from globalization even as they undergo restructuring from older patterns of trade and investment. However it has not been possible in most of the studies to spell out the mechanisms involved in the new patterns of trade and development, although in some—as we have seen—their consequences for employment and urban growth have been presented.

Demographic and demo-economic patterns of change, including migration, are not developed in terms of causality, although the importance of changing demographic structures to differences in regional growth paths is evident in the results to date. New immigration tends to favor large urban areas (Toronto, Mexico City, New York) while at the same time all three are experiencing a movement of middle and upper income groups to the suburbs. This works against distributional policies that depend on fiscal transfers, education, and infrastructure support. On the other hand, there is increased migration from less to more-rapidly developing sub-regions.

Dissimilar approaches in each chapter limit their potential for comparison in this first phase of analysis. This was almost assured by the need to "piggy-back" the research for this volume on work already underway by different groups in different regions—owing to budgetary limitations and the step by step requirement for regional analysis that begins with scenario-building. Moreover, the lack of comparable data sets across all regions was a limiting factor in direct comparisons. As it is, the high quality of personnel involved, their disciplinary heterogeneity, and their unusual commitment to the project made it a wise choice to draw from their expertise and to take a wider approach at the outset despite the limitations. As a result, what had initially been construed as a single project opens up an area that calls for much additional follow-up. It is hoped that there will be second phase to this research, intended to focus on specific issues within a holistic analytical framework beginning with the elements in chapter one, as modified by the findings of the subsequent chapters and developments in what might be called the "new regionalism" in global perspective. This will ensure a more systematic comparative approach leading to a better understanding of the socio-economic consequences of regional integration and their policy implications in today's world.

The authors have sketched an interactive and inclusive portrait of a city in flux, and the challenges that poses to local and regional governments, the surrounding state administrations, and the federal government. Some of the issues raised (echoing those from the studies of Mexico City and Toronto) are:

(g) How does one determine the political mix of responsibility for metropolitan budgetary stability: Federal/state/regional/local (how much decentralization of power)?

It should be noted that for a regional economy which includes several local and state jurisdictions, there is no single constituency or set of institutions in which to resolve these issues. Their resolution would tend to rely on political decision-making that affects the economy of the entire region though in different ways for different subregions. [3] With globalization and economic liberalization, the conditions of supply and demand are continually changing—and the pace of change increases as economies face increased international competition and the impact of today's accelerating technologies. Integration offers new "gains (and losses) from trade" calling for rapid responses that are hampered by outmoded barriers to trade and investment. Globalization sharpens the opportunity cost of market distortions imposed to satisfy particular interests (including restraints on trade, migration, and employment) by hitting at the bottom line and by taking away jobs and tax revenues. Integration with liberalization is usually assumed to reduce the scope for directly unproductive "rent seeking" and restraints on trade by those who are forced to share power with those from outside the region. But the liberalization process may also open the door to new forces of monopoly and monopsony power that must now be addressed in a more complex environment involving broader constituencies that cut across state and national boundaries. The New York Metropolitan Area study raises such considerations and opens up issues that goes well beyond those presented in the "model" of chapter one.

Always a city of immigrants, today the population of NYC is almost one-fifth foreign-born. This sounds like San Diego (and to some extent Toronto.) Located on the trade routes of the international labor market and offering a large pool of actual (if not potential) jobs, plus networking of successive migrant households, these metropolitan areas characterize the "new demography" of international population flows from emerging markets to advanced industrial destinations, brought about by both "push" as well as "pull factors.” These include accelerated population growth, inadequate resources, and the lack of economic opportunity in sending areas, as well as falling travel costs, improved communications, and the de facto "opening" of labor markets in receiving areas to all comers. The process of attraction is driven by relentless competition among enterprises confronted with global cost reductions, price declines, and challenges from outsourcing. However even for profitable enterprises, it reflects new opportunities to take advantage of softer labor markets by replacing higher with lower-wage employees (including temporaries) for similar jobs, in order to lower the wage share of value added as raise the return on capital. It also indicates weakening barriers to entry (on racial, ethnic, or union lines) and greater responsiveness of firms to opportunities to pay low entry-level wages, even in the previous bastions of labor power such as Mexico, New York, and Toronto.

Not surprisingly the structural changes that this introduces, in terms of reduced labor welfare and bargaining power, leads to major opposition to economic opening from unions and populist politicians on all sides of the political spectrum. The need to be responsive to present voters, while at the same time attempting to attract new investment and to keep old firms from leaving or outsourcing jobs, creates apolitical-economic challenge for urban governments that is increased as the economic space of the core cities expands into the suburbs. Major cities struggle to offer tax breaks and other incentives to investors, even as they are pressed to fund the rising cost of social services and infrastructure out of a shrinking tax base--while more affluent citizens move to the suburbs and footloose industries seek lower tax havens. While this is nothing new, harkening back to the competition between New York and New Jersey in the past century, and to the hollowing of center cities after World War II, it is exacerbated by the changes introduced by the new technologies and greater flexibility of international trade and investment.

In New York the authors identify five major industries that are experiencing economic concentration--and in some cases relocation--accompanied by job loss in the area particularly in the inner-city core for a number of large firms. Even in cases where the region has a global comparative advantage (e.g. banking and financial services), employment is being cut by automation and mergers. The fact that the region has had relatively high wages even by U.S. standards has hurt its competitive advantage in labor-intensive industries such as textiles and garments, so that between 1989 and the end of 1995 the New York region experienced the work force. While levels of personal income which showed earlier declines seem to be recovering a bit—along with the absolute number of jobs—New York appears to be an example of” downward convergence" in the lower echelons of the labor market in comparison with other regions of North America.

In New York "export-led growth" has been generated by four main sectors:(1) finance, insurance, and real estate (FIRE); (2) culture and media; (3)tourism and recreation; and (4) computer-related activities. The city reveals a growing "computer intelligentsia," according to the authors, with locales such as SOHO now being called "Silicon Alley." This is associated with a shift in the demographic structure in which more long-standing groups are being replaced with younger persons and new waves of immigration. A new "computer intelligentsia" is forming. But the shift toward more "high tech" activities is putting severe demands on the area's infrastructure, calling for major expenditures in new technologies, electronic networking, and education of a work force capable of handling the evolving demands of the computer age. This affects every area of employment.

Hence the positive benefits from new export expansion carry with them major costs, many of which are externalities that the public sector is best-equipped to finance. Yet, as we have seen, the creation of fiscal incentives for new enterprises, facing increased competition from globalization, cuts into the tax base. Meanwhile increased pressure for entitlements for an aging resident population, exacerbated by rising unit costs of health care and social services, increases the need for government expenditures. All of these forces work against budgetary balance, even as globalization forces fiscal prudence on harried urban administrations. For all practical purposes metropolitan New York represents two metropolis, one consisting of a more youthful, growing, high tech and immigrant-oriented potential growth pole—and the other a sinecure for its aging population and under-skilled minorities. These groups that compete with each other using their respective political voices. Many older residents and less-fortunate newcomers demand entitlements and a growing share of public expenditures, while business, the affluent, and younger groups of skilled workers push for fiscal conservatism. Meanwhile, the rising interest costs of debt service, reflecting the growing budgetary gap of recent years, has eaten into the city’s revenue base.

