Unconditional convergence in the Mexican manufacturing sector (1988–2018)

This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on "Growth, productivity and macro modelling in the Americas", held in Ottawa on 26–27 October 2023.

Summary

Focus

I study unconditional convergence of labour productivity in the manufacturing sector of Mexican states from 1988 to 2018. That is, I investigate whether manufacturing regions with low productivity have grown faster than those with high productivity and are catching up with the latter unconditionally of any other economic force. To do so, I combine newly digitized historical data with modern economic census data.

Contribution

Despite the abundant evidence regarding the lack of unconditional productivity convergence across countries, previous studies have found that unconditional convergence of manufacturing labour productivity occurs internationally. If so, this phenomenon is likely stronger within a country where barriers to capital and labour reallocation are expected to be smaller. Nonetheless, few studies analyse this phenomenon within a country, with this being the first to focus on Mexico. 

Findings

I find no unconditional convergence in manufacturing sector-wide labour productivity across Mexican states from 1988 to 2018. However, I find that some manufacturing sub-sectors have converged at an average pace of 1.22 per year during that period. This is a relatively low rate, as it implies that the gap between low- and high-productivity regions in those industries will close in about 80 years. In addition, this convergence process tends to exhibit a "catching-down" feature, where past leaders have seen their labour productivity decline. So the underperformance of some of the largest industries, combined with the lack of labour reallocation towards the more productive ones, has prevented aggregate convergence from occurring. Moreover, I show that the manufacturing convergence process broke down in the early 2000s. I provide evidence that one possible explanation is the so-called "China shock", that is, the entry of China to the World Trade Organization in 2001. This facilitated the penetration of Chinese exports to the United States while crowding out Mexican ones, thus affecting Mexico's productivity.

Abstract

In this paper, I digitize economic census data to study unconditional convergence in manufacturing labor productivity across Mexican states from 1988 to 2018. I document its existence in three-digit industries at a rate of convergence of 1.22% per year. However, this result does not hold at the aggregate level: I find no unconditional convergence in manufacturing wide labor productivity across states. Shift-sharing analysis reveals that the primary reason is the lack of labor reallocation towards more productive industries and the underperformance of some of the largest ones. Unconditional convergence at all levels only occurred during 1988–1998. Afterward, the convergence process broke down and was only observed at disaggregated levels. I provide evidence that one possible cause of this breakdown is the so-called "China shock". Additionally, I show that the convergence process, when it happened, tended to exhibit a catching-down feature, where past leaders have seen their labor productivity decline.

JEL classification: O40, O14, O54

Keywords: growth, convergence, manufacturing, Mexico