Academic journal article The European Journal of Comparative Economics

Could Mexico Become the New 'China'? Policy Drivers of Competitiveness and Productivity

Academic journal article The European Journal of Comparative Economics

Could Mexico Become the New 'China'? Policy Drivers of Competitiveness and Productivity

Article excerpt

1. Introduction

In recent years, shifts in global competitive conditions have caused China to lose competitiveness in some of its dominant export sectors. This has allowed Mexico's unit labour costs to become increasingly competitive with those of China. China has experienced a yearly growth of more than five per cent in unit labour costs, while Mexico's costs have increased at only half that rate. Mexico's catch-up in unit labour costs emerged primarily from a slowdown in China's productivity gains as its workers' wages grew rapidly, while at the same time the RMB appreciated against the USD (OECD, 2013, 2015a).

This change in costs boosted Mexico's trade competitiveness, particularly in the manufacturing sector, where China's average wage now exceeds Mexico's (Sirkin et al., 2014). In addition, total landed costs for the US market, which include taxes, tariffs and regulatory compliance, as well as transportation and storage, have considerably increased for products made in China since 2005, while they have fallen for products made in Mexico (AlixPartners, 2013; Wang and Hu, 2014). As a consequence, there are increasing incentives for manufacturers to shift parts of their production process from China to Mexico, particularly in light of the proximity to final goods markets in North America. (2)

Mexico's increasing competitiveness and attractiveness masks, however, one of the countries' fundamental concerns, which is the absence of productivity improvements. Mexico's productivity lags behind that of other major emerging economies, and it has suffered from a negative growth trend. One prominent feature of the Mexican economy as compared with China's is much more extensive employment informality and smaller average firm size (Dougherty, 2015; OECD, 2015a, 2015b). In order to fully take advantage of the increasing cost of production in China, identifying policies to improve productivity is essential for Mexico.

Firms differ in productivity within even narrowly defined industries in a country. For example, in US manufacturing, the productivity of the 90th percentile plant is almost twice that of the 10th percentile plant (Syverson, 2004). The gap in productivity between high and low productive plants is five to six times larger in Mexico than in the United States (Hsieh and Klenow, 2014). These differences may indicate misallocation of resources across firms with negative effects at the aggregate level (Bartelsman et al., 2013; Hsieh and Klenow, 2009). Differences in productivity across countries can thus be explained by cross-country variation in the distribution of firm productivity.

Multiple factors influence a firm's productivity, both internal and external to the firm. Among the internal factors, better management practices are associated with productivity gains (Bandiera et al., 2009; Bloom and Van Reenen, 2007). In addition to management quality, the quality of labour and capital influences productivity. Productivity is increasing in workers' education and age (Ilmakunnas et al., 2004), but differences in labour quality across firms only explain a small part of productivity dispersion (Fox and Smeets, 2011). Differences in capital quality are difficult to assess, and therefore, some studies have focused on information technology (IT) capital. IT productivity gains contributed to the acceleration of US productivity growth in the mid-1990s, in particular for IT-intensive industries (Bloom et al., 2012). There is also evidence that product innovation and intangible capital leads to productivity gains (OECD, 2015c). Indeed, the number of products and patent grants are positively correlated with total factor productivity (TFP) (Balasubramanian and Sivadasan, 2011; Bernard et al., 2010).

In this paper, we focus on the external or contextual factors that influence productivity because they are more related to policy design. Even if contextual factors do not operate directly on productivity, they may influence producers' incentives based on internal factors and, thus, the productivity distribution across firms (Syverson, 2011). …

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