Increasing fiscal problems hold for Mexico City and Toronto as well and seems to be a generalized phenomenon of urbanization in the new era of globalization. As openness and integration lead to downward wage and income convergence in the job market (for all but those at the top end of the skill ladder), pressures increase for tax relief and localized entitlements. Yet the new technologies and trade patterns call for costly modernization and expansion of infrastructure. Politics have tended to polarize, changing party constituencies and alliances—and attempts to deal with the problem seem to make things worse by encouraging the flight of many industries to other locations which offer lower taxes, lower wages, and lower costs of infrastructure-including maintenance and upgrading. To the extent that major cities have over-expanded, this transition may reflect a favorable element of diffusion (the spreading of income and productivity to a broader social and sub-regional base)—but if this occurs at the expense of rising poverty, lower quality of life, and increased insecurity for those remaining in the urban core areas, the cost of diffusion is clearly "downward convergence."

The New York study is carefully and comprehensively researched. It boldly illuminates problems facing the largest urban complex in the United States, and calls attention to similar issues in the two other cities of this study, Mexico City and Toronto, and on major urban entrepots around the world enjoy benefits and bear costs of globalization. Here structural change has been overwhelming, altering patterns of demographic growth, widening income gaps, forcing the relocation or demise of many industries, and giving new life to activities that service the growth of international markets including finance, merchandising, and the media. In the process, the population of New York City has been transformed, adding an increasing share of Hispanics, Asian, and Eastern Europeans, while the traditional white Anglo population is moving to the suburbs, to the South, and to the West. The city's black population, which came up from the South during and after World War II, is now reversing its flow as the quality of life elsewhere begins to outstrip that of the metropolis.

It should be noted that there is no single arena in which to resolve these issues, which are political-economic in nature, and differ from region to region. Integration changes the conditions of supply and demand and offers new "gains from trade"(exchange), revealing the opportunity cost of market distortions. But it also opens the door to the possibility of new restraints on trade as more powerful forces from elsewhere are able to integrate with local activities and even move outside of the region or threaten to do so unless they are offered better conditions. To some extent the New York experience appears to present new opportunities for non-competitive behavior, raising issues that go well beyond the regional "model" of chapter one.

Five major industries are experiencing economic concentration and in some cases relocation for a number of large firms. This has accompanied a loss of jobs in the area and particularly in the inner-city core. Even in cases where the region has a comparative advantage (e.g. banking and financial services) jobs are being lost to automation and mergers. The region has had relatively higher wages—and this is hurting its competitive advantage in labor-intensive activities so that between 1989 and the end of 1995 the New York region had the worst job loss since the Great Depression. The region's share in national employment is shrinking (as with Mexico City)—yet there has been net job growth. But there is a major shift to new lower-paid and less-skilled employment in the services and in small and medium enterprises of the private sector, vis a vis larger firms and the government.

The chapter on New York provides detailed information on the changing patterns of production, employment, trade, fiscal policy, and infrastructure. It weaves together these trends, indicating that there will be an increasing need for region-wide political-economic planning and cooperation—if the mix of economic potential and social pressures are to be reconciled. Governance seems to be a major issue; and the richness of New York in knowledge-based skills (which are capable of earning a relatively high return) applied to "cheap" information services is suggested as a way to finance its increasingly costly infrastructure and earnings requirements. It is hoped that with the new directions of growth the quality of life in the metropolis will increase, rather than decline, and that "upward convergence" for a broad segment of society will again be possible. However the study presents a challenging research agenda directed not only at sustainable development but an improved quality of life (focusing on new areas of growth; the need for health and hospital workers; and improved education)—that should be part of the goal of the next stage of this project.

Mexico City: Here the focus is on fiscal challenges—due to the expertise of the authors and research team linkages to the Finance Secretariat in Mexico City's urban administration. [4] The Mexican metropolis has no counterpart in either the U.S. or Canada, given its high concentration of national production and population, although New York's Metropolitan Area has similar characteristics. The study maintains with statistical evidence that Mexico City generates more fiscal revenues than it receives, although this position is disputed by other regions of the country. The recent budget deadlock in the Mexican Congress is testimony to the debate over this issue. The authors argue that the metropolis is paying a "tax" (the excess between revenue and expenditure)to favor the leveling of per capita outlays throughout Mexico. Revenue-sharing between Mexico City and the provinces is an old issue in Mexico, related to the city's ability to deal with burgeoning population. While many have come from outlying regions to add to the swelling urban population, Mexico City's outlays on urban infrastructure and social support, low as they are, tended to further the magnet-like "pull" factors on migration from rural areas—just as the recent recession, increases in charges for heavily subsidized urban transport and services, and concerns about overcrowding served to reduce and even reverse population flows to the Federal District core.

There is the likelihood that Mexico City has gone beyond the point of positive externalities of agglomeration at least for most of its industries, and the net effect of additional population growth (if one includes environmental and other quality of life elements) is probably negative. Hence relocation of its population on a voluntary basis (by creating similar and less-costly urban support systems and subsidized services elsewhere) would probably increase productivity and welfare in the country as a whole. This is not the result of any careful calculus, but it arises from an assessment of the general conditions of Mexico City today when compared with localities to which production is already relocating. The reduced role of the state in the economy has made it less-important to locate industry and trade in the central city near the government agencies on whose support profitability used to depend. Urban congestion, pollution, and security problems are increasing the tendency of upwardly mobile households to respond to incentives to relocate elsewhere. This has been an important motive for the relocation of elites and middle-classes to places such as Tijuana. This is similar to New York City and its surrounding metropolitan area—and dramatic improvements in communications technology and services have also lowered the opportunity cost of moving to places such as Connecticut—or to relocating "back office" systems as far away as the mid-west or far west.

Zeroing in on urban finance in this chapter opens the door to a number of more basic structural problems which deserve further study in the next phase of research. The budgetary approach taken has the advantage of being able to develop more detailed examination of interdependence-related issues as they affect fiscal policy but the disadvantage of leaving out many other dimensions which could prove important in assessment of the impact of changing patterns of integration. Changes elsewhere associated with liberalization and globalization have reduced the scope for endogenous growth policy of the metropole. Other regions are gaining degrees of freedom for decision-making well beyond that of fiscal federalism. The brief description of its salient economic characteristics, as provided by the authors, helps one to make a broader assessment of Mexico City's fortunes.

The paper focuses on two periods, 1983-88 and 1989-94, beginning with the aftermath of the 1982 crisis which found Mexico over-dependent on the public sector and on expected (but unrealized) surpluses from oil discoveries that had propelled growth since the late 1970s. The situation in the early1980s underscored the need to restructure Mexico City's fiscal system just at the time when it was needing more, rather than less, revenue to maintain any semblance of support for a burgeoning population. The end of the second period marked a crisis(1994/95) which highlighted the strengths and weaknesses of fiscal restructuring. This led to the city's first mayoral election and to a political turnover in administration (1997) in which the PRD assumed power in the Federal District, the PAN won many suburban posts, and there was a resulting takeover (from the PRI) of all major elected posts by opposition parties from the left and right.

Hence the major decision—what degree of funding at the Federal level should be apportioned to the Federal District (D.F.)--is now complicated by party politics. The Party of the Democratic Revolution (PRD) Mayor of Mexico City,Cuautemoc Cardenas, is expected to challenge the successor to ErnestoZedillo who will be the PRI's candidate for president in the year 2,000.Too much Federal support for the D.F. budget from the PRI-controlled national government can strengthen the opposition; too little can weaken the PRI's dominance which is already being challenged in many parts of Mexico, partly because of problems addressed in this volume.

The tradeoff between major urban development and that of outlying regions and smaller cities becomes vital, not only for Mexico's overall growth and welfare, but for the country's democratic evolution and long-term stability. This is not as sharply defined in New York, though the mayor and governor, even when they represent the same party, have different constituencies, class interests, and dispositions to favor social programs (that are disproportionately large in NYC)—tugging in opposing directions for the state's fiscal resources. But there is also a federal dimension of revenue-sharing, in which national funds moved to New York State do not necessarily benefit its majority—and because the New York metropolitan area itself includes other states with their own revenue-sharing problems. The tug of war between the city and state for federal revenue-sharing in New York is quite different from Mexico's Federal which has its own direct access to federal funds—though it certainly affects those suburban areas of Metropolitan Mexico City which extend into several surrounding states. Such conditions illustrate the problem of subregional integration, in which contiguous economic zones do not have common political or institutional mechanisms that can take a holistic view of urban growth problems and the need for common approaches to fiscal policy and development incentives.

