The Low Productivity Trap : Chiapas Growth Diagnostics

Chiapas is the state with the lowest income per capita in Mexico and the state that grew the least during the last decade. Therefore, the income gap between Chiapas and the rest of Mexico has widened remarkably. This weak performance contrasts sharply with the relative macroeconomic and institutional stability that prevailed during the same period, and the massive amount of public resources that poured into the region since the Zapatista uprising in January 1994.To identify contributing factors, this document follows the Growth Diagnostics methodology developed by Hausmann, Rodrik and Velasco (2005), with some changes to adapt to the particularities of a sub-national context. Our goal is the same: to identify the main constraints to economic growth in Chiapas. Our analysis indicates that the main constraints to economic growth in the state are not among the usual suspects. Low levels of education are to some extent related to the way Chiapas fell behind the rest of Mexico, but only explain a small part of the gap. Mountainous geography and weather are a challenge to building and preserving infrastructure in the region, but that doesn’t seem to be the major obstacle to the development of productive capacities. There isn’t evidence of failures in the credit markets. Low levels of private credit in Chiapas are related to the low productivity of the local economy rather than bottlenecks or insufficiencies in the supply of financing options.Our conclusion is that Chiapas is in a (low) productivity trap. Its major problem is that its economy has very low complexity and mirrors its scant capacities. Modern production systems require a number of complementary inputs that are absent in Chiapas. In this context, productive diversity and private investment are low because returns to investment are also low. Given that demand derived from investment is low, supply of complementary inputs is inhibited, which leads to a coordination dilemma similar to the chicken and egg problem. Solving this problem requires government intervention. Some of the few cases of exports of manufactured goods in Chiapas are the result of successful federal interventions to coordinate provision of necessary production inputs with the demand for them