## _wp1545

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### Introduction and research question
- December 2013 Mexican energy reform removed PEMEX’s monopoly on exploration, production, and transportation of hydrocarbons and increased private participation in the electricity sector.
- Paper assesses real effects of the reform through its impact on energy prices, focusing on manufacturing activity as the sector most likely to exhibit real effects because of its energy dependence.
- Empirical approaches:
  - Panel regressions using sub-sector and state-level GDP data and past variation in energy prices.
  - Panel Vector Auto Regression (VAR) model similar to macro studies on oil prices and growth.

### Main quantitative findings
- Electricity prices have the largest quantitative impact on manufacturing output:
  - A one-standard-deviation reduction in electricity prices is associated with a 2.8 percent increase in manufacturing output.
- Reform simulation results:
  - Changing electricity generation from fuel oil to natural gas could lead electricity prices to decline by 13 percent.
  - This could boost manufacturing output by up to 3.9 percent (scenario-calculation ranges reported below give the same ordering).
  - This could increase overall GDP by up to 0.6 percent.
  - Larger effects are possible if electricity prices converge to U.S. levels.
- Sectoral and aggregate impacts:
  - Manufacturing is more sensitive to energy prices than services.
  - Because services account for about 60 percent of GDP, the combined impact on GDP through higher manufacturing and services output could reach about four times the contribution of manufacturing alone.
  - Among manufacturing subsectors, larger effects are found in metals, machinery and equipment (including the export-oriented auto industry).
- Labor-cost channel:
  - In a panel VAR framework, unit labor costs respond statistically significantly to changes in electricity prices, suggesting an amplification mechanism beyond direct price-cost effects.

### Manufacturing performance and trade context (stylized facts)
- Post-NAFTA manufacturing surge:
  - 1994–2000 average annual growth in manufacturing output: 5.6 percent.
  - Exports rose from 15 percent of GDP before NAFTA to over 30 percent in 2012.
  - Overall GDP growth, 1994–2012: 2.6 percent (annualized).
- Regional and subsector heterogeneity:
  - Northern regions outperformed southern regions, particularly in the 1990s and in the recent recovery.
  - Metals, machinery, and equipment subsector mirrors Northeast regional growth.
  - Auto manufacturing: car production tripled since NAFTA; Mexico became the second biggest car exporter to the United States and supplies one third of all U.S. imports of auto parts.
- International competition and oil-price channel:
  - Rising oil prices can increase transportation costs and raise the importance of proximity to the U.S. market, potentially affecting Mexico’s U.S. market share.

### The role and structure of energy inputs
- Industrial energy consumption shares in 2012:
  - Electricity: 58.6 percent of industrial electricity consumption.
  - Gas: 17.7 percent of industrial gas consumption.
  - Oil derivatives: 6.3 percent of industrial oil derivatives consumption.
- Direct input shares to manufacturing:
  - Oil derivatives (liquefied petroleum gas, diesel, gasoline, fuel oil) account for a total of 15.6 percent of energy inputs.
  - In the auto industry: Electricity 60.4 percent of energy inputs; Natural gas 28.7 percent of energy inputs.
- Natural gas infrastructure and reserves:
  - Natural gas pipelines have operated close to maximum capacity; early 2013 shortages estimated to account for a loss of 0.3 percent of GDP growth during Q2 2013.
  - Mexican natural gas reserves are estimated at 63,229 Mmcf.
- Energy demand outlook:
  - Some estimates suggest energy demand in 2024 could be 79 percent higher than in 2010 under current usage patterns.
  - McKinsey Global Institute (2014) estimates assume a 3.5percent growth rate in overall GDP and energy production relying on the same proportion of energy sources observed in 2012.

### Electricity and natural gas: constraints and comparative metrics
- Mexico ranks:
  - 133rd on easiness to get electricity (Doing Business Report).
  - 81st on quality of electricity (World Economic Forum Competitiveness report).
- Industrial electricity prices in Mexico have been about twice those in the U.S. for the same client category for at least a decade.
- Installed electricity generation capacity in Mexico is close to 80 percent based on fossil fuels.
- Composition of fossil fuel generation capacity (2012):
  - Mexico: Oil Derivatives 26.9, Coal 14.6, Natural Gas and Others 58.5 (percent of fossil fuels).
  - United States: Oil Derivatives 0.8, Coal 54.6, Natural Gas and Others 44.6 (percent of fossil fuels).
- Oil derivatives account for about 18 percent of actual electricity generation in Mexico.
- Distribution losses in Mexico account for more than 16 percent of total generation, more than double losses in developed economies.

