Growth and inequality linkages of the Mexican states in the new century : a panel data approach with spatially lagged variables

The direction of the relationship between economic growth and income (social) inequality remains an open area of research, with theoretical models suggesting the possibility of positive or negative covariations. This study contributes to the debate by examining the case of Mexico, a country characterized by significant income disparities. Our analysis introduces several innovations. First, we adopt a regional approach with data at the level of states, which provides a more suitable framework for comparison in regard to cross-country studies. Second, we employ three distinct measures of income inequality - the Palma ratio (P90/40), the P90/50 ratio, and the Gini index - offering a more comprehensive perspective in terms of income distribution deciles. Additionally, we incorporate a panel data approach that accounts for spatial neighborhood effects in inequality influencing growth. Our findings reveal a strong significant positive covariation between inequality and growth: periods of rising inequality coincide with accelerated economic growth, whereas periods of declining inequality align with growth slowdowns. Interestingly, the model is able to capture both positive and negative covariations for groups of states along the period of analysis, 2005-2019, highlighting the importance of considering regional heterogeneity when running national-level investigations. The effects of spatial inequality clusters on growth seem to be important too, affecting both northern and southern states. These results suggest that Mexico's growth model appears structurally unequal, which can help to explain the persistent inequality situation shown by the country in the last decades.