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? Hanson Nov 20122/24 Mexico’s Competitive Position

Mexico’s growth has been sluggish… Hanson Nov 20123/24 Mexico’s Competitive Position

reducing the relative size of Mexico’s market Hanson Nov 20124/24 Mexico’s Competitive Position

Though even with tepid growth poverty has fallen Hanson Nov 20125/24 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 Hanson Nov 20126/24 Mexico’s Competitive Position

Domestic credit to private sector in Mexico is low Hanson Nov 20127/24 Mexico’s Competitive Position

An abundance of small firms keeps productivity low Hanson Nov 20128/24 Mexico’s Competitive Position Source: Hsieh & Klenow

Mexico’s has low electricity output Hanson Nov 20129/24 Mexico’s Competitive Position

Mobile penetration in Mexico is relatively low Hanson Nov /24 Mexico’s Competitive Position

China’s export surge has restricted Mexico Hanson Nov /24 Mexico’s Competitive Position

Revealed comparative advantage I Hanson Nov /24 Mexico’s Competitive Position

Revealed comparative advantage II Hanson Nov /24 Mexico’s Competitive Position

Revealed comparative advantage III Hanson Nov /24 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 Hanson Nov /24 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 Hanson Nov /24 Mexico’s Competitive Position

Mexico’s manufacturing cost disadvantage is declining Hanson Nov /24 Mexico’s Competitive Position

China’s comparative advantage is shifting Hanson Nov /24 Mexico’s Competitive Position

Mexico is keeping pace in educational attainment Hanson Nov /24 Mexico’s Competitive Position

While Mexico is already highly urbanized… Hanson Nov /24 Mexico’s Competitive Position

there is still some room for growth in large cities Hanson Nov /24 Mexico’s Competitive Position

Urbanization and economic growth reinforce each other Hanson Nov /24 Mexico’s Competitive Position

Digital connectedness is ahead of income growth Hanson Nov /24 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 Hanson Nov /24 Mexico’s Competitive Position