### Prices, distribution losses, and cost structure
- If Mexico used natural gas instead of fuel oil under current conditions, the input cost structure for electricity generation would imply a drop of about 13 percent in electricity prices for industrial users.
  - Calculation from source: oil derivatives represent 18.1 percent of total generation; natural gas about 71 percent cheaper than fuel oil; implied reduction 0.181 * -0.71 = -13 percent (ceteris paribus).
- A large component of distribution losses is technical (aging infrastructure); electricity theft is also important.
- Twenty-one generation projects amounting to US$7.7 billion are expected to be completed by 2018.
- Reconversion of seven power plants from fuel oil to natural gas announced, totaling 4560 MW, which is about 9 percent of installed capacity of the system.

### The Mexican energy reform: institutional and sectoral changes
- Reform objectives:
  - Open parts of oil, gas, and electricity sectors to private investors.
  - Retain control of transmission and distribution channels through more autonomous regulatory agents.
  - Increase investment for exploitation of reserves, exploration, transmission network expansion, and infrastructure improvement.
- Oil sector:
  - Increased autonomy for PEMEX via the State Productive Enterprises legal figure.
  - Joint ventures with private agents allowed.
- Natural gas:
  - Reform opens possibility of exploiting vast gas reserves and facilitating increased transportation capacity of imports from the U.S.
  - Short-term gains in natural gas availability expected mainly through increased imports and pipeline investments.
- Electricity sector:
  - Generation opened to private competition; private investors can build and sell to a centralized regulatory body and may sell directly to high-volume customers.
  - Reformed state body can contract private firms for transmission and distribution grid development and maintenance.
  - Potential to reduce distribution losses and, in a limiting case, converge Mexican industrial electricity prices toward U.S. levels (implying up to about 50 percent reduction in prices faced by manufacturing industry).

### Empirical analysis: data and identification
- Data sources and coverage:
  - Real output at state and subsector level from INEGI, 1996–2012.
  - Unit labor costs at subsector level (local currency, deflated by Mexican CPI).
  - Moody’s yield on corporate bonds deflated by U.S. core CPI as proxy for opportunity cost of capital.
  - U.S. Industrial Production (Haver Analytics) and IMF trade-weighted real exchange rate included.
  - Energy prices from SENER; electricity = average industrial prices for medium and large industrial users.
  - Gas prices: available 1994–1997; other years proxied by revenue/volume ratios; all deflated by Mexico’s CPI.
  - WTI crude oil average spot price used for international oil prices.
- Empirical strategy:
  - Panel regressions at subsector-state-year level with lagged dependent variable, lagged changes in electricity (EL), natural gas (NG), and oil derivatives (OD) prices, and control vector X (unit labor costs, real effective exchange rate, cost of capital, U.S. industrial production, world crude oil price) in first differences.
  - Fixed effects at sector-state pair; robust standard errors clustered at sector-state pair.
  - Lagging regressors one period; energy prices at national level while dependent variable at subsector-state level reduces reverse causality concerns.

### Estimated energy-price elasticities (key results)
- Electricity elasticities:
  - Table 2 (each energy source independently): Electricity elasticity: -0.174.
  - Tables 3–4 (all energy sources simultaneously): Electricity elasticity ranges from -0.114 to -0.283 when all manufacturing subsectors considered.
  - Excluding the subsector that includes oil refining yields electricity elasticity -0.323.
  - GMM (Arellano and Bond) electricity coefficient ranges from -0.278 to -0.284.
- Natural gas elasticities:
  - Natural gas elasticity: -0.024 (Table 2).
  - After controlling for electricity prices and in GMM estimations: typically in range -0.036 to -0.037.
- Oil derivatives:
  - Positive sign in some specifications (puzzling result noted in source).
- Subsector heterogeneity:
  - Largest impact in subsector that includes export-oriented auto industry: elasticity of -0.51 versus manufacturing average of -0.28.
- Standard-deviation examples:
  - One standard deviation reduction in electricity prices -> 2.8 percent impact on manufacturing output.
  - One standard deviation reduction in natural gas prices -> 1.1 percent impact on manufacturing output.

### Quantitative scenarios and back-of-the-envelope calculations
- Elasticity range used: between -0.11 and -0.28 (from Tables 3 and 4).
- Two scenarios:
  - Scenario 1: Substitution of fuel oil for natural gas (13 percent reduction in electricity prices).
  - Scenario 2: Convergence to U.S. electricity price levels (50 percent reduction in electricity prices).
- Results (In percent):
  - Elasticities: Lowest -0.11; Highest -0.28.
  - Scenario 1: Substitution of fuel for natural gas (13 percent price reduction)
    - Increase in manufacturing output: 1.4 to 3.6
    - Increase in overall GDP: 0.2 to 0.6
  - Scenario 2: Convergence to U.S. levels (50 percent price reduction)
    - Increase in manufacturing output: 5.5 to 14.0
    - Increase in overall GDP: 0.9 to 2.2
- Interpretation:
  - A 13 percent reduction in electricity prices could increase manufacturing output between 1.4 and 3.6 percent and increase real GDP by up to 0.6 percent.
  - Convergence of electricity prices to U.S. levels could increase manufacturing output up to 14 percent and increase real GDP up to 2.2 percent.

