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«Juan Carlos Moreno-Brid This article explores the need for Mexican policymakers to add an active industrial policy as a key instrument to assist in ...»

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This view is radically opposed to other approaches put forward by Amsden (2001), Chang (2002), ECLAC (2012), Rodrik (2004, 2008), and Hausmann, Hwang, and Rodrik (2005), who view industrial policy as an indispensable 220 Latin American Policy instrument to promote development by aiding in the “discovery” of new industries that may create and build up the economy’s dynamic competitive advantages.2 The introduction of this article examines the open return of industrial policy in the official discourse of Mexico’s new presidential administration. It evidences that industrial policy is back, apparently with no particular emphasis on the manufacturing sector. Its current version relies more on strengthening the already existing, static comparative advantages of the Mexican economy than on the discovery of new activities or capacities oriented toward the creation or buildup of more dynamic comparative advantages. There may be still some uncertainty given the fact that the new president has been in office for only a few months and the fact that the details of the policy to promote “strategic sectors”—as industrial policy is now being referred to in official circles—are yet to be specified. The next section examines the stylized facts of Mexico’s growth performance over the last three decades and its relationship with the performance of its manufacturing sector. An objective of this section is to illustrate the urgent need to put an industrial policy into place in Mexico with special emphasis on the manufacturing sector. The third section provides a brief, critical analysis of the myths and facts of the merits and criticism of industrial policies, as well as their different orientations in terms of scope, instruments, and degree of state intervention. The section is not intended as an in-depth contribution to the study of the theory and practice of industrial policy in emerging markets. Its purpose is to examine the criticism usually raised about industrial policy, to consider if this criticism is valid, and to identify broadly the range of options currently available to governments interested in using industrial policy as a tool for development. The article closes with comments and conclusions on the challenges, merits, and restrictions of industrial policy in Mexico. The conclusions also identify the complementary key policies that should accompany the implementation of industrial policy to assist it in inserting Mexico onto a high-growth path (see UNCTAD, 2007).

Mexico: Economic Growth and Manufacturing Performance after the Macro Reforms The macroeconomic reforms that Mexico implemented in the 1980s had two related goals. The first was to stabilize inflation and adjust public finances. The second was to open domestic markets and reduce state intervention in production and investment. The idea was that these reforms would transform Mexico’s productive structure and make exports the main engine of economic expansion (see Aspe, 1993; Krueger, 1998; Lustig, 1998; Moreno-Brid & Ros, 2009). The reforms abated inflation and reduced the fiscal deficit. For the last 15 years, the annual increase in the consumer price index has remained anchored at a onedigit level, in general within the 3%–4% range. The fiscal deficit—excluding investment by Petróleos Mexicanos and contingent liabilities due to social security pensions—has remained at less than 2% of GDP for years.

A contraction of public investment and an increasing dependence on oil revenues led to the adjustment of public finances more than the elimination Industrial Policy in Mexico 221 6.70% 2.89% 1.59% 5.37%

-4 2.67%




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of tax evasion, special fiscal regimes, or collecting more taxes from the wealthy.

The tax burden as a proportion of GDP, excluding oil revenues, is less than 12%, one of the lowest in Latin America. Most worrisome, the primary fiscal balance has registered red numbers in recent years and, given the weak tax burden, the capacity to implement a countercyclical fiscal policy is very limited.

An undeniably successful result of Mexico’s shift in macroeconomic strategy has been the dynamism of its non-oil exports. Its manufactured exports have surged since the mid-1980s. From representing less than 20% of Mexico’s total exports, they now comprise more than 80%. Since the mid-1980s, Mexico’s share in the world export market of manufactures has risen sharply. It jumped to the top position of the worldwide ranking from 1994 to 1995 as the implementation of the North American Free Trade Agreement (NAFTA) helped boost exports of Mexican manufactures, especially to the United States (see López-Córdova, 2002).