Demographic growth, although slowing, remains high in Mexico City—which now holds about one-sixth of the nation's population (compared to one-fourteenth for the NYC Metropolitan Area.) As the birth rate has fallen, the age structure is shifting toward those in working years. This makes economic growth crucial to the city's future and increases the likelihood that it will become a source of, rather than a destination for, new job-seekers. Hence employment openings in response to the burgeoning supply of labor will be crucial for social welfare and stability in the core city of Mexico and will determine the extent to which it will itself increasingly become an entrepot for migration to other growing points—including the north and west. During the 1980s Mexico City had already begun to be an important source of migration to the U.S. and this may be expected to increase. Along with jobs, public transportation infrastructure and mid-income housing are listed as the key areas for public sector support to complement private sector growth in the Mexico City area. As in the case of New York, the need includes the maintenance, shoring up, and replacement of depleting infrastructure—a very large drain on the budget just to keep the city in the same condition as before—plus new telecommunication networks and health care systems to serve its aging population and new migrants.

For New York there is accentuation of a dual class-structure, sustained by a new pattern of immigrants from "developing regions" outside of the traditional European sourcing areas, consisting of Latin Americans, South and East Asians, and to a lesser extent Africans, as well as immigrants from the former "Eastern Bloc.” Mexico’s urban migration remains largely domestic in nature—though from more distant regions—and its poorer population is filling outlying areas, causing a mushrooming demand for subsidized water, waste disposal, transportation, housing, health, education, and other social services.

This places a major strain on the city's budget at the very time when existing resources are being squeezed by fiscal cutbacks at the Federal level as well as high real interest rates in response to tight monetary policy. As with NYC and Toronto industrial employment is down as a share of total jobs in the city, while services, commerce, and transport dominate—with one-fourth of the jobs in the public sector. Needless to say, as the government goes, so goes Mexico City's job market as it presently is structured. Investment is moving away from the core city, following the disincentives of rising costs of D.F. location and falling benefits of being near the (weakened)government agencies. Labor costs are lower elsewhere, especially considering the taxes paid to sustain urban infrastructure in an already-overgrown metropolis. Environmental concerns also encourage location of some industries elsewhere. Moreover the power of unions is less outside of Mexico City—and the cost of supplying urban demand for goods and services from more distant locations is falling with the new transport and communication technologies.

Opening of the national economy, according to the authors, has "weakened the traditional engines of development" for Mexico City—by eliminating a captive internal market and widening the access of consumers to imports not only from NAFTA partners but from the lowest-cost suppliers in the world (including China, Korea, and South East Asia.) The astonishing growth of black market commerce since liberalization suggests that contraband may also be increasing, as lower transaction costs make it more profitable to circumvent the already-lowered legal barriers to exchange. So as demand soars, production atrophies in the core city. And exchange rate policy which affects the relative price of tradable versus non-tradable (the real exchange rate as it devalues increases the tradable/no tradable price ratio and favors import-competing goods and services, and vice versa) has not helped during the periods of gradual revaluation of the peso/dollar exchange rate—after sharp adjustments for devaluation in 1982 and 1984. Hence trade liberalization disincentives for domestic manufacturing (by lowering protection barriers) have been augmented by de facto revaluation of the peso (causing it to slide more slowly, against the dollar, to "anchor" domestic prices which tend to rise faster than those in the U.S. or Canada.) Capital inflows in response to tight monetary policies have added to the peso valuation—relieved only in the crisis periods—and forcing structural change in Mexico away from the kind of "protected” production that helped to spur Mexico's growth during the "miracle" years of import-substituting industrialization.

All of this may well be good for the economy, but it is hard on the central city and its budget—which is simply a reflection of structural changes and the related policy shift from protection to openness and from public sector command economy to one in which the market is allowed to work more freely. Meanwhile, Mexico City has become a haven for those caught in the process of structural change and in the shifting labor market, and especially those younger cadres who have left the lagging rural regions in search of a better life. This is a phenomenon that is observed in all so-called "emerging market" economies, from China to Brazil, but it is particular important for Mexico which needs to absorb labor in higher productivity jobs if it is to realize its market potential.

The consequences for those responsible for combining growth with the public interest (including education and training in the forging of a new” social compact") are enormously challenging. How do you bring about structural change, by allowing incentive structures to render unproductive important parts of the economy in order to spur others? How do you adjust to major international shifts in the pattern of production, distribution, and, at the same time, provide households with a sense of involvement, social well-being, and hope for their children—avoiding the despond of underemployment, urban overcrowding, deteriorating health and sanitary conditions, and criminal activities in one's own neighborhood? What can be done when this is accompanied by a sharpened view of luxury and privilege on the other side of the freeway? One does not need moral imperatives to recognize that middle-class self-interest (not to mention that of a growing elite) demand the competitiveness and stability that comes from shared development—especially when the mobility of capital is growing, infrastructure is decaying, and the alternative is to move to safer havens abroad.

The chapter calls for greater participation of all citizens in the fiscal process. This requires improved city-federal cooperation, including the mushrooming barrios and affluent suburbs that fall outside of the Federal District. Owing to recent political developments in Mexico City, the challenge is even greater since the mayor is no longer a federal appointee and the broader urban area has tended to polarize between the conservative PAN party in the middle-class suburbs and the PRD in the barrios. In Washington D.C. there is a similar problem, though the relatively much smaller Federal District of the U.S. faces a much greater fiscal and social crisis than Mexico City, while the suburbs of Washington enjoy expanding prosperity. This growing urban gap, and its resulting political challenge, is a phenomenon occurring throughout North America that puts the situation of Mexico City in perspective.

The U.S. Congress maintains a strong voice in the fiscal conditions of Washington D.C., even as Mexico City has now been given more leeway regarding its budget vis a vis the Federal Government. But in Mexico the national "fiscal coordinating pact" is much more like a zero-sum game owing to the gigantic size of the capital city. With the PRI no longer controlling Congress, there is an increasingly strident call by the states for a larger share of the "pie," particularly in the northern border states. The Mexico City metropolitan area has within its territory middle and upper income localities which had previously benefited from major subsidies in infrastructure and public services, including energy, water, sewage disposal, transport, and communications. Privatization and increased user fees have already augmented the tax base. The location and easy identifiably of poverty areas make targeting of subsidies possible. Hence there is the potential for urban fiscal policy to become more distributionally-oriented in the future in terms of both taxes and expenditures, provided that disparate constituencies are able to reconcile their very different interests. But the allocative effect of new taxes and fees, and their viability in a nation attempting to democratize and decentralize, in the face of competitive international pressures, has yet to be fully studied, according to this excellent report.

Greater Toronto Area: The Canadian experience has many parallels with the other two major urban areas presented above. However the authors have gone somewhat further in actually engaging in econometric estimation of the impact of trade on urban development in the Toronto area, vis a vis domestic market swings and the structural changes that have been brought about by technological innovation. Moreover there is a much more detailed examination of the political evolution of suburban Toronto is a vis the urban core in this study—which suggests the potential for such analysis and its reconciliation with the process of competitiveness and economic change. In the future it would be useful to explore the fortunes of adjacent regions south of the Canada-U.S. border, including adjacent urban areas in Michigan (such as Detroit), upstate New York, and cities of the U.S.Midwest that were hard-hit by forces of the shifting international market and the pattern of industrial change (especially the auto and auto parts sectors, which have prospered in terms of NAFTA trade and investment, but have created major problems for some U.S. cities and opened up new opportunities for others.)