### Dynamic analysis: panel VAR results
- VAR specification:
  - Variables: manufacturing output (state i, subsector j, year t), U.S. r, U.S. IP, unit labor costs (ULC), industrial electricity prices (EL).
  - State-subsector fixed effects included.
  - VAR imposes lower-triangular identification and treats U.S. IP and U.S. r as exogenous.
  - Timing assumptions: unit labor costs respond with a lag; output responds with a lag.
- Impulse responses to a 1 percent electricity-price shock:
  - Baseline VAR: negative and significant effect of electricity prices on manufacturing output lasting at least 2 years before flattening.
  - VAR impact effect biased downwards relative to panel regression estimates; effect on output by period 2 comparable to lower end of Table 3 estimates.
  - Cumulative effect after 5 years is about 50 percent larger in magnitude than the impact effect.
- Unit labor costs:
  - Increase in unit labor costs observed following electricity-price shocks; result significant and robust to parametric and non-parametric bootstrapped standard errors.
  - Controlling for oil prices reduces but does not eliminate the unit labor cost response; unit labor costs still respond statistically significantly and amplify the impact on manufacturing.

### Robustness, heterogeneity, and supporting statistics
- Baseline estimates (Table 2, sample 1996-2012) show electricity-price coefficients frequently negative and statistically significant (examples: -0.232, -0.277, -0.192, -0.229 reported in source tables).
- Including services subsectors (Table 5, sample 1998-2012) yields electricity-price elasticities around -0.114 to -0.279 across specifications.
- Differential effects across subsectors (Table 6) indicate heterogeneity across industries (Food, Textiles, Wood, Paper, Chemicals and oil derivatives, Minerals, Other).

### Policy-relevant implications and priorities
- Priorities to increase manufacturing competitiveness and output:
  - Expand natural gas transportation and pipeline capacity to enable substitution of fuel oil by cheaper natural gas.
  - Promote reconversion of generation plants from fuel oil to natural gas (reconversion of 4560 MW announced equals about 9 percent of installed capacity).
  - Advance electricity sector reforms that enable private generation investment, foster gas-based generation, and allow centralized market sales and direct sales to high-volume customers.
  - Contract private firms for transmission and distribution grid development and maintenance to reduce technical distribution losses (currently >16 percent).
- Potential macroeconomic gains:
  - Short-to-medium-term reductions in electricity prices via fuel substitution and reconversion could yield measurable increases in manufacturing output and GDP.
  - Longer-term infrastructure and efficiency improvements that close the Mexico–U.S. industrial electricity price gap could yield substantially larger gains for manufacturing and aggregate GDP.
- Implementation caveats:
  - Growth impact is complex and uncertain due to multiple structural changes and implementation challenges.
  - Realization of broader benefits depends critically on effective and transparent implementation of the reform and effectiveness of newly created regulatory agencies.

### Key statistics and exact figures (as presented in source)
- One-standard-deviation reduction in electricity prices -> 2.8 percent increase in manufacturing output.
- One-standard-deviation reduction in natural gas prices -> 1.1 percent increase in manufacturing output.
- Estimated electricity-price-induced reduction under fuel-oil-to-gas substitution: 13 percent.
- Possible electricity-price reduction if prices converge to U.S. levels: up to about 50 percent.
- Scenario 1 (13 percent reduction) -> manufacturing output increase: 1.4–3.6; real GDP increase: 0.2–0.6.
- Scenario 2 (50 percent reduction) -> manufacturing output increase: 5.5–14.0; real GDP increase: 0.9–2.2.
- Manufacturing share: less than 18 percent.
- Manufacturing and services combined: close to 80 percent of the economy.
- Services sector size relative to manufacturing: about three times larger.
- Distribution losses: more than 16 percent of total generation.
- Reconversion announced: 4560 MW (about 9 percent of installed capacity).
- Generation projects expected by 2018: US$7.7 billion across 21 projects.
- Mexican natural gas reserves: 63,229 Mmcf.
- VAR horizon reported: 5 years; confidence bands: 90 percent confidence intervals with bootstrapped standard errors.

*Source: _wp1545 - References (excerpted content provided in the source PDF).*

### References .............................................................................................................

### _wp1545 - References

### Introduction and research question
- The December 2013 Mexican energy reform removed PEMEX’s monopoly on exploration, production, and transportation of hydrocarbons and increased private participation in the electricity sector.
- The paper assesses real effects of the reform through its impact on energy prices, focusing on manufacturing activity as the sector most likely to exhibit real effects because of its energy dependence.
- Empirical approaches used:
  - Panel regressions using sub-sector and state-level GDP data and past variation in energy prices.
  - A panel Vector Auto Regression (VAR) model similar to macro studies on oil prices and growth (e.g., Lee and Ni, 2002; Blanchard and Gali, 2007; Kilian, 2009).

