Exporting without growing: Investment, real currency appreciation, and export-led growth in Mexico

Despite two positive developments - the rise of manufactured exports and a prolonged but eventually successful disinflation - Mexico failed to sustain a high rate of economic growth during its free-trade period 1988-2006. The paper argues that the proximate cause of Mexico's growth failure is the low dynamism of investment, which resulted from the high share of maquila (or assembly goods) in manufactured exports and the real appreciation of the peso during disinflation. The argument is supported by two strands of evidence: an aggregate-demand decomposition that measures the contributions of investment and exports to GDP growth, and the estimation by Johansen's methodology of two- and three-equation cointegration models that show the effect of manufactured exports and the real exchange rate on total investment.