This chapter has three main sections; the first two address the political challenge of reconciling the interests of the Toronto core and its expanding surroundings; the third deals with major forces bringing about economic change in the Greater Toronto Area (GTA). The impact of trade, technology, and demand on the region are subjected to rudimentary econometric tests for the periods 1976-86 and 1990-92, two periods associated with a major trade cycle and structural change—in which the growth of the GTA is examined under different counterfactual hypotheses of "what might have happened" if the economic structure had not changed vis a vis observed performance. The results are used to predict what might be expected to happen in the future.

One of the major findings is that the structural change from opening up of the regional economy through the Canada-U.S. Trade Agreement and NAFTA has-been significant. A surprising and encouraging result is that the greater Toronto economy, which used to be associated with a considerable amount of import-substituting production of goods and services, turns out to have benefited from the greater availability of low-cost imports since trade liberalization. Increased access to outsourcing, while costing some jobs, has permitted firms in the region to restructure along the lines of increased global competitiveness leading to net gains overall. This is what had been hoped by ardent free-traders, but the study seems to reveal that for Toronto it did in fact happen—though with considerable dislocation and disproportionate population growth into the greater metropolitan area and away from the central core.

Part of this pattern of urban spread is due to an unbalanced tax structure in which property taxes are much higher in the core than the periphery—financing infrastructure and services which seem to have provided low-cost externalities to those living in the lower-taxed suburbs. This appears to be a universal phenomenon as noted above for both the New York metropolitan area and greater Mexico City.) How important is the "free-rider" problem of suburban development that depends on the central city to support the economic base (e.g. high wage employment of executives and staff who work in the city but live in the suburbs) on which the metropolitan area depends? Is it sustainable or is it likely to lead to a collapse of the inner core on which the suburbs depend? Is there a political solution to the expenditure-sharing problem and the related tax-sharing requirements of urban/suburban symbiosis? These are issues which the study highlights and which must be explored in greater detail in the future.

With regard to its trade patterns, Ontario itself runs a trade surplus with the rest of Canada that tends to offset its deficit with the rest of the world. The Greater Toronto Area (GTA) was much harder hit than the rest of Canada in terms of jobs lost from the 1990-92 recession, but the resulting restructuring and recovery has-been faster and more sustained than the country at large. This suggests that in some respects central cities may be in a better position to shift their economic base (faster) than other regions—perhaps in part because of their greater access to financial capital and a pool of available labor with a wide range of skills that can readily adapt. This is the other side of the coin for major metropolitan areas when faced with new challenges; they may well have more flexibility and growth potential, but they also have more traditional activities to cut back on, forcing them to deal with a large population that is to some extent displaced by newcomers who are more employable. (This is reflected in the "stubbornly" high continuing unemployment in the Toronto region.)

The regional trade analysis undertaken by the Toronto study, which deals with inter-regional as well as international trade flows, best reflects the approach proposed in the conceptual chapter of this volume (chapter one.) In future work on the new regional approach to trade and development, one expects that a specific locality’s comparative advantage will be reflected in the pattern of production and employment, not only among countries but also within them. This will be affected by macroeconomic policy. For example, during the period studied the downswing in fortunes of the Toronto economy were related to anti-inflationary policy at the national level. Attempts to fight inflation by tight monetary policy raised the value of the Canadian dollar working against export-led growth and encouraging imports. (More recently the Canadian dollar has fallen sharply, reversing the impact on trade.) Canada's tight money policy and revalued dollar had an adverse impact on localities such as Toronto which were vulnerable to the competitiveness of the country's exports and the price of competing imports. The consequences for the Toronto economy are covered in the chapter. However the ultimate result was that restructuring plus regained fiscal stability at the macro level ultimately permitted Toronto to eventually benefit from trade-related growth, once the Canadian dollar had fallen to more competitive levels.

The affect of Toronto's restructuring in response to changing comparative advantage and macroeconomic policy had a sectoral impact on employment that is outlined in the chapter. As in New York, clerical positions were lost in both manufacturing and services—driven in part by globalization but also by the advent of new information technologies. (The very technologies which have fostered "globalization" by reducing transaction costs seem to have hit urban employment, not as a result of international competition per se but as a consequence of the new productivity-enhancing and hence labor-displacing technologies. While this expands the scope for new job-creation, to make use of displaced labor, the adjustment takes time and may occur elsewhere than at the original location. Hence the regional consequence of globalization is the internationalization of both production and employment and regional dislocation—which could dampen the growth of central cities but which may also increase the disposition of labor to migrate from lagging regions toward the big cities which are believed to be "new job" centers (the existing centers and their surrounding regions act as magnets—even as they attempt to deal with their own misemployed.) The resulting labor market asymmetries may lead to a decline in real wages and incomes of those workers must vulnerable to dislocation from previous jobs, along with an increase in real wages and incomes of those migrating to the urban centers from a lower base. The net effect appears statistically to be "downward convergence" —but it represents a composite of two separate components of labor supply, responding to changes in the structure of labor demand.

The authors of the Toronto chapter provide evocative results in their conclusions, indicating that during the two periods the relative importance of globalization per se was below that of technology or the business cycle downswing—and in the second period (1990-92 compared with 1976-86) the recession takes preeminence over technology. [However it may be said that technology itself led to the conditions that forced restructuring and contributed to the recession in the second period. The eventual recovery of the Toronto area may be a bellwether for those economies—like Mexico City—that must endure a trying period of restructuring before emerging in a new wave of growth.] The study makes a sharp point that is worth emphasizing in general—namely that domestic demand (the non-traded sector) is very important as a contributor to the overall development process—and it can be badly hit by the restructuring process.

The results of the Toronto study show that it is essential for those interested in the growth of metropolitan areas to pay attention to expansion paths that stimulate a balance between domestic and foreign demand—and not be complacent solely with external "engines of growth." Exports alone will not be sufficient to sustain the demand for nontaxable on which employment depends (and which contribute to the widening of income distribution, rising real wages, and stability.) Upward convergence requires a two-pronged strategy in which on-tradable activities prove to be far more than just a "multiplier.” They are important in their own right. Otherwise "trade-led growth" by itself can lead to downward convergence or even divergence between returns to labor and capital. The study also shows that business cycles play a major role in regional development—challenging the new theories that growth can take place in an uninterrupted path; instead it shows that even growth induced by the new wave of technologies leads to structural changes that have a major destabilizing impact that needs to be addressed by macroeconomic policy (but the openness of economies makes such policy much more difficult than simple closed economy macro-economic analysis would suggest.)

Not surprisingly the literature is somewhat inconclusive and even controversial as to whether globalization is leading to upward or downward convergence of productivity and wages. From a political viewpoint the matter is more importantly whether individual workers are experiencing dislocation and a reduction in wages if they come from previously prosperous regions, while others are experiencing rising wages if they come from "lagging" regions. This is the result of shifting tastes and technologies as well as the consequence of trade and migration for the ability of labor in "high wage" jobs to share in the scarcity rents ("above-normal profits") of goods and service production which confront an increasingly competitive international market.

