Industrial development and economic growth: Implications for poverty reduction and income

5.6 Mexico
Compared to South Korea, Taiwan or China, Mexico’s economic develop-
ment has been far less noteworthy. Especially during the 1980s and 1990s,
the country experienced several economic crises. From the 1940s until the
mid-1980s, Mexico’s economic policy was based on import-substituting
industrialization (e.g. Esquivel and Rodríguez-López, 2003). The strategy
included high protective tariffs and other import barriers, especially to con-
sumer goods. Industrial expansion was promoted through public investment
in energy and transportation infrastructure. During those years, the Mexican
economy industrialized and the economy performed well. In the 1960s, for
example, GDP grew by 6.8 per cent per annum and industry also grew rap-
idly (7.9 per cent per year, 1965-1969). By 1970, Mexico had diversified its
export base – the share of manufactures in merchandise exports was already
32 per cent, while eight years earlier it had been less than half of that – and

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it was also self-sufficient in many consumer goods. Rapid economic growth
continued in the 1970s, but growth was undermined by fiscal mismanage-
ment and deterioration of the investment climate. Foreign borrowing
increased, and the public sector deficit rose rapidly. Also, inflation started to
rise. The poor investment climate led to massive capital flight. In general, the
macroeconomic policies of the 1970s left the economy vulnerable to exter-
nal shocks and, at the beginning of the 1980s, rising inflation, increasing
debt, falling oil prices and higher world interest rates caused an economic cri-
sis. The crisis forced the country to start economic reforms, and in the mid-
1980s economic policy was re-oriented toward trade liberalization, export
promotion and privatization. Trade barriers were reduced, Mexico joined the
General Agreement on Tariffs and Trade (GATT), and Mexico’s US debt was
re-scheduled. The economy stagnated, however, throughout the 1980s and
the growth of GDP was negative as late as 1986. By the end of the 1980s,
the inflation rate fell significantly and growth resumed. Trade liberalization
further progressed as Mexico joined the North American Free Trade
Agreement (NAFTA) in 1994. A new economic crisis occurred, however, in
1994-1995, and in 1995 GDP growth was significantly negative. With inter-
national support, growth recovered by the end of the 1990s before declining
again at the beginning of the next decade, when industry in particular stag-
nated. During the past few years, the country’s economic health has
improved and, compared to the period of the mid-1990s economic crisis, it
is more resilient to external shocks. Tighter monetary and fiscal policies have
dampened inflation: in 2002 consumer price inflation was 5 per cent, com-
pared to 69 per cent in the 1980s.
The services sector is the largest contributor to Mexican GDP, account-
ing for 70 per cent in 2005 (Figure 9). The importance of the sector has
somewhat increased during recent decades, but it accounted for 59 per cent
of GDP already in the mid-1960s (World Bank, 2006). The contribution of
agriculture to GDP has been minor. In 1965, its share was 14 per cent and
the share has declined further since then – in 2005 it was only 4 per cent.
The agricultural sector is, however, still an important employer, absorbing 16
per cent of total employment in 2003, and in some regions significantly
more than that. The share of manufacturing has been relatively constant over
the years, accounting for 18 per cent of GDP in 2005. The importance of
manufacturing exports has, however, significantly increased. In the late
1970s and early 1980s, Mexico relied heavily on oil for foreign-exchange
earnings (in 1982 the share of fuels in merchandise exports was 77.2 per
cent), but since the mid-1980s, when trade liberalization started, the share of
manufacturing exports began to increase, and in 2004 they accounted for
approximately 80 per cent of total merchandise exports. 
The most important manufacturing sub-sectors in terms of output are
currently metal products, machinery and related equipment; food, beverages
and tobacco; and chemicals, petroleum products, rubber and plastics (see e.g.

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Industrial Development for the 21st Century
Economist Intelligence Unit, 2004). The first of these is also the most
important manufacturing export sector. During the last 15 years, the impor-
tance of some skill-intensive exports (including road vehicles, telecommuni-
cation equipment, and electrical machinery) has been increasing, as has the
share of some light industries (Figure 10). Among individual light industries,
the clothing and accessories sector is the most important, accounting for
more than one-fourth of total light industry export income in 2003. The
share of food and agricultural raw material exports in total merchandise
exports has been steadily declining, from more than 40 per cent of total mer-
chandise exports in the 1960s to 12 per cent in 1980 and 5 per cent in 2004
(World Bank, 2006). A remarkable part of Mexico’s production of manufac-
tures for export is currently occurring in 
maquiladoras
(in-bond assembly for
re-export plants), which generally have a large content of imported inputs.
Poverty and inequality are still significant problems in Mexico. In 2002,
one-fifth of the population was living in poverty (measured using a food-
based poverty line, close to the international $2 per day poverty line) (World
Bank, 2004c). Over the past decade, the pattern of overall poverty has close-
ly followed the macroeconomic cycle and the changes in the labour market
(World Bank, 2004c). During the 1994-1995 crisis, poverty increased signif-
icantly, and it later declined with economic growth. The period 2000-2002
was exceptional, however, and poverty fell despite economic stagnation. 
Inequality is high in Mexico – the Gini index for the year 2000 was
54.6, while for India it was 32.5 (World Bank, 2004a). Wage inequality
increased between the mid-1980s and the mid-1990s (see e.g. Cortez, 2001).
In manufacturing, according to Esquivel and Rodríguez-López (2003), wage
income inequality between skilled and unskilled workers increased substan-
tially between 1988 and 1996, after which it did not change much until
2000. Between 2000 and 2002, overall income inequality declined (World
Bank, 2004c). In addition to inequality between the skilled and unskilled
labour force, there are large differences across regions, and poverty is highest
in the southern parts of the country (e.g. World Bank, 2004c). 
There are several possible reasons that can explain why inequality increased
even if, according to standard factor-proportions trade theory, trade liberaliza-
tion could have been expected to reduce inequality in Mexico. According to
Esquivel and Rodríguez-López (2003), technological change was responsible for
the increase in manufacturing wage inequality in the late 1980s and 1990s. In
the absence of technological change, trade liberalization would have led to a
reduction in the wage gap, particularly in the pre-NAFTA period. Moreover, the
structure of effective protection before liberalization may have favoured
unskilled labour-intensive industries (e.g. Ros and Bouillon, 2002).
Furthermore, even if Mexico has an abundance of unskilled labour compared to
the United States (Mexico’s main trading partner), it does not necessarily
have it vis-à-vis the rest of the world (see e.g. Ros and Bouillon, 2002). 
Slow economic growth and high inequality have inhibited progress in

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poverty reduction (World Bank, 2004c). Manufacturing, which could be an
engine of growth, has been growing slowly in recent years. Exports have been
expanding, but a significant share of exports is produced in relatively skill-
demanding industries, which has decreased the possibilities of poor people to