Does Trade Liberalization Cause Long Run Economic Growth in Mexico? An Empirical Investigation

Mexico, in its quest for economic growth, moved from an import substituting inward-oriented policy regime towards an outward oriented trade regime since the introduction of the economic reform in 1985. In the form of stocktaking, this study examines the impact of trade liberalization (openness) on long run economic growth in Mexico by using data from 1980:q1 to 2008:q4 with the help of cointegration and error correction methods. The empirical results suggest that long run economic growth in Mexico is largely explained by trade liberalization (openness) and the level of capital (investment). The results, however, show that the contribution of labor force and human capital is minimal. This is somewhat surprising given increased educational spending over the last decade. The estimated coefficient of the ECM indicates low speed of adjustment to equilibrium. The sign of the ECM term is negative and significant, thus, confirming that the system corrects its previous period’s disequilibrium by 20 percent a quarter. The policy implication of our results is that Mexico needs to intensify trade and investment reforms to promote sustainable long run economic growth. As an open economy, Mexico should continue to avoid real exchange rate overvaluation while minimizing exchange rate volatility. There is also the need to complement reforms in trade and investment sectors with reforms in the education sector.