Its performance has been further strengthened in recent years, as Mexico ceased losing ground to China in the U.S. market.3 Mexico has increased in the technological intensity of its basket of exported goods. In 1990, less than one-third of its exports were of medium or high technological intensity; by 2011, this percentage was over 60%, but the production processes of a vast proportion of Mexican exports has very little local content of intermediate inputs and value added.

Many export businesses may be seen more as assembling firms than as real manufacturing enterprises.

The unquestionable progress in price stabilization, in the reduction of the public sector deficit, and in building up a dynamic non-oil export sector has not been accompanied by a higher and sustained growth of the Mexican economy. As Figure 1 shows, the Mexican economy and its manufacturing grew at a slower pace during 1987–2012, after the reforms of the mid-1980s, than from 1960 to 1981 (see Kehoe, 2010; Kehoe & Meza, 2012; Moreno-Brid & Ros, 2009).

222 Latin American Policy From 1987 to 2012, the average annual rate of expansion of GDP in real terms was 2.7%. This performance was an improvement relative to 1982–1986, the 5 years severely affected by the international debt crisis, but is less than half the average registered in 1960–1981 (6.7%).

From a demand-side perspective, the slow growth of the Mexican economy after 1986 is related to two interdependent factors. The first is the surge in its import propensity, or technically speaking, the acute rise in the income–elasticity of imports that led to a drastic reduction in the Keynesian income multiplier of investment and exports (see Moreno-Brid, 1999). Its reduction diminished the pull-effect that the surge of exports and the mild recovery of investment had on the rate of expansion of total GDP in the Mexican economy. The second factor is the lack of dynamism of investment—of fixed capital formation—in Mexico after the macroeconomic reforms. Investment as a proportion of GDP collapsed due to the crisis of 1982, but mildly recovered thereafter, although not completely.

By 2012 the investment ratio was 22%, still lower than in 1981. It is also three points below the 25% that United Nations Conference on Trade and Development (UNCTAD) and others consider as the minimum coefficient needed to achieve annual rates of economic growth above 5% (ECLAC, 2012). The fact that private investment failed to respond dynamically to the macroeconomic reforms implied that the private sector could not or did not modernize and expand its machinery and equipment rapidly enough. In turn, this problem tended to undermine the overall international competitiveness of Mexico’s productive sector and hindered its possibilities to meet the challenges of the increased pressure from its foreign competitors brought about by trade liberalization. If the economy is to grow persistently at annual rates above 5%, it is necessary to boost investment, especially in the tradable sectors and in infrastructure, and to increase the local content of domestic production, in particular of exports, to strengthen Mexico’s internal market.4 Avoiding the trend to appreciate the real exchange rate would be a contribution in this direction. All of these points are key challenges for the fiscal and monetary authorities in Mexico.

Regarding the composition of output and its relation to economic growth, a key area of relevance for industrial policy, Figure 1 shows that the annual changes in GDP and in its manufacturing industry are closely associated. In 1960–1981, manufacture expanded at an average annual rate of 5.4%, its performance deteriorated in 1982–1986, and since then has grown at an average annual rate of 2.9%. The slowdown of the manufacturing sector is worrisome because it reveals that this sector—notwithstanding its impressive export boom after the macroeconomic reforms—has been losing its capacity to act as an engine of growth in Mexico. To verify this hypothesis, we applied econometric analysis to test Kaldor’s First Law, which associates the rate of growth of real GDP in the whole economy to the rate of growth of GDP in manufacturing. The rationale behind it is that, due to the prevalence of increasing returns to scale in manufacturing, it is a main determinant of the growth of output and of productivity in the rest of the economy. In large economies a strong, competitive manufacturing sector is the cornerstone that allows them to enter into virtuous cycles of growth marked by the persistent expansion of output, productivity, and exports in a context of innovation, rising real wages, and stronger domestic markets.5 Industrial Policy in Mexico 223 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6

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Figure 2 illustrates the changing magnitude of the multiplier effect of the expansion of GDP in manufacturing on the GDP generated by the aggregate of nonmanufacturing activities and on the GDP of the whole Mexican economy in 1960–2012.6 We used a log–linear specification and Kalman Filter techniques to estimate the multiplier. When its magnitude is above or below the unity, an increase in the real GDP of manufactures brings about a proportionally higher or lower increase of real GDP of the aggregate of nonmanufacturing activities as a whole and, as a consequence, of the GDP of the Mexican economy.