### Main quantitative findings
- Electricity prices have the largest quantitative impact on manufacturing output:
  - A one-standard-deviation reduction in electricity prices is associated with a 2.8 percent increase in manufacturing output.
- Reform simulation results:
  - Changing electricity generation from fuel oil to natural gas could lead electricity prices to decline by 13 percent.
  - This could boost manufacturing output by up to 3.9 percent.
  - This could increase overall GDP by up to 0.6 percent.
  - Larger effects are possible if electricity prices converge to U.S. levels.
- Sectoral and aggregate impacts:
  - Manufacturing is more sensitive to energy prices than services.
  - Because services account for about 60 percent of GDP, the combined impact of the reform on GDP through higher manufacturing and services output could reach about four times the contribution of manufacturing alone.
  - Among manufacturing subsectors, larger effects are found in metals, machinery and equipment (which includes the export-oriented auto industry).
- Labor-cost channel:
  - In a panel VAR framework, unit labor costs respond statistically significantly to changes in electricity prices, suggesting an amplification mechanism beyond direct price-cost effects.

### Manufacturing performance and trade context (stylized facts)
- Post-NAFTA manufacturing surge:
  - 1994–2000 average annual growth in manufacturing output: 5.6 percent.
  - Exports rose from 15 percent of GDP before NAFTA to over 30 percent in 2012.
  - Overall GDP growth, 1994–2012: 2.6 percent (annualized).
- Regional and subsector heterogeneity:
  - Northern regions outperformed southern regions, particularly in the 1990s and in the recent recovery, reflecting proximity advantages to the U.S. market.
  - Metals, machinery, and equipment subsector is an outlier with a pattern similar to Northeast regional growth.
  - Auto manufacturing: car production tripled since NAFTA; Mexico became the second biggest car exporter to the United States and supplies one third of all U.S. imports of auto parts.
- International competition and oil-price channel:
  - Rising oil prices can increase transportation costs and raise the importance of proximity to the U.S. market, potentially affecting Mexico’s market share in the U.S.
  - China’s WTO accession in 2001 contributed to crowding out Mexican exports in some labor-intensive sectors.

### The role and structure of energy inputs
- Industrial (including manufacturing) energy consumption shares in 2012:
  - Electricity: 58.6 percent of industrial electricity consumption.
  - Gas: 17.7 percent of industrial gas consumption.
  - Oil derivatives: 6.3 percent of industrial oil derivatives consumption.
- Importance of electricity and natural gas:
  - Electricity and natural gas are the most important energy inputs for industrial production.
  - Natural gas affects manufacturing both directly (as an input) and indirectly (as input to electricity generation).
- Energy demand outlook and infrastructure concerns:
  - Some estimates suggest energy demand in 2024 could be 79 percent higher than in 2010 under current usage patterns.
  - McKinsey Global Institute (2014) estimates assume a 3.5percent growth rate in overall GDP and energy production relying on the same proportion of energy sources observed in 2012.

### Literature context and contribution
- Mixed prior evidence on energy reform impacts:
  - Non-OECD country experiences show mixed results (Williams and Ghanadan, 2006).
  - In OECD samples, privatized competitive generation may lower prices and increase efficiency (Steiner, 2000).
  - Studies of developing countries find competition and regulatory frameworks can raise energy-sector productivity and efficiency (Zhang et al., 2008; Cubbin and Stern, 2006; Bortolotti, 1998).
- Electricity and growth literature:
  - Survey evidence is mixed: Payne (2010) reports 22.95 percent of studies support electricity production causing growth; Ozturk (2010) finds no consensus.
  - Regional studies (Apergis and Payne, 2010) find Granger causality from energy production to growth in Latin America.
  - Country studies for Mexico yield mixed results; this paper adds to the literature by analyzing effects through prices and using disaggregated GDP data.
- Manufacturing productivity literature in Mexico:
  - Related to studies on determinants of manufacturing productivity growth (Chavez and Fonseca, 2013; Salgado and Bernal, 2007; Chiquiar and Ramos Francia, 2009).