The fact that "innovation rents" and other profits from special knowledge and privately held technology have shorter half-lives, and that the increasing competitiveness of labor markets prevents workers from extracting "monopoly rents" from the threat of strikes and collective withholding of labor services, is bound to have a negative effect on real wages of those privileged to work in activities where there is a "rental income" to capital which can be shared with labor. Hence the automobile and steel industries in the U.S., when faced with declining scarcity rents in the 1960s and 1970s, found it not only possible but necessary to cut wages (the wage share of those rents)—but when they recovered their fortunes through restructuring, they were able to retain a higher share of value added than before. They were able to cite global competition and the threat of relocation and job-cuts in order to improve their profitability and retain lower real wages, effectively weakening union opposition.

While this is associated with globalization it is not a direct consequence of international trade and investment liberalization—though it is an effect of factor market opening through the broadened process of exchange and changes in the de facto bargaining (and power) positions of both domestic enterprise and labor unions, vis a vis those firms able to take advantage of internationalization and consolidation of production and investment. The net effect is to foster efficiency and productivity, increasing the potential for international growth and prosperity. But a short-term consequence is to create market forces that produce the appearance of "downward convergence" in wages without a comparable reduction in profits. Hence the global functional distribution of income in terms of wages versus profits, interest, and rent, declines and income concentration takes place. This can feed back on the growth of demand and global market potential—and can short-circuit the internationalization process—unless efforts are made to increase the share of labor in value added in productivity-enhancing way rather than through simple transfers. This includes importantly attention to the supply and demand for "no tradable" goods and services in domestic economies and to the provision of economic and social infrastructure (including education and skill-formation) that provide positive external economies to the production process and widen the pattern of distribution so as to permit the diffusion of productivity growth.

For those activities which are nontaxable, the end result may be lower value added (rather than physical product) per worker resulting from a fall in relative prices as the supply of those services rises with a weak employment situation (just as the relative price of services rises in a tight labor market). The same trend can happen with tradable, if the supply of labor is abundant (through, e.g., globalization of labor-intensive production and outsourcing to low-wage per unit of physical productivity locales), leading to falling relative prices in labor-intensive tradable (from electronic equipment to garments) that lead to a reduction in the marginal value product of labor (greater than the rise in marginal physical product of labor) and hence in real wages and incomes of low-skilled workers employed in those industries. Whether the fall in relative prices of tradable outstrips that of nontaxable depends on the international exposure of the economy and its growth potential. Both are influenced by the openness of the nation to a new flow of financial capital and investment—which affect (along with current account behavior) the real exchange rate, with different impacts on each region.

Cascadia: This relatively prosperous region that links the northwest of the U.S. and Canada is in the process of defining itself in terms of size, scope of integration, and the institutions needed to bring about sub-regional cooperation in the context of the broader FTA and NAFTA agreements (and the Canadian Agreement on Internal Trade—CAIT.) Given the early stages of formulation of the "Cascadia" region—the section is highly descriptive, optimistic, and enthusiastic rather than analytical.

The similarity of the NW region’s state and provincial components is noteworthy, in terms of their traditional dependence on staples-based export-led growth with a recent shift into higher technology manufacturing and services stimulated by proximity to the Pacific Rim market. Physical contiguity of the NW has been influenced by the importance of water-based rather than land-based transport until recent decades. Today highway links are binding the localities into a "corridor" that promises to make one long metropolis out of the three population centers, greater Vancouver, Seattle-Tacoma, and Portland.

Finance is flowing within the North West, propelling startups and furthering growth. There does not yet appear to be any significant amount of fiscal cooperation or collective effort at infrastructure development among the sub-regions—a likely burden of the international nature of Cascadia. Manufacturing (aircraft industry and electronic software) is steady—while growth tends to be focused in commerce and services (including ecotourism) which are important revenue-sources. In terms of social and demographic change, globalization has stimulated a considerable influx of population to the region. Especially on the Canadian side of the border in the Vancouver area, East and South Asian population have expanded rapidly, bringing with them large amounts of financial capital for investment in the region. Canada's migration laws have required new settlers from non-traditional places of origin to bring with them large amounts of investable funds per household in order to secure visas. In the major metropolitan areas of Cascadia the study cites the significant growth of black populations, from a very low historical base, responding to the relatively positive opportunities for employment and income in the region. There is also a considerable amount of migrant labor from Mexico settling in the rural areas and small towns in Washington State and Oregon. This has played a key role in the expansion of its in export-based horticulture.

Trade from Cascadia is mainly outward—to the Pacific Rimand the rest of North America, though the study reports a growing region-wide exchange (commerce) linked to trade with the rest-of-the world trade and resource transfers within the U.S. (e.g. mining, gas, and oil from the NW producing regions to west coast cities.) In addition to merchandise trade, discussions sessions at the 1995 Vancouver meeting of this project stressed the importance of cross-border traffic between the U.S. and Canada. The immense flow of vehicles between both parts of Cascadia has benefited by the issue of binominal vehicle permits permitting those who drive frequently across the border to circumvent slow customs procedures. This is said to bring about with enormous savings in time, increasing the scope for region-wide exchange by lowering transaction costs. "Full exchange" seems well on its way toward happening in the Cascadia Region, though population movements between the U.S. and Canada are simplified by the already-existing convergence in productivity and incomes. The problems with similar patterns of exchange between Mexico and the U.S. are exacerbated by the gap between the two economies, especially in terms of wages and income.

Resource rents which are high per unit of population give a potential for savings and investment (including the expansion of social infrastructure)in the Pacific Northwest that is already high for the two nations. The mobilization of mineral resource rents is already well-underway in both Alaska and the NW Canadian provinces; through the establishment of "resource trust funds," though the federal, state and provincial institutions controlling their use are widely dissimilar.

The opening to liberalized global trade and finance of transnational sub-regions such as Cascadia in the northwest, and the southwest corridor between Ventura, California and Ensenada, Mexico is having a transforming effect in terms of both production and demographics. Population flows themselves play a key role in expanding their dynamic comparative advantage, by increasing the productivity of local resources and expanding the base of consumer demand. While national policies play a key role in setting the framework for sub-regional decision-making, their problems are unique. They for innovative institution-building and greater cooperation at the local, state, and provincial levels and between countries. Promotion of sustainable development and social prosperity in such regions cannot be left to national policy or broad multinational organizations such as NAFTA. These objectives must become the responsibility of the localities themselves—working together across borders for the common good—however rudimentary and unprecedented such efforts appear to be at the outset.

San Diego-Tijuana Region: This is part of a larger regional economy considered for the study(Ventura--Ensenada) which has been singled out for more detailed analysis because of the amount of research already done on these two border urban areas. The southern (Mexican) part of the sub region has grown since the very beginning from links with California and the U.S. economy because of (not in spite of) the existence of a national border dividing two different legal systems, institutions, and social conditions between south and north. The future of the corridor from Baja California to Southern California still depends heavily on asymmetrical markets for goods and services (including labor) and "internationalization" of the Southwestern economy (as part of the Pacific Rim.)—an economy which gains in size and economic potentials border barriers are lowered. But there are many reasons why barriers have remained—especially to migration—and why the U.S./Mexico border policies differ from those between Canada and the U.S.

Environmental affects (pollution from "south" to "north") are discussed in this chapter and are predicted to become increasingly important as population and production swell along the border. Demographic changes insane Diego (and Tijuana) reflect the flow of labor from southern to northern job markets; the profile of Sandi ego itself has changed dramatically in recent years. There is a growing need for new "border institutions" that focus not only on cross-border problem-solving, but that promotes joint development projects, transport, and infrastructure that could benefit all parties. Maquiladoras reveal some of the potential for linked development in which labor stays south of the border but the manufacturing process takes advantage of subregional comparative advantage. Third countries (e.g. Japan and Korea)have responded to the potential for such linkages—and the profits they imply—especially given the concern that the open part of "open regionalism" will be honored in the breach and that trade diversion may well occur in the future (favoring Mexican suppliers over Asian outsourcing to U.S. markets.) Under the rules of NAFTA many Asian companies have established component production facilities in Tijuana to take advantage of "penalties" for components produced outside the North American region. The choice of Tijuana as a site for such activities is due to lower labor costs, adjacency to existing maquiladoras, and other locational advantages—including the proximity of the western U.S. market and adjacency to the Pacific Rim.