As Figure 2 shows, from 1960 through the early 1980s, manufacturing was an engine of growth of the Mexican economy, with an estimated multiplier well above one (1.0). Thereafter it began to lose its pulling capacity, and by the end of the 1980s, its estimated magnitude fell below unity. In other words, the expansion of manufacturing GDP was no longer bringing about a more-than-proportionate increase in the GDP of the rest of nonmanufacturing activities and of the GDP of the Mexican economy as a whole. Why did this happen? Why do we find the paradox that our manufacturing industry, at the same time that it became Mexico’s most impressively dynamic exporter, lost its capacity to act as an engine of growth, its capacity to pull the rest of the economy into a platform of high growth? Why do we have a very sluggish performance of manufacturing’s value added—and moreover of the whole economy—in the midst of a boom in its exports of manufactures? The answer to these questions lies in finding explanations for the slowdown of the Mexican economy over the last three decades.

Two main hypotheses have been put forward to understand the asymmetric trajectories of trade and value added in Mexico’s manufacturing sector after the reforms. The first argues that the vastly increased export capacity of the Mexican economy—fundamentally manufactured—detonated by the macro-reforms was accompanied by an even stronger increase in import penetration of Mexico’s domestic market (see Moreno-Brid, 1999). A rise in the overall penetration of imports more than compensated the dynamism of exports. Approximately 33% of 224 Latin American Policy

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the increase in Mexico’s aggregate demand brought about partially by the rise of exports triggered by the macroeconomic reforms of the mid-1980s was translated to an increase in imports to augment the foreign component of aggregate supply.

The factor behind this change was a shift in the development strategy that led to the elimination of trade barriers, but the strong momentum of imports suggests that there has been a certain dismantling, a breakup of important backward and forward linkages in Mexico’s productive structure, with local firms being displaced by foreign competitors. Behind Mexico’s changing export and import trajectories lies the consolidation of a dual structure with a few of its large firms competing successfully in world markets but with scant use of domestic suppliers of inputs and raw materials, and with a vast number of hardly dynamic small, medium, and micro firms excluded from the benefits of surging export demand and oriented to a rather sluggish domestic market (See Domínguez & Brown, 2003; Moreno-Brid & Ros, 2009; Pacheco, 2005; Vidal, 2008).

A second, and to a certain extent complementary, hypothesis is that the expansion of exports—relying more and more on foreign-produced intermediate inputs—provoked the surge of imports and, therefore, the sluggishness of investment explains Mexico’s slow growth (see Blecker & Ibarra, 2013). Both interpretations coincide on the view that the tendency of the real exchange rate to appreciate has reduced the Mexican economy’s growth potential because it undermines the international price competitiveness of domestic producers and also tends to orient investment to the production of nontradable goods, but they differ on the importance they give to the penetration of imports in the nonexporting sector and the subsequent breakup of the domestic interlinkages.

Figure 3 shows that the magnitude of the trade deficit in manufactures above the trade surplus in oil has essentially determined the evolution of Mexico’s trade balance since 1993. Manufactures are the main component of Mexico’s trade deficit, despite their outstanding export performance. Such behavior reflects this activity’s dual character where the in-bond industry and a few big manufacturing firms generate large trade surpluses whose volume is dwarfed by the imports of manufactured goods from other manufacturing and nonmanufacturing firms in the rest of the economy.

Industrial Policy in Mexico 225 Although not shown in the figure, the magnitude of the trade deficit depends on the level of economic activity. The trade deficit in manufacturing has shown a tendency to increase as a proportion of its GDP even at given rates of growth.

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