Mexico’s Competitive Position in the New Global Economy

Mexico’s Competitive Position in the New Global Economy Gordon Hanson UC San Diego and NBER November 2012

The rise of emerging economies • The most significant global economic event of the last two decades is the rise of the emerging world • Booming supply of manufactured goods • Booming demand for commodities • Rising incomes, falling poverty in developing countries • How has Mexico fared? Mexico’s Competitive Position

Mexico’s growth has been sluggish… Mexico’s Competitive Position

reducing the relative size of Mexico’s market Mexico’s Competitive Position

Though even with tepid growth poverty has fallen Mexico’s Competitive Position

Explaining Mexico’s growth record • The usual suspects • Weak credit markets intermediate savings poorly • A large informal sector drags down productivity growth • Regulatory capture hampers telecoms, energy • China’s growth has weakened Mexico’s market position Mexico’s Competitive Position

Domestic credit to private sector in Mexico is low Mexico’s Competitive Position

An abundance of small firms keeps productivity low Source: Hsieh & Klenow Mexico’s Competitive Position

Mexico’s has low electricity output Mexico’s Competitive Position

Mobile penetration in Mexico is relatively low Mexico’s Competitive Position

China’s export surge has restricted Mexico Mexico’s Competitive Position

Revealed comparative advantage I Mexico’s Competitive Position

Revealed comparative advantage II Mexico’s Competitive Position

Revealed comparative advantage III Mexico’s Competitive Position

Prescriptions for economic growth • Ideas for policy reforms (neither new nor easy) • Strengthen protection to creditors • Reduce incentives to join informal sector • Raise incentive to stay and to excel in school • Enforce anti-monopoly provisions • Reform energy sector Mexico’s Competitive Position

Where else could growth come from? • Possible sources of increased GDP • Cost increases in China improve Mexico’s terms of trade • Education spurs human capital accumulation • Urbanization generates knowledge spillovers • Digitization reduces information costs Mexico’s Competitive Position

Mexico’s manufacturing cost disadvantage is declining Mexico’s Competitive Position

China’s comparative advantage is shifting Mexico’s Competitive Position

Mexico is keeping pace in educational attainment Mexico’s Competitive Position

While Mexico is already highly urbanized… Mexico’s Competitive Position

there is still some room for growth in large cities Mexico’s Competitive Position

Urbanization and economic growth reinforce each other Mexico’s Competitive Position

Digital connectedness is ahead of income growth 2010 2010 2000 2000 Mexico’s Competitive Position

The path ahead for Mexico • Long-term economic growth is spurred by capital accumulation and steady improvements in productivity • Institutional deficiencies in Mexico are impediments to both • Policy reform has failed to address these deficiencies • But there are some reasons for optimism • Despite reliance on US, Mexico survived the GFC rather well • Poverty has fallen sharply, educational attainment is rising • The China threat is weakening, creating market openings • Past policy inaction means there is money on the table Mexico’s Competitive Position

Mexico’s Competitive Position in the New Global Economy