The initial findings suggest that there may have been some "divergence" in recent years, with average living standards actually lowered on both sides of the border but more in Mexico than the U.S. Part of this is related to the weakness of the Mexican economy in the 1980s (and falling real wages after 1982), partly to the recession of the early 1990s and peso crisis of 1995, and to push factors that have spurred job search on the Mexican side of the border, lowering the opportunity cost of labor on both sides. (No hard data is offered for entry level wages in Tijuana or San Diego, either in nominal or real terms.) The population of San Diego is converging toward that of Mexico in terms of number of Hispanics (between 1980and 2000 the Hispanic share is projected to have risen from 15 to 25percent.) The English-language competence of arrivals is limited. Educational levels differ sharply (though they are higher for Tijuana than for Mexico at large.)

Federal government military jobs in San Diego are still over 9%of total employment (cf. 1.7% for U.S.) While the economy was hard-hit by cutbacks in military expenditures in recent years—this is being partially offset by non-defense service activities such as tourism and new manufacturing growth, though not enough to prevent the malaise in per capita income in the San Diego area. In Tijuana precipitate product actually declined from 1970-1990 as employment in services and maquiladoras grew, drawing on the abundant supply follow-wage labor from the rest of Mexico. Hence growth in this larger transborder region has tended to be extensive rather than intensive—with some evidence of divergence in productivity and incomes between Mexico and the U.S. (this is different from the trend reported in Arizona/Sonora where there seems to have been some upward convergence in per capita output.)

San Diego exports to Mexico account for 43 percent of its total foreign exports, a share that exceeds that of any other large city in California(e.g. Los Angeles or San Francisco.) Yet the perception of Mexico as a potential market for California goods and services remains under-appreciated. The state remains focused on the Pacific Rim and has not yet recognized the importance of its trade with Mexico, as compared with Texas which has been a strong promoter of NAFTA, of roads and rail links among the three countries across the Rio Grande, and of binominal commerce from the border southward.

What is being imported to San Diego are primarily labor services in the form of migrant and commuter workers who live in Tijuana. Commercial links are important, with expenditures taking place in a "dollarized" economy that crosses the border—hence the middle class and professionals in Mexico feel swings in the peso/dollar exchange rate much more than their compatriots elsewhere. And even maquiladora investments respond importantly to the real value of the peso, so that the crises of 1982 and 1994 stimulated cross-border manufacturing. But the exchange policies that originate from the two national capitals and from global financial markets have a very strong exogenous destabilizing effect on the border regions (as do Canada/U.S. dollar fluctuations as we have seen.) Capital flows and immigrant remittances are very important to the cross-border economy. Mexicans rely on U.S. banks to avoid exchange risk, to ensure that their savings will not be subject to political risk, and for tax purposes. Remittances to Mexico are vitally important to the domestic economy, reflecting a return to the export of "labor services" which benefit poorer households and localities.

The general impression is that Tijuana-San Diego have yet to develop an effective trans-boundary mechanism for cooperation in growth-enhancing approaches to subregional development—or to ensure environmental harmony or attention to the problems and potential for "managed interdependence" of labor markets, innovation, and penetration of the global economy. Much remains to be done. Meanwhile the dead weight cost of problems arising from proximity seem to have darkened the political horizon --including drugs, urban crowding, and pollution. Hopefully the enormous potential that could arise from a fuller integration of financial capital, resources, skills, and know-how of the U.S. southwestern economy and northwestern Mexico may become an engine of growth for the economies of both countries. The rise of a new political force in the U.S., the "Hispanic caucus" in Congress (which plays an impressive bipartisan role), and the increasing role of Hispanics in local and state politics from Texas to California, make it likely that such issues will be addressed in the future. Political democratization in Mexico is leading to an increased role for local and provincial governments in decision-making and fiscal responsibility for subregions including those along the border. De facto cross-border cooperation among local governments has already become an important reality along the border from Texas to California. It remains to build on these foundations as part of a new U.S.-Mexico constellation of subregional alliances for growth, just as with Cascadia, and other cross-border areas of the U.S. and Canada.

Arizona-Sonora: This study complements that of San Diego-Tijuana by taking explicitly into consideration the impact of growing linkages between two regions separated only by a border along a common frontier. The distinction between "functional" and "formal" integration that the authors apply is useful. It makes sense in terms of the efficiency-goals of integration strategies for form to follow function, consistent with political and social wants on both sides of the border. Indeed the "silent integration" which has taken place historically between the two states reflects a high degree of functionality—given national boundaries and the differences in cross-border markets for goods and services including labor.

One of the key findings of the study is that the region's growth of population and production in the past has had little to do with "integration" per se, either formal or informal. For the U.S. side climate and mineral resources have attracted population to a state with desertous mountainous terrain for much of its extension. Even its agriculture depends largely on the irrigation of arid lands. At one point east-we stand north-south rail links made it an important entrepot for transcontinental U.S. and binominal transportation. It is evident that the attractiveness of the climate in Arizona (when one adds air-conditioning and irrigation) is bringing in waves of middle-class migrants from elsewhere in the U.S. who are demanding services provided by low-cost labor from Mexico and abroad.

Population migrated to northwest Mexico in the past century to take advantage of newly irrigated land, proximity to U.S. markets, and the provision of services of the region as an entrepot between the two countries. Only recently has this led to the evolution of manufacturing-based activities, especially in urban centers such as Hermosillo. This is similar to the growth of the Tijuana/Tijuana region that has recently moved from services to manufacturing activities.

After World War II the two subregional economies began to be "integrated" through the growth of Sonoran agriculture which became an important adjunct to the irrigated high-yield farming of the Southwest—in both cases supported by substantial public sector investments in infrastructure and accessing of water resources which acted as subsidies to commercial agriculture (including benefits to the ejidal farms in the Yaqui Valley of Sonora). When horticultural trade with Cuba was blocked by U.S. policy after the Cuban revolution, the market shifted to Mexico, and again Sonora provided an entrepot for winter fruits and vegetables from fertile regions of the Northwest to the U.S. market. Today, as with similar regions of the U.S. southwest,Sonora's irrigated agriculture, though still highly productive, is beginning to strain scarce resources (such as ground water, dams, and irrigation systems) and is threatened by salinization and the accumulation of chemical byproducts from fertilizers and pesticides.

Sonora, facing its own limits to irrigated agriculture, is forced to explore the potential for investment in tourism and other service activities, environmentally conscious fish-farming and the growth of selected high unit value crops, as well as new areas of manufacturing tailored to the availability of Mexican labor, raw materials and primary products, and accessibility to U.S. and foreign markets. In recent years population growth along the Sonora/Arizona border has become increasingly involved in cross-border activities, not only because of its role as "entrepot" between the two countries, but also through the boom in maquila production in San Luis, Agua Prieto, Nogales, and a food processing plant in Hermosillo. This calls for improvement in roads, railroads, air-transport, and port facilities.