*Source: _wp1545 - References (PDF).*

### 35.8 percent of consumption when it enters industrial production as a direct input. Finally, oil

### _wp1545 - 35.8 percent of consumption when it enters industrial production as a direct input. Finally, oil

### Energy inputs in manufacturing
- Electricity and natural gas are the dominant direct energy inputs in manufacturing when accounting for each energy source by their direct contribution to manufacturing processes.
- Oil derivatives (liquefied petroleum gas, diesel, gasoline, fuel oil) account for a total of 15.6 percent of energy inputs.
- In the auto industry:
  - Electricity: 60.4 percent of energy inputs.
  - Natural gas: 28.7 percent of energy inputs.
- Natural gas pipelines have operated close to maximum capacity in recent years; early 2013 shortages were estimated to account for a loss of 0.3 percent of GDP growth during Q2 2013 (Bank of Mexico, 2013).
- Mexican natural gas reserves are estimated at 63,229 Mmcf.

### Electricity and natural gas: constraints and comparative metrics
- Mexico ranks:
  - 133rd on easiness to get electricity (Doing Business Report).
  - 81st on quality of electricity (World Economic Forum Competitiveness report).
- Industrial electricity prices in Mexico have been about twice those in the U.S. for the same client category for at least a decade (Figure 4A).
- Installed electricity generation capacity in Mexico is close to 80 percent based on fossil fuels.
- Composition of fossil fuel generation capacity (as of 2012) shown:
  - Mexico: Oil Derivatives 26.9, Coal 14.6, Natural Gas and Others 58.5 (percent of fossil fuels).
  - United States: Oil Derivatives 0.8, Coal 54.6, Natural Gas and Others 44.6 (percent of fossil fuels).
- Oil derivatives account for about 18 percent of actual electricity generation in Mexico.

### Prices, distribution losses, and cost structure
- If Mexico used natural gas instead of fuel oil under current conditions, the input cost structure for electricity generation would imply a drop of about 13 percent in electricity prices for industrial users.
  - Calculation note from source: oil derivatives represent 18.1 percent of total generation; natural gas about 71 percent cheaper than fuel oil; implied reduction 0.181 * -0.71 = -13 percent (ceteris paribus).
- Distribution losses in Mexico account for more than 16 percent of total generation, more than double losses observed in developed economies and above the regional average for Central and South America (Figure 5).
  - A large component of losses is technical (aging infrastructure); electricity theft is also an important component.
- Twenty-one generation projects amounting to US$7.7 billion are expected to be completed by 2018.
- Reconversion of seven power plants from fuel oil to natural gas announced, totaling 4560 MW, which is about 9 percent of installed capacity of the system.

### The Mexican energy reform (constitutional reforms Dec 2013; secondary legislation Aug 2014)
- Reform objectives:
  - Open parts of oil, gas, and electricity sectors to private investors.
  - Retain control of transmission and distribution channels through more autonomous regulatory agents.
  - Increase investment for exploitation of reserves, exploration, transmission network expansion, and infrastructure improvement.
- Oil sector:
  - Increased autonomy for PEMEX via the State Productive Enterprises legal figure.
  - Joint ventures with private agents allowed; potential to reverse declining oil production trend.
- Natural gas:
  - Reform opens possibility of exploiting vast gas reserves and facilitating increased transportation capacity of imports from the U.S.
  - Short-term gains in natural gas availability expected mainly through increased imports and pipeline investments.
- Electricity sector:
  - Generation opened to private competition; private investors can build and sell to a centralized regulatory body responsible for transmission and distribution.
  - Generation companies may sell directly to high-volume customers.
  - Reformed state body can contract private firms for transmission and distribution grid development and maintenance.
  - Potential to reduce distribution losses and, in a limiting case, converge Mexican industrial electricity prices toward U.S. levels (implying up to about 50 percent reduction in prices faced by manufacturing industry).

### Empirical analysis: data and identification
- Data:
  - Real output at state and subsector level from INEGI, 1996–2012.
  - Unit labor costs at subsector level (local currency, deflated by Mexican CPI).
  - Moody’s yield on corporate bonds deflated by U.S. core CPI as proxy for opportunity cost of capital.
  - U.S. Industrial Production (Haver Analytics) and IMF trade-weighted real exchange rate included.
  - Energy prices from SENER; electricity = average industrial prices for medium and large industrial users.
  - Gas prices: available 1994–1997; other years proxied by revenue/volume ratios; all deflated by Mexico’s CPI.
  - WTI crude oil average spot price used for international oil prices.
- Empirical strategy:
  - Panel regressions at subsector-state-year level with lagged dependent variable, lagged changes in electricity (EL), natural gas (NG), and oil derivatives (OD) prices, and control vector X (unit labor costs, real effective exchange rate, cost of capital, U.S. industrial production, world crude oil price) in first differences.
  - Fixed effects at sector-state pair; robust standard errors clustered at sector-state pair.
  - Lagging regressors one period to mitigate simultaneity; left-hand side at subsector-state level while energy prices at national level reduces reverse causality concerns.

