Productivity Growth in Mexico

July 15, 1998

Why has Mexico’s economic growth been so modest? In the last decade, Mexico has often been put forth as a leading example of the market-opening economic adjustment programs advocated by the international economic organizations. Since the mid-1980s, it has greatly liberalized its trade regime, sharply reduced the number of state-owned enterprises, reached fiscal balance with a reformed tax system, and established full convertibility for external capital account transactions. Yet, the country’s rate of economic growth, even before the economic crisis of 1994-95, remained far below the near 7 percent growth rate achieved during the 1960s and 1970s.

The purpose of this paper is to review Mexico’s economic growth experience within the confines of a simple growth-accounting framework, to put that performance in an international context, and to investigate some of the hypotheses that have been advanced to explain the low return to date from the reform program. The first section is devoted to a review of the basic data used to measure economic growth in Mexico and an allocation of output growth between those gains due to increases in the factor inputs, capital and labor, and improvements in the efficiency with which the factors are used. The review is necessary because of wide variations among earlier studies in the reported rates of productivity change due to differences in the choice of data used to construct the productivity measures. The second section compares Mexico’s growth record with that of other countries. Finally, the paper explores some potential explanations for the slow growth and suggests additional policy actions to promote growth in the future.

Accounting for Growth

The analysis of Mexican economic growth begins with the construction of a set of growth accounts that decomposes the growth in output per worker into the contributions from the accumulation of physical and human capital and a residual measure of the change in total factor productivity (TFP). A growth accounting exercise cannot identify the fundamental causes of growth, but it does provide a consistent decomposition of growth among its proximate sources, which can be particularly informative in comparing experiences across countries. It is particularly well-suited for distinguishing between growth due to the painful process of sacrificing current consumption in order to save and accumulate capital for the future and the seemingly less-costly alternative of adopting existing technologies and management techniques from more advanced economies.