In terms of "formal integration" of the two economies of Arizona/Sonora, beyond the transport link, there remains considerable scope for future development. While firms such as the Ford Motor Company have set up highly efficient assembly operations in Hermosillo, much of the new commerce and manufacturing in both states—while similar in characteristics to that of the San Diego-Tijuana region—is sensitive to bilateral asymmetries in the cost of labor, including those differences that reflect macroeconomic policy and strength of the respective currencies. Cross border commerce flourishes owing to differences in real purchasing power of the two currencies and real incomes in Mexico—both of which are highly sensitive to the peso/dollar exchange rate. As with commerce between Canada and the U.S. commerce, the exchange rate really matters to relative prices. [5]

Concern is expressed about the durability of regional dependence on maquila-type cross-border production, to the extent that it relies on wage/productivity gaps between the two countries. If integration leads to upward convergence in wages and salaries, the reason for integration industries may be lost as the wage gap narrows. "Footloose" industries which located south of the border for its comparative advantage of "cheap labor" will be forced to move elsewhere, to the extent that they are sensitive to wage costs, if they are unable to accomplish proportional gains in productivity. Firms which earn "rents"(excess profits) from labor service arbitrage will also seek profits elsewhere in low-wage regions. To the extent that firms are taxed to cover the cost of infrastructure for themselves and their workers, or to internalize the cost of "externalities” provided by government subsidies, the attractiveness of the region will be reduced proportionately.

Oaxaca: This is one of the most beautiful and fascinating but also one of the poorest regions in Mexico. Ironically the study indicates that the fiscal decentralization process that is well underway may have adverse implications for backward regions such as Oaxaca, unless major new productivity enhancing support programs are developed. Increased revenue-sharing tends to be associated with more stringent overall budget support from the Federal Government. Public sector outlays are diverted to activities more complementary to directly profitable private sector investments than to social and economic expenditures designed to spread the pattern of development and productivity growth. Yet such expenditures are desperately needed if growth is to be sub-regionally diffused and socially equitable.

The authors point out that under present conditions outlays on regional infrastructure must be designed to maximize narrowly defined benefit/cost ratios (benefits being reflected in private profits rather than "social returns") if regions are to compete among themselves for private investment. This is the direct consequence of increased fiscal stringency and a growing share of private investment in total infrastructure-building. This has important implications for lagging regions such as Oaxaca. There is little attention to the political instability of this part of Mexico, other than to point out that under the outgoing PRI governor relations had improved enough to make him uniquely able to last a whole term.

This section indicates the need to address the problem of social and regional participation in the gains from trade and integration more directly and in more detail. Clearly there are reasons why important states such as Oaxaca lag behind the general development process and why some activities have done better than others. It is evident that there is something missing in the governmental framework for project evaluation, at least at the state level. Little is said about previous programs such as "Solidarity"(PRONASOL) under the Salinas administration which attempted to provide resources to lagging regions yet were frequently accused of having political rather than economic goals. The more recent social expenditures programs under President Zedillo call for independent assessment in terms of regional and local conditions, in the perspective of changing domestic and international trade, to indicate the extent to which they are able to play a role in the diffusion of productivity, income, and development rather than simply continuing the historical pattern of income and consumption transfers and subsidized social services.

The extent to which it is possible to reconcile economic growth objectives with those of "social participation"--through policies designed to diffuse productivity and generate employment—remains to be seen. Clearly the Oaxaca study points out the need for such efforts, given the mandate of globalization. However it should be mentioned that such measures have not been explicitly addressed in any of the three countries of NAFTA, so it is not surprising that none of the case studies in this volume presents a coherent program for the evolution of comparative advantage with social diffusion. It may be useful to look at specific projects, such as the road improvements between Oaxaca and Mexico City., which were undertaken by the public sector even in times of fiscal stringency and budgetary conservatism, and when most major highway developments were relegated to the private sector. While this topic is not addressed in the chapter, there is evidence of much greater success of state covering of transportation-related externalities in attracting truck traffic to newly improved roads. This contrasts with the generally acknowledged failure of privatized toll roads developed elsewhere. In fact, truckers throughout Mexico proved unwilling or unable to compensate directly for the externalities involved in private road construction by paying very high toll rates imposed for the use of the new privatized freeways. However in the case of the Oaxaca-Mexico City freeway, highway improvements(which did not charge commensurate tolls) have given rise to an explosion of transport and related commercial activities benefiting the regional economy. It would also be useful to look in depth at education and other measures as they have related to the development of this lagging region and to suggest what might be the appropriate level and structure of revenue sharing, given the particular characteristics of low income regions such as Oaxaca.

Newfoundland: This section deals with the consequences for poorer regions of the impact of globalization on financial markets and the resulting fiscal constraints which are imposed on Federal governments—which previously provided transfers to lagging regions in order to reduce the income gap among states and provinces. The problem is that attempts to force upward convergence in an unequal economy through income transfers, making use of the fiscal mechanism, tends to deal with effects rather than causes of inequality. What is needed for upward convergence of incomes is upward convergence of productivity plus tightening labor markets(that permit real wages to move up with productivity gains (by causing average gains in labor productivity to be matched with marginal gains so that real wages can rise without resort to inflation, transfers, or other subsidies.)

Newfoundland is a region with a major industry, fisheries, that appears to have been worked beyond its capacity—even as population and the labor force have grown. The chapter shows how attempts to deal with rising unemployment levels created adverse incentives by relying on unemployment insurance schemes (UI)supported by fiscal transfers from more prosperous regions. The goal was income maintenance rather than productivity enhancement. The insurance program provided the wrong kind of incentives, leading to schemes (such as” lotto 10-42") which spread the minimal work available plus the transfer payments to the maximum number of individuals. The result was to shrink long-term employment, making everyone dependent on the dole, and stimulating activities that created short-term jobs (including fisheries) regardless of the need for long-term growth in regional productivity and employment. By providing income comparable to other regions for a minimum of work effort, the scheme reduced the pressure on labor in Newfoundland to migrate to more productive regions (from which they might have been able to send remittances.)

As with Oaxaca, the fiscal impact of "integration" turns out to have greater consequences for this lagging region than trade liberalization per se. In one case it reduces the scope for social expenditures and infrastructure support. In the other it cuts into Federal relief for provincial unemployment—forcing the region back on its own limited resources. Newfoundland dissimilar to Oaxaca, despite the great differences between them in per captaincies, since in both cases revenue-sharing turns out to be a mixed blessing. It brings with it "expenditure-sharing" that forces backward regions to carry an even larger burden of their own social programs than increased revenue transfers can support.

Even the modest degree of revenue-sharing for the development of backward regions, once an alleged goal of national governments, is now threatened in Mexico as in Canada and the U.S. The market-enforced discipline of fiscal stability, which derives from internationalization of financial flows even more than from trade liberalization, has cut into the usual schemes of regional transfers and subsidies for consumption and social services. The danger is that this can augment the disparities that already exist between regions and social groups. There is also a danger that the lack of such transfers in the North American context can exacerbate the widening of productivity and income between Canada/U.S. and Mexico as well as among the several subregions of NAFTA (in which a so-called "poverty area" of the U.S. or Canada has the potential to be comparable in per capital income to one of the more advanced regions of Mexico.)

In the lessons learned from the Newfoundland experience, the author lists the dangers of reliance on programs such as unemployment insurance (and, we might add, simple income transfer mechanisms that are unrelated to productivity-enhancement of the recipients and their regions.) Simple transfer programs tend to lock-in dependency of labor on subsidies; work against reallocation of resources from declining to expanding sectors (and regions); divert entrepreneurial activity into” working the margins" of benefit schemes rather than seeking productive investment; deal with symptoms rather than causes of poverty and underemployment; fail to consider the behavioral response of beneficiaries to wasteful incentives; make regional economies dependent on external support; developing the underground economy in such regions; fostering intergenerational dependency; failing to ensure upward convergence because they do not deal with the underlying need for productivity gains. Increased economic integration and trade liberalization will make transfer programs increasingly difficult to sustain.

