Historically, industrialization has proven to be a crucial engine of economic growth, with only a handful of countries successfully transitioning from low- to high-income growth without a policy focus on industrialization. SDG 9 “Build resilience infrastructure, promote inclusive and sustainable industrialization and foster innovation” acknowledges the significance of the manufacturing sector’s role in a country’s development.
The outbreak of the COVID-19 pandemic in 2020 triggered the worst global recession in 70 years, with an estimated loss of 255 million full-time jobs. UNIDO’s Industrial Development Report (IDR) 20221 identifies a clear pattern of resilience that emerged during the COVID-19 crisis: although industrialized economies suffered output losses of 3.9 per cent, on average, this figure was nearly double for emerging and developing economies (7.7 per cent). Further empirical evidence from the IDR 2022 confirms that the pandemic’s impact was less severe for countries with above-average industrial capabilities as measured by the Competitive Industrial Performance Index (CIP)2. The message is clear: industrial capabilities matter not only for development in general, but also for a country’s robustness in the face of crisis.
Mexico, the second largest economy in Latin America and the third largest in terms of population ranked, 20th in the CIP index in 2019, and is the most competitive manufacturing economy in the LAC region. Trade liberalization has been the main driver of Mexico’s economy since entering the North American Free Trade Agreement (NAFTA) in 1994, with the country’s real gross domestic product (GDP) nearly quadrupling since then. Manufacturing plays a crucial role for Mexico’s economy, accounting for 18 per cent of GDP in 2021. This is in large part attributable to manufacturing companies—predominantly from the United States—which gradually moved their production activities to Mexico in recent decades.
Despite the fact that Mexico ranks high in the CIP index, that it is one of the United States’ most important trading partners and a recipient of investments from major multinational corporations, the country continues to struggle with specific structural challenges, which were further exacerbated during the pandemic. Mexico dropped six positions in the SDG-9 Industry Tracker between 2000 and 2019, and currently ranks 30th among 132 economies. This reflects a reversal in the trend of all key dimensions covered by the SDG-9 Industry Tracker, namely manufacturing value added (MVA), manufacturing employment, technological sophistication of manufacturing production and the manufacturing sector’s environmental performance.
Moreover, Mexico’s GDP contracted by 8.4 per cent in 20203, exports and imports fell by 9.5 per cent and 15.9 per cent, respectively, and the average unemployment rate increased by 4.4 per cent4. The rate of underemployment in 2020 reached 16.3 per cent, and the labour informality rate climbed to 54.4 per cent. Poverty and extreme poverty increased by 2 per cent and 1.5 per cent, respectively, from 2018‒20205.
The 2020 recession triggered by COVID-19 has exacerbated some of the prevailing imbalances and structural challenges of Mexico’s economy. The restrictions imposed around the world to contain the spread of the virus severely disrupted global value chains. Mexico’s industrial sector was hit hard due to lack of access to inputs and intermediate goods required for manufacturing production (75 per cent of all intermediate inputs used in production are imported). Currently, 66 per cent of manufacturing value added rests on fewer than 30,000 production units (out of a total of nearly 5 million production units in Mexico), most of which employ over 250 workers and have strong linkages to other economic activities and international trade.
According to INEGI (National Institute of Statistics and Geography), 1 million businesses employing 12 million workers were forced to close during the pandemic. Despite the economy recovering by mid-2021, 400,000 companies had not yet reopened, a four-year setback in the number of operational firms in Mexico. The COVID-19 containment measures and the subsequent closure of companies furthermore resulted in a reduction in investment flows. Investments fell to 17.8 per cent of GDP in 2020, a level only observed during the crises of 1995 and 2009. There is no growth without investment, and this decline in investment flows stymied Mexico’s GDP growth; while Mexico reported a GDP growth rate of 2.5 per cent between 1990 and 2018, it was only 1.5 per cent by the end of 2021.
The COVID-19 outbreak and the measures introduced to control the spread of infection disrupted not only global value chains, but also had a negative effect on Mexico’s driving force to generate economic growth. This situation was exacerbated by first, the absence of a reactivation programme similar to that implemented in other countries in the region, and secondly, by the absence of an industrial policy strategy such as that pursued by developed economies, including Germany, the Republic of Korea, China, the United States and France.
The relatively low resilience of Mexico’s industrial sector seems to reflect the finding of the IDR 2022 that the resilience of a country and its industrial ecosystem relies on two specific subsets of capabilities: (i) robustness to resist, absorb and accommodate shocks in the short term; and (ii) readiness to adapt, transform and recover in the medium term. Mexican firms’ robustness capabilities primarily suffered due to the lack of domestic availability of resources and technology, and a degree of redundancy in supply chains (e.g. access to multiple and diversified sources of input).
The IDR 2022 also draws attention to the fact that three important megatrends will shape the post-pandemic landscape: (i) digitization and automation of production; (ii) the global economic power shift towards Asia, and (iii) industrial greening. While the pandemic has had a severe impact on the world economy, it will not fundamentally influence these ongoing megatrends6. The megatrends offer new avenues for Mexico’s industrial development trajectory, yet at the same time call for the development of new strategies and policies to capitalize on the potential opportunities the megatrends open in terms of building digital capabilities and absorptive capacities, fostering economic resilience through diversification, and investing in technologies that decouple industrial development from environmental harm.
Mexico’s government has been taking encouraging steps in this direction. One example is the collaboration between the Ministry of Foreign Affairs of Mexico, UNIDO and UN-Habitat in the so-called “Prospective Territorial-Industrial Atlas for the Attraction of Investments”, which was presented by the Minister of Foreign Affairs in November 2021, with the aim of becoming a tool for economic reactivation in the country. This effort is an innovative approach to boost investments in specific regions by focusing on key industrial sectors that have the potential of attracting investment, thereby enhancing Mexico’s economic, social, environmental and urban development.
Moreover, the Ministry of Economy has established a dialogue forum with the industrial sector, particularly with the Confederation of Industrial Chambers of the United Mexican States (CONCAMIN). The results of the Ministry of Economy’s efforts to align the objectives of different public and private stakeholders were presented in September 2022 through the strategy “Towards an industrial policy”. This strategy, which is also based on industrial innovation measures pursued in leading economies, aims to achieve inclusive growth based on four cross-cutting axes: (i) sustainable industries; (ii) innovation and technological upgrading; (iii) promotion of regional content, and (iv) training and skills development. The initiatives implemented in the four axes specifically target five industries that play a particularly relevant role in the current and future economy and labour market, namely: (i) agri-food, (ii) electromobility, (iii) electronics, (iv) medical and pharmaceutical services, and (v) creative industries. The strategy “Towards an industrial policy” represents a step in the right direction by providing a clear path forward to increase Mexico’s competitiveness and make the country more resilient.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
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