Mexico – do the poor benefit from increased openness?
Abstract In the last 15 years Mexico has shifted to an outward-looking, export-oriented growth strategy. The strategy seems to have been more successful in Mexico than in almost any other country in the region. Exports have tripled since 1990 and the growth in per capita income since 1995 is among the highest in Latin America. The purpose of this chapter is to estimate the distributional, employment and poverty implications of this change in growth strategy. After reviewing the very turbulent macroeconomic environment in Mexico since 1980, we develop a CGE-microsimulation model and use it to simulate the impact of Mexico’s trade liberalization and increased openness on output, employment, poverty and the distribution of income. We find that increased openness, whether measured by lower tariffs, capital inflows or an increase in the demand for exports, is expansionary. Output and employment both increase and poverty declines, but there is at the same time a slight increase in inequality and extreme poverty. This is partly because the new growth strategy has been skill-intensive, causing a widening of wage inequality between skilled and unskilled labour in the urban sector and between agriculture workers and everyone else. These favourable effects of increased openness on poverty at the national level hide very different effects for the urban and rural sector. Increasing export demand or capital inflows hurt agricultural workers because they lead to both an appreciation of the exchange rate and a movement of capital out of agriculture and a contraction of agricultural wages and output. Overall, poverty falls but both rural poverty and extreme poverty increase because most extreme poverty is found in rural families.