### Estimated energy price elasticities (key results)
- Table 2 (each energy source independently):
  - Electricity elasticity: -0.174.
  - Natural gas elasticity: -0.024.
  - Oil derivatives: positive sign in this specification (puzzling result).
- Tables 3–4 (all energy sources simultaneously; controlling for other energy sources):
  - Electricity elasticity ranges from -0.114 to -0.283 when all manufacturing subsectors considered.
  - Excluding the subsector that includes oil refining yields electricity elasticity -0.323 (column (8) note).
  - Natural gas elasticity (statistically significant after controlling for electricity prices): typically in range -0.036 to -0.037 in GMM Arellano and Bond estimations.
  - GMM (Arellano and Bond) electricity coefficient ranges from -0.278 to -0.284.
- Standard deviation example:
  - One standard deviation reduction in electricity prices -> impact of 2.8 percent on manufacturing output.
  - One standard deviation reduction in natural gas prices -> impact of 1.1 percent on manufacturing output.
- Subsector heterogeneity:
  - Largest impact in subsector that includes export-oriented auto industry: elasticity of -0.51 versus manufacturing average of -0.28.
  - Electricity price increases negatively impact all subsectors, though magnitudes and significance vary.

### Quantitative importance: back-of-the-envelope scenarios
- Elasticity range used for calculations: between -0.11 and -0.28 (from Tables 3 and 4).
- Two scenarios considered:
  - Scenario 1: Substitution of fuel oil for natural gas (13 percent reduction in electricity prices).
  - Scenario 2: Convergence to U.S. electricity price levels (50 percent reduction in electricity prices).
- Results (In percent)
  - Elasticities: Lowest -0.11; Highest -0.28.
  - Scenario 1: Substitution of fuel for natural gas (13 percent price reduction)
    - Increase in manufacturing output: 1.4 to 3.6
    - Increase in overall GDP: 0.2 to 0.6
  - Scenario 2: Convergence to U.S. levels (50 percent price reduction)
    - Increase in manufacturing output: 5.5 to 14.0
    - Increase in overall GDP: 0.9 to 2.2
- Interpretation:
  - A 13 percent reduction in electricity prices could increase manufacturing output between 1.4 and 3.6 percent and increase real GDP by up to 0.6 percent.
  - Convergence of electricity prices to U.S. levels could increase manufacturing output up to 14 percent and increase real GDP up to 2.2 percent.

### Policy-relevant implications (drawn from analysis and scenarios)
- Priorities for increasing manufacturing competitiveness and output:
  - Expand natural gas transportation and pipeline capacity to enable substitution of fuel oil by cheaper natural gas.
  - Promote reconversion of generation plants from fuel oil to natural gas (reconversion of 4560 MW announced equals about 9 percent of installed capacity).
  - Advance electricity sector reforms that enable private generation investment, foster gas-based generation, and allow centralized market sales and direct sales to high-volume customers.
  - Contract private firms for transmission and distribution grid development and maintenance to reduce technical distribution losses (currently >16 percent).
- Potential macroeconomic gains:
  - Short-to-medium-term reductions in electricity prices via fuel substitution and reconversion could yield measurable increases in manufacturing output and GDP.
  - Longer-term infrastructure and efficiency improvements that close the Mexico–U.S. industrial electricity price gap could yield substantially larger gains for manufacturing and aggregate GDP.

*Source: IMF staff analysis (excerpted content provided in the source PDF).*

### 2.2 percent for each scenario respectively, given today’s importance of the manufacturing

### _wp1545 - 2.2 percent for each scenario respectively, given today’s importance of the manufacturing

### Findings on energy-price effects on manufacturing and GDP
- Electricity prices have the largest effect on manufacturing output among several energy prices.
- Using estimated elasticities and probable reductions in electricity prices due to substitution of fuel oil for natural gas in electricity generation of around 13 percent implies:
  - a 1.4–3.6 percent increase in manufacturing output, and
  - a 0.2–0.6 increase in real GDP.
- Manufacturing alone represents less than 20 percent of the economy (manufacturing alone is less than 18 percent is noted), while manufacturing and services combined represent close to 80 percent of the economy.
- Elasticities that include services (Table 5) show an elasticity of -0.25 (instead of -0.28 for manufacturing alone), implying an overall increase in GDP that is more than four times larger than the manufacturing-only estimate because services are about three times larger than manufacturing.
- Some services-sector impacts may be indirect consequences of manufacturing activity, as services subsectors are closely linked to manufacturing.

### Dynamic analysis: Panel VAR framework
- A multivariate panel Vector Auto Regression (VAR) model is estimated in an open-economy framework with variables:
  - manufacturing output (by state i, subsector j, year t),
  - U.S. interest rate (U.S. r),
  - U.S. industrial production index (U.S. IP),
  - unit labor costs at the subsector level (ULC),
  - industrial electricity prices (EL).
- Specification includes state-subsector fixed effects to account for trend differences.
- The VAR imposes a lower-triangular identification (J matrix) and restricts U.S. IP and U.S. r to be exogenous.
- Timing assumptions: unit labor costs respond to output and energy price fluctuations with a lag; output responds to electricity prices with a lag (conservative assumption, contemporaneous supply effects set to zero).

