Made in Mexico: Energy Reform and Manufacturing Growth

31 Pages Posted: 26 Mar 2015

See all articles by Jorge Alvarez

Jorge Alvarez

International Monetary Fund (IMF); Princeton University

Fabián Valencia

International Monetary Fund (IMF)

Date Written: February 2015

Abstract

This paper assesses the real effects of the energy reform in Mexico by looking at its impact on manufacturing output through changes in energy prices. Using sub-sector and state-level manufacturing output data, along with past variation in energy prices, we find electricity prices - relative to oil and gas - to be more important in the manufacturing process, with a one standard deviation reduction in electricity prices leading to a 2.8 percent increase in manufacturing output. Our estimated elasticities together with plausible reductions in electricity tariffs derived from the energy reform, could increase manufacturing output by up to 3.6 percent, and overall real GDP by 0.6 percent. Larger reductions are possible over the long run if increased efficiency in the sector leads electricity prices to converge to U.S. levels. Moreover, including the impact of lower electricity tariffs on the services sector, could lead to significantly larger effects on GDP. Accounting for endogeneity of unit labor costs in a panel VAR setting leads to an additional indirect channel which amplifies the impact of electricity prices on output.

Keywords: Energy sector, Mexico, Manufacturing sector, Industrial production, Electricity, Energy prices, Fiscal reforms, growth, energy reform, manufacturing output, gas, panel VAR., oil, generation, natural gas

JEL Classification: C14, C31, C33, E30, E65

Suggested Citation

Alvarez-Romero, Jorge G. and Valencia, Fabian V., Made in Mexico: Energy Reform and Manufacturing Growth (February 2015). IMF Working Paper No. 15/45. Available at SSRN: https://ssrn.com/abstract=2585431

Jorge G. Alvarez-Romero (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Fabian V. Valencia

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
90
Abstract Views
1,144
rank
288,542
PlumX Metrics