Volume 44, Number 173,
April-June 2013
From Recession to Recovery:
Production and Employment in Mexico and The State of Mexico
Pablo Mejía*, Sandra Ochoa** and Miguel Ángel Díaz***
Date received: April 9, 2012. Date accepted: August 6, 2012
Abstract

The objective of this text is to measure the magnitude and analyze the causes of the drop and increase in sector production and employment in Mexico and The State of Mexico during the current international economic cycle. Our main results are as follows: 1) foreign trade has played a central role in the drop and recovery in employment and production throughout the entire cycle, while foreign direct investment and remittances have only been determining factors in the recessive phase; 2) the fluctuations in industrial and manufacturing production are greater than those of the service sector, and all three are greater than those of employment; 3) there has been a reorganization of employment in favor of temporary jobs, especially in the tertiary sector, even during times of expansion.

Keywords: international economic cycles, expansion, recession, production, employment.
INTRODUCTION

In 2008 and 2009, the global economy entered into the worst economic crisis in recent history, with consequences including catastrophic losses in financial markets and commercial flows, as well as foreign investment on the international scale. Despite its modest origins, clearly identified in the United States (us) real-estate market, the collapse of international transactions brought about the most profound and generalized recession since the second post-war era, to such an extent that it has been called the Great Recession.1 In fact, the aftershocks – fiscal difficulties derived from stabilization policies and challenges to reestablishing confidence and normal functioning in financial markets – are still being felt in various economies, especially in the European Union, although the majority of countries have entered a new phase of growth. Though fragile, in many cases they have been able to recover losses in production and employment from the previous recession.

The rapid succession of the phases in this cycle (recession and growth) is undoubtedly a result of the growing commercial and financial integration that global economies have been experiencing over the past few decades.2 In fact, recent studies, such as those by Baxter and Kouparitzas (2005), Imbs (2004), Wang and Wong (2007) and Burnstein et al.(2008) suggest that in general, capital flows, and principally foreign commerce, explain the synchronization of economic cycles on the international level.

The Mexican economy has undergone a gradual integration process with the us, which has translated into, among other phenomena, strong synchronization of their economic cycles on various levels. Specifically, some studies argue that Mexican state cycles have become more synchronized with us economic cycles. For example, Cuevas et al.(2003) argue that the Northern states have become more synchromized with us cycles, while Mejía and Campos (2011) and Mejía (2011) suggest that the most synchronized states are those where foreign direct investment (fdi), exports, manufacturing production and maquila factories are of greatest importance, which are located along the northern border, in the center-northern region and the center of the country.3 In general, this increased synchronization explains why the Mexican economy has been one of the most affected by the Great Recession, as well as one of the nations that has benefited most from the relatively rapid recovery that followed, while also accounting for the differentiating effects of the various economies of the federal entities.

In this context, this work seeks to analyze the effects of the current economic cycle on production and employment in Mexico, and especially in the State of Mexico.4 We hypothesize that the behavior of these two factors responds to exogenous shocks on demand linked to the international cycle, in such a way that its cyclical dynamics can principally be explained by foreign commerce flows, while fdi flows and remittances have only further deepened the recession, but not the later growth in productive activity. Our results support this affirmation and also demonstrate differential effects between production and employment as well as between sectors.

Following this section, this text will be divided into five parts. The first explains the mechanisms of international transmission of cycles and the empirical evidence related to the Mexican economy. The second discusses the methodology of classic cycles applied to identify the beginning of the two phases considered as the current cycle and to measure the magnitude of changes in all variables of interest. The third presents the effects on national and state production and employment in the Great Recession and the current growth period. The fourth section analyzes the factors (transmission mechanisms) that may explain these effects. Finally, the fifth section provides the most important conclusions of the study.

* Professor-Researcher at the Autonomous University of the State of Mexico. E-mail: pmejiar@yahoo.co.uk.

** Course Professor at the Autonomous University of the State of Mexico. E-mail: sochoad@uaemex.mx.

*** Professor-Researcher at the Autonomous University of the State of Mexico. E-mail: madiazc@uaemex.mx.

1 This name, coined by Martin Wolf of the Financial Times and made popular by economists such as Paul Krugman and Joseph Stieglitz, links it to the Great Depression, but on a smaller scale. According to data from the United nations Conference on Trade and Development, with the exception of Asia, all regions in the world effectively experienced negative growth rates in 2009: nations of the Organization for Economic Cooperation and Development grew -4.0%, Latin America grew at -2.1% and the European Union at 4.3%. Moreover, the United States had the lowest rate that year (-3.5) since the post-war period. According to the same source, the recent recession produced losses slightly greater than those of 1995 in Mexico (6.3 compared to 6.2), but much greater than those of the debt crisis, which only caused economic contraction of 4.3% in 1983. Furthermore, according to Mejía and Erquizio (2012), the last recession has been more generalized both in terms of sectors and regions.

2 In particular, there has been elevated integration of financial markets, both stock markets and credit institutions, as volumes of commerce have grown exponentially due to the elimination of trade barriers, on the one hand, and the growing vertical integration of productive processes, on the other. See work by Blanchard et al. (2010) and Llaudes et al. (2010) for further analysis regarding the role of these factors in the recent crisis.

3 Studies on state cyclical demand are relatively scarce, and the majority of them use production indicators to measure demand. A summary of this literature can be found in Mejía and Erquizio (2012). For an analysis of the effects of the Great Recession on specific state economies, see Erquizio and Gracida (2012), who highlight the role of linkage with foreign markets and the productive structure in the states of Sonora and Sinaloa.

4 The State of Mexico is not only the second-most important state in the national economy, contributing nearly 10.8% of the national gdp, but is also one of the most integrated with the us. Mejía (2011) argues that this synchronization has increased constantly reaching high levels of synchronization in recent years.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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