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  • Gerardo Esquivel Hernández and Alexander Monge-Naranjo

Gerardo Esquivel Hernández:

This paper addresses a fundamental question: what effect has the North American Free Trade Agreement had on total factor productivity in the manufacturing industry in Mexico? Responding to this question is important for Mexico, since it may provide one of the most important pieces of evidence in terms of the long-term impact of the opening of the Mexican economy. However, the relevance of answering this question goes well beyond the Mexican case and may be an important part of the more general debate about the effects of globalization.

As is well known, there is an important, and in some cases growing, degree of skepticism about the benefits of globalization. This perception is related to the apparently limited benefits that increased trade and investment links have brought to the people of the countries that have undergone a process of trade and investment liberalization. The critics' main argument is often that liberalization has translated into more poverty and unemployment, as well as greater wage inequality. In this sense, the contribution of the paper by Ernesto López-Córdova is a very important one, since it presents very compelling evidence on the positive effects of trade and investment liberalization on total factor productivity (TFP) in the manufacturing industry in Mexico. TFP has been identified as one of the main explanatory factors of per capita income differences across countries.1 The fact that trade and investment reforms are positively associated with TFP in the manufacturing industry in Mexico thus suggests that economic openness will have positive and long-lasting effects on the Mexican economy. Given the nature of the effects, the positive effects of liberalization should be observed mostly in the medium and long term, and not just in the short term. Providing robust and convincing evidence that trade and investment liberalization has an effect on a fundamental variable such as TFP is the most important contribution of this paper. [End Page 89]

The paper proceeds in a very well organized fashion. First, the paper reviews the process of trade and investment liberalization in Mexico. It succinctly but thoroughly describes the main reforms that led to the opening of the Mexican economy in the 1980s. The author then briefly surveys the theoretical and empirical literature on the relationship between trade, FDI, and productivity. Next, the author presents the estimates of total factor productivity in the manufacturing industry in Mexico and analyzes its determinants. In doing so, he attempts to establish a link between productivity performance, in either levels or growth rates, and some variables that presumably capture the channels through which increased trade and investment may have had an effect on productivity performance in Mexico.

In general, I like the approach used by the author (productivity analysis at the firm level), and he used an appropriate econometric methodology (the Olley-Pakes algorithm), which takes into account the problems of firms' exit and selectivity in the manufacturing industry. I would further like to mention one caveat, one comment, and one criticism of this paper. The caveat has to do with the lack of representativeness of the data used in this paper. Unfortunately, the survey that the author uses in this paper, the Annual Industrial Survey, is not representative of the whole manufacturing industry in Mexico, but rather is biased toward medium-sized and large firms. The Mexican authorities basically chose to oversample medium-sized and large firms in this survey to deal with the problem of a relatively large death rate among small firms. This characteristic of the dataset implies that we cannot easily draw inferences for the whole population based on these data. Moreover, part of the gains in productivity that are documented in the paper were achieved through economies of scale; this result might have been different if the dataset had included a greater number of small firms. Even so, this is probably the best available dataset for analyzing the topic discussed in this paper, and the results are quite valuable since they contribute to an understanding of the effect of liberalization on TFP in an important segment of the manufacturing industry in Mexico.

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pp. 89-94
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