### Impulse responses to a 1 percent electricity-price shock
- Figure 7.A (baseline VAR, parametric bootstrapped standard errors):
  - A negative and significant effect of electricity prices on manufacturing output lasting at least 2 years before flattening.
  - The VAR impact effect is biased downwards relative to panel regression estimates; the effect on output by period 2 is comparable to the lower end of Table 3 estimates.
  - Cumulative effect after 5 years is about 50 percent larger in magnitude than the impact effect.
- Unit labor costs:
  - Increase in unit labor costs observed following electricity-price shocks, consistent with VAR literature on oil-price shocks (inflationary pressures on real wages).
  - This result is significant and robust to parametric and non-parametric bootstrapped standard errors (Figure 7.B).
  - Possible mechanisms: substitution effect increasing labor demand, or labor supply channels from greater transportation costs and higher costs of living.
- Controlling for oil prices (Figure 7.C):
  - Response of unit labor costs to electricity-price changes is smaller once oil prices are included.
  - Unit labor costs still respond in a statistically significant magnitude to electricity prices and amplify the impact on manufacturing.
  - Suggests an additional indirect channel beyond the direct panel-regression effect that can make the overall growth impact of lower electricity prices larger.

### Robustness and heterogeneity (high-level from tables)
- Baseline estimates (Table 2, sample 1996-2012) show electricity-price coefficients frequently negative and statistically significant (e.g., -0.232, -0.277, -0.192, -0.229 with standard errors reported).
- Including additional controls and alternative estimators (Tables 3 and 4) generally preserve the negative relationship between electricity prices and manufacturing output.
- Including services subsectors (Table 5, sample 1998-2012) yields negative electricity-price elasticities around -0.114 to -0.279 across specifications, with significance at conventional levels.
- Differential effects across subsectors (Table 6) indicate heterogeneity in responses across industries (coefficients and significance reported for subsectors such as Food, Textiles, Wood, Paper, Chemicals and oil derivatives, Minerals, and Other).

### Policy implications and interpretation
- The energy reform in Mexico is potentially transformational but its growth impact is complex and uncertain due to multiple structural changes and implementation challenges.
- Lower electricity prices provide a tangible channel for increasing manufacturing output and aggregate GDP, with amplified effects when services are considered.
- Dynamic feedbacks through unit labor costs provide an additional indirect amplification channel.
- Realization of broader benefits (modernizing oil and gas industries, attracting investment, technology spillovers, increased FDI) depends critically on effective and transparent implementation of the reform and effectiveness of newly created regulatory agencies.

### Key statistics and exact figures (as presented)
- Estimated electricity-price-induced reductions used in scenarios: around 13 percent.
- Resulting manufacturing-output increase: 1.4–3.6 percent.
- Resulting real GDP increase: 0.2–0.6.
- Manufacturing share: less than 18 percent (manufacturing alone is less than 18 percent).
- Manufacturing and services combined: close to 80 percent of the economy.
- Services sector size relative to manufacturing: about three times larger.
- VAR horizon for impulse responses: 5 years.
- Confidence bands: 90 percent confidence interval bands used for impulse responses; bootstrapped standard errors (parametric and non-parametric) reported.

*Source: IMF Working Paper content in the provided PDF excerpt.*

### References

### References

### Energy and growth literature
- Apergis, N., & Payne, J. E. (2010). Energy consumption and growth in South America: Evidence from a panel error correction model. Energy Economics,32(6), 1421-1426.
- Cheng, B. S. (1997). Energy consumption and economic growth in Brazil, Mexico and Venezuela: a time series analysis. Applied Economics Letters,4(11), 671-674.
- Ferguson, R., Wilkinson, W., & Hill, R. (2000). Electricity use and economic development. Energy policy, 28(13), 923-934.
- Murray, D.A., & Nan, G.D. (1996). A definition of the gross domestic product-electrification interrelationship. Journal of Energy and Development 19, 275–283.
- Ozturk, I. (2010). A literature survey on energy–growth nexus. Energy policy,38(1), 340-349.
- Payne, J. E. (2010). A survey of the electricity consumption-growth literature. Applied energy, 87(3), 723-731.

### Oil, gas, and oil-shock analysis
- Blanchard, O. J., & Gali, J. (2007). The Macroeconomic Effects of Oil Shocks: Why are the 2000s so different from the 1970s? (No. w13368). National Bureau of Economic Research.
- Kilian, L. (2009). Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. The American Economic Review, 1053-1069.
- Lee, K., & Ni, S. (2002). On the dynamic effects of oil price shocks: a study using industry level data. Journal of Monetary Economics, 49(4), 823-852.
- Melolinna, M. (2012). Macroeconomic shocks in an oil market VAR.
- BP (2014). Statistical Review of World Energy 2014: Historical Data Workbook. Retrieved from http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html
- Energy Information Administration. (2014). Online database on energy indicators. Retrieved from http://www.eia.gov/countries/data.cfm.

