Made in Mexico: Energy Reform and Manufacturing Growth
IMF Working Papers, February 27, 2015
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Bibliographic details
- Authors: Jorge A Alvarez, Fabian Valencia
- Published: February 27, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498376426.001
Summary findings
- The paper assesses the real effects of the energy reform in Mexico by examining its impact on manufacturing output through changes in energy prices.
- Electricity prices, relative to oil and gas, are found to be more important in the manufacturing process.
- Accounting for endogeneity of unit labor costs in a panel VAR setting introduces an additional indirect channel that amplifies the impact of electricity prices on output.
Quantitative estimates and scenarios
- A one standard deviation reduction in electricity prices leads to a 2.8 percent increase in manufacturing output.
- Using the authors’ estimated elasticities together with plausible reductions in electricity tariffs derived from the energy reform:
- Manufacturing output could increase by up to 3.6 percent.
- Overall real GDP could increase by 0.6 percent.
- Larger reductions in electricity prices — and correspondingly larger output gains — are possible over the long run if increased efficiency in the sector leads electricity prices to converge to U.S. levels.
- Including the impact of lower electricity tariffs on the services sector could lead to significantly larger effects on GDP.
Channels and mechanisms identified
- Direct price channel: lower electricity prices reduce input costs for manufacturing, raising output.
- Relative importance: electricity prices matter more than oil and gas prices for manufacturing output in the empirical results.
- Indirect labor-cost channel: endogeneity of unit labor costs (addressed in a panel VAR) amplifies the effects of electricity price changes on output.
- Cross-sector spillovers: reductions in electricity tariffs can affect services, which may substantially increase aggregate GDP effects beyond direct manufacturing gains.
Policy implications
- Energy reform measures that reduce electricity tariffs can have measurable positive effects on manufacturing output and GDP.
- Policies that improve sectoral efficiency and move electricity prices closer to U.S. levels could yield larger long-run gains.
- Considering spillovers to services and accounting for labor-cost feedbacks strengthens the case for electricity tariff reform as a growth-enhancing policy.
Authors: Jorge A Alvarez, Fabian Valencia; February 27, 2015; Working Paper No. 2015/045; Pages: 30; DOI: https://doi.org/10.5089/9781498376426.001