The paradox of Mexico's export boom without growth: A demand-side explanation

In recent decades the Mexican economy has seen a dramatic expansion of exports of manufactured goods and imports of manufactured inputs. Mexico's integration with global production chains, however, has failed to produce sustained output and productivity growth. In this paper we propose an explanation for slow growth that hinges on the negative demand externalities of input outsourcing. We make two contributions. First, using input–output data we show that outsourcing has lowered domestic demand for the manufacturing sector, especially for capital-intensive basic industries. Second, we develop a model of outsourcing and capital accumulation and show that lower costs of outsourcing can hurt accumulation if, for the aggregate manufacturing sector, the negative effect of domestic demand shortfalls on profitability exceeds the offsetting effects of lower input costs and of export expansion. Our findings complement the broader literature on the apparent paradox of Mexico's success as an exporter of manufactures amid sluggish growth.