### Electricity sector reform, regulation, and privatization
- Besant-Jones, J. E. (2006). Reforming power markets in developing countries: what have we learned?. World Bank.
- Bortolotti, B., Fantini, M., & Siniscalco, D. (1998). Regulation and privatization: The case of electricity. Fondazione Eni Enrico Mattei.
- Cubbin, J., & Stern, J. (2006). The impact of regulatory governance and privatization on electricity industry generation capacity in developing economies. The World Bank Economic Review, 20(1), 115-141.
- Steiner, F. (2000). Regulation, industry structure, and performance in the electricity supply industry. Available at SSRN 223648.
- Williams, J. H., & Ghanadan, R. (2006). Electricity reform in developing and transition countries: A reappraisal. Energy, 31(6), 815-844.
- Zhang, Y. F., Parker, D., & Kirkpatrick, C. (2008). Electricity sector reform in developing countries: an econometric assessment of the effects of privatization, competition and regulation. Journal of Regulatory Economics, 33(2), 159-178.

### Mexico-specific studies, data, and policy documents
- Bernal, L. & Salgado, H. (2007). Productividad Multifactorial y sus Determinantes: Un Análisis Empírico para el Sector Manufacturero Mexicano (No. 2007-09). Working Papers. Banco de Mexico.
- Bank of Mexico. (2013). Efectos del Desabasto de Gas Natural sobre la Actividad Económica. Informe sobre la Inflación Julio-Septiembre 2013, 31-34.
- Chavez, J. & Foseca, F. (20012). Eficiencia Técnica y Estructural de la Industria Manufacturera en México: un Enfoque Regional (No. 2012-09). Working Papers. Banco de Mexico.
- Chiquiar, D. & Ramos Francia, M. (2009). A Note on Mexico and U.S. Manufacturing Industries’ Long-term Relationship (No. 2008–08). Working Papers. Banco de Mexico.
- Chiquiar, D., & Ramos Francia, M. (2009). Competitiveness and growth of the Mexican economy (No. 2009-11). Working Papers. Banco de Mexico.
- Garcia, K. (2014, August 21). Para la electricidad, inversión de 2 billones de pesos en 15 años. El Economista. Retrieved from http://eleconomista.com.mx/industrias/2014/08/21/electricidad-inversion-2-billones-15-anos-sener.
- International Monetary Fund, 2014, The impact of Mexico’s energy reform on hydrocarbons’ production. Selected Issues, chapter 1.
- Kamil, H & Zook, J. (2012). What Explains Mexico’s Recovery of U.S. Market Share?. IMF Article IV Consultation. Selected Issues, 16-25.
- McKinsey Global Institute. (2014). A tale of two Mexicos: Growth and prosperity in a two-speed economy. McKinsey Global Institute.
- Secretaria de Hacienda y Crédito Público. (2013). Programa Nacional de Financiamiento del Desarrollo 2013-2018.
- Secretaria de Hacienda y Crédito Público. (2014). Ajustes a las tarifas eléctricas 2014-2018  [PowerPoint presentation].
- Secretaria de Hacienda y Crédito Público. (2014). Programa Nacional de Financiamiento de Infraestructura 2014-2018.
- SENER. (2013). Estrategia Nacional de Energía 2013-2027.
- SENER. (2014). Estrategia Nacional de Energía 2014-2028.
- SENER. (2013). Prospectiva del Gas Natural 2013-2027.
- SENER. (2013). Prospectiva del Petróleo Crudo y Petrolíferos 2013-2027.
- SENER. (2013). Prospectiva del Sector Eléctrico 2013-2027.
- Doing Business. (2014). Doing Business en Mexico 2014. World Bank.
- World Economic Forum. (2013). The Global Competitiveness Report 2013-2014. Full Data Edition. World Economic Forum.

### Methods, regional concentration, and complementary analyses
- Arellano, M., and S. Bond. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58: 277–297.
- Ellison, G., & Glaeser, E. L. (1999). The geographic concentration of industry: does natural advantage explain agglomeration?. American Economic Review, 311-316.
- Kamil, H & Zook, J. (2012). What Explains Mexico’s Recovery of U.S. Market Share?. IMF Article IV Consultation. Selected Issues, 16-25.
- Williams, J. H., & Ghanadan, R. (2006). Electricity reform in developing and transition countries: A reappraisal. Energy, 31(6), 815-844.

*Source: _wp1545 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1545.pdf_