this shift, Mexico quickly moved up the ladder of “economic complexity” and now ranks 1<sup>st</sup> in the region and 25<sup>th</sup> in the world (ahead of Canada, Hong Kong, and Spain, for instance) in this regard, according to the MIT’s Observatory of Economic Complexity. That alone should have led to higher growth, yet it did not.<sup>15</sup> This section sheds light into Mexico’s nonconvergence puzzle, again with the help of the growth decomposition method discussed in Section 2.<sup>16</sup> As Figure 9a clearly illustrates, Mexico’s real exