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
TRANSMISSION OF INTERNATIONAL CYCLES: THEORY AND EVIDENCE IN MEXICO

The international transmission of economic cycles can be explained by multiple factors, including specific commercial and capital flows.5 The first, and likely most important mechanism, is international commerce. Many studies have shown that vertical integration of productive processes (Burnstein et al., 2008) and the exchange of similar goods (Imbs, 2004) has played a fundamental role in this process, because the economies involved face common shocks or turbulence that is quickly transmitted among them. Moreover, Baxter and Kouparitzas (2005) maintain that the most important factor to explain the international co-variation in production is commerce, while Levchenko et al. (2010) argues that commerce can also explain a large portion of how the Great Recession was transmitted to emerging countries.6

In Mexico, Torres and Vela (2002) and Chiquiar and Ramos (2005) have proposed that commerce, especially manufacturing, has served as an important transmission channel between us and Mexican cycles. Elevated integration of productive processes between the two countries, especially maquiladora production, implies that fluctuations in income and industrial production in the us affect the demand for Mexican exports and these exports, in turn, influence the Mexican economic cycle.7

fdi can also contribute to the international synchronization of economic cycles. The availability of financial resources in the country of origin of capital makes fdi pro-cyclical, which could also favor the alignment of cycles between the receiving country and the latter, especially when investment drives greater integration of productive processes and strengthens the synchronization derived from the commercial channel. Still, when the sector allocation of investment is based on differentiated comparative advantages, the effect may be the opposite (see Imbs, 2004).

International empirical evidence reveals that fdi is pro-cyclical with respect to the country of origin (Wang and Wong, 2007), and that it has contributed to synchronizing cycles, especially in developed countries, although it has also meant greater instability in receiving countries, mainly in underdeveloped nations (Jansen and Stokman, 2004). Studies that analyze the transmission of the Great Recession from developed countries to emerging nations have shown evidence of a drastic drop in fdi on the global scale, due to the collapse of the international financial system and the consequent credit cuts, as well as increased uncertainty and the resulting increase in country risk for the majority of economies (Blanchard et al., 2010; Llaudes et al., 2010).

In Mexico, the few studies that analyze the cyclical behavior of fdi have found a positive correlation with the national cycle, although not very strong (Alper, 2002). This has not prevented these studies from concluding that their behavior responds more to internal conditions than to those prevailing in the us economy (Vargas, 2008).

Finally, remittances are another mechanism to explain the international synchronization of cycles. In principle, according to the moderation hypothesis, remittances are pro-cyclical with respect to the country receiving the migrants, which also implies a positive relation between remittances and other pro-cyclical variables such as income and employment. On the contrary, this idea supposes that remittances are counter-cyclical relative to the country of origin of migrants, which allows them to act as macroeconomic stabilizers by moderating fluctuations in income, consumption and investment.8 However, when the cycles of countries involved are synchronized, remittances can indeed act as a destabilizing force by increasing the capacity of oscillations to generate additional fluctuations in income and production of the receiving country. During times of recession, this behavior would aggravate the situation by further reducing external demand, resulting in greater instability and undermining the credit credibility of the receiving country (Sayan and Feltenstein, 2006; Frankel, 2009).

Mexico in particular is one of the main economies receiving remittances, only below India and China, which to some extent is due to its role as one of the most principal exporters of human resources in the world. Existing studies suggest that remittances are counter-cyclical with respect to the cycle in Mexico (Vargas, 2008, and Durdu and Sayan, 2008) and pro-cyclical, albeit weakly, relative to the us cycle (Vargas, 2008), which represents some support in favor of the moderation hypothesis.9 Still, the situation could have been reversed during the current cycle, as will be shown later on.

5 Other studies have considered variables such as commercial agreements, the coordination of macroeconomic policies, the productive structure and gravitational variables (see Otto et al., 2003; Imbs, 2004; Baxter and Kouparitzas, 2005).

6 However, there is widespread debate regarding the effects of commerce on the synchronization of cycles: if commerce is based on differentiated comparative advantages, generating inter-industrial commerce, synchronization decreases. However, if intra-industrial commerce dominates, based on exploiting economies of scale and product differentiation, synchronization increases (see Baxter and Kouparitzas, 2005, and the references cited there).

7 Specifically, there is an argument that Mexico is highly dependent upon machinery and equipment imports, as well as inputs for maquiladora production. At the same time, Mexican exports are highly dependent upon the cyclical dynamics of the us economy, especially since the signing of the North American Free Trade Agreement (nafta). These interdependencies have recently led to a gradual increase in the correlation between exports and Mexican industrial production, from high negative values to positive values close to one, starting in the second half of the 1990s, according to Gutiérrez et al. (2005).

8 Moreover, remittances are more stable than other private capital flows such as fdi. They do not produce obligations abroad because they are unilateral transfers, and may drive entrepreneurial spirit by allowing a way around credit restrictions to invest in physical and human capital (Durdu and Sayan, 2008).

9 A central aspect that affects the relatively low correlation between remittances and production both in Mexico and the us is migration policy. The cyclical behavior of remittances does not only respond to economic factors, but also to legal and political aspects.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 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,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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