To reduce income disparities it will become more and more necessary to attack lagging productivity directly and to raise wages by tightening the demand for labor throughout the economy. Regions such as Newfoundland and Oaxaca must identify projects that are profitable in their own right, even though the return is based on indirect demand via the public sector. It is necessary to explore the potential for expanding the growth of no tradable as well as tradable goods and services—including construction, roads and other infrastructure, education, health, parks and recreational activities, the arts, and other social services to raise the quality of life for all regions and income groups.

For backward regions the type of transfers that will be self-canceling are growth-enhancing measures from both the government and private capital markets—in response to new investment opportunities that draw on a growing supply of productive labor and a widening of local markets. Taking advantage of such opportunities, once they have been identified, calls for higher rates of regional savings and investment including openness to investment from other parts of the country and abroad—including the creation of financial intermediaries to attract such funds and venture capital for risk-taking. It will also be important for such economies to support innovation in” labor-using" technologies which raise output per worker while at the same time attracting more labor in order to expand production. Global economic integration will facilitate such expansion paths, along with the widening of markets in a virtuous cycle of incentives that will draw backward regions into the productive process.

These two chapters take a look at "backward" regions in Canada and Mexico’s their host economies undergo major growth with structural change. They indicate that the impact of initial asymmetries tends to widen rather than narrow the gap between regions at the national level (not to mention the gap between the poorest regions of the NAFTA partners.) It is necessary in future studies to research similar lagging regions of the U.S. (such as West Virginia, Arkansas, or Mississippi) for purposes of comparison and contrast. In addition it is useful to look at the success of "growth poles" in greater detail. The section in this volume on Silicon Valley indicates that even the most prosperous areas, which have already demonstrated their productive potential, call for combinations of public/private sector cooperation and decision-making needed to provide those services for which short-term private profit-making may be inadequate.

Silicon Valley: This chapter provides a summary statement of the importance of cooperation between local government, business, and interested citizens(e.g. those in the educational community) to sustain development of region that has already "taken off." In the case of this high tech region of Northern California, initial prosperity of a basically Schumpeterian type, in which innovative technologies were harnessed by entrepreneurs with access to venture capital, to serve a rapidly expanding domestic and international market, a downturn in the fortunes of the Valley in the late1980s suddenly awakened a realization. The agglomeration effects of new technological creativity, entrepreneurship, and flexible financing were not enough to avoid recession. The reversal of the fortunes of Silicon Valley at the end of the 1980s, as it seemed to be outgunned by "high tech" production elsewhere (and the plummeting prices of high tech products that were experiencing "commoditization"—like the cost of information units or bites), forced a reassessment of the old libertarianism and are thinking of the role of cooperation in the provision of public goods and attention to positive externalities.

It was believed by the practitioners of Joint Venture Silicon Valley (and activities such as "Smart Valley") that government was not well-equipped to understand the needs of the local economy or to provide on its own the appropriate expenditure policies. On the other hand, private investors were constrained by the requirement of short-term profit maximization (in a time of high and rising real interest rates from globalization of financial markets and significant risk discounts) from spending large amounts for "public goods" on an individual basis. What was developed, instead, was an innovative institution which merged public and private sector interests and capabilities, supported by the educational community, going beyond the patterns already established by Stanford University for incipient private investors who leased space on its own land over the past several decades.

While this chapter does not go into the details of such institutions or processes, or the underlying concepts associated with entrepreneurship,” innovation rent-seeking," agglomeration economies, and externalities associated with regions attempting to pursue a comparative advantage in high technology—it opens a window into a process of cooperation that is proving to be fundamental to sustained growth even in one of the most legendary and privileged segments of the world’s high tech economy. The chapter is written by practitioners who have had experience with the process itself. The approach that has engendered "Smart Valley" and other cooperative measures patterned after it recognizes that those externalities associated with good government, information networking, educational support (via public-private sector cooperation), and diffusion of profits from innovation for broader-based infrastructure and human-capital formation, really matter if even the most advanced regional economies are to succeed in the long run.

It will be necessary in future research and policy analysis to go beyond this chapter to determine the ways and means to accomplish what is championed by this section of the study—and how they might be applied to very different regions with similar objectives. But that is understandable, given the limitations of the present volume and the complexity and novelty of the cases surveyed and the approaches suggested. It is important in subsequent stages of research to mine information from case studies of specific cooperative programs, such as Joint Venture Silicon Valley (and those in other areas, including Chihuahua, Mexico, where similar approaches have been taken), to better-understand the means of achieving positive agglomeration economies and the growth with social stability which this could permit. The question remains, how many "smart valleys" can be accommodated in the new global development process—the answer may be an infinite number, given the potential in world demand, if society in general and not just a privileged few living in the "valleys” are able to share in the process of innovation and growth. For this to happen, this and the other chapters in this volume indicate how important it is touring about new forms of institutionalization and public-private sector cooperation, with support from the educational community, in every region which hopes to attract the new growth processes to their locales—or which wishes to remain in the vanguard into the next century.

[1] There is no long-term equilibrium in the real world of economic and social development, though certain parameters (such as the real price of wheat or gold) show astonishing long-term stability and causal relationships repeat themselves with regularity. Events are constantly shifting, so that the conditions of supply and demand themselves become variables. The contemporary rate of technological change, adaptation of tastes, and unprecedented globalization of development accelerates the pace of structural change as well, speeding up shifts in the underlying conditions of supply and demand. The challenge to analysts such as those involved in this study is to know which conditions to hold constant long enough to be able to identify key variables believed responsible for the changes themselves. The next step is to know which parameters to shift so that they become variables in a wider pattern of recursive change. The fact that psychology dominates both real and financial market decision-making, and that expectations are mutable, severely complicates the analysis. In this study the practitioners have made a first attempt to identify those benchmark characteristics believed to reflect the underlying path of economic and social change. By going beneath these parameters, to the forces which act upon them—including demographics, resources, technology, domestic conditions of supply and demand, and the pattern of international exchange—one lays out the path of key variables. These variables can then be tested to determine the proximate role of endogenous and exogenous elements underlying the changing structure and growth of their specific regions. The object is to present specific scenarios which allow for more generalizable findings from the representative cases—so that the structural changes in each region may be appropriately compared and contrasted with others. The task is daunting, especially in world in which Darwin jets instead of sails—and there is no Galapagos Island chain to be observed in North America. Indeed the decision to look at "globalization" reduces the scope for scientific control. The accomplishments of the chapter authors deserve praise, given the challenges they faced—and the findings of this phase are compelling evidence that this type of research should be continued and expanded.

[2] The initial plan of this project was to include the Caribbean Basin as well, and to draw cases from Central America and the Caribbean for comparison and contrast with those from North America. In fact some introductory research was done for Jamaica and other Caribbean countries by Donald Harris and for Costa Rica by Eduardo LizanoFait and Ricardo Monge González. Their work was supported in part by the Ford Foundation project on "Economic and Social Implications of Labor Market Integration in North America and the Caribbean Basin." It was determined by the editors of this volume to confine the present cases to those from NAFTA. It is hoped that future phases of this project will permit a broader approach to the regional impact of international economic integration in which Central America and the Caribbean will figure importantly.

[3] The reference here is to what might be called a "political market place” which is incomplete, because all the necessary agents to accomplish political decisions (across regions) are not in place, nor are there institutions that can address their interests.

[4] The Mexico City chapter was written before the change in urban government from the PRI governorship to the elected PRD administration of Cuautemoc Cardenas, but the city's economic, fiscal and social conditions continue to challenge the leadership.

[5] Arbitrage in tradable such as gasoline and groceries put pressure on both governments to consider the implications of a de facto "currency area" in which the answer to date seems to be "dollarization" on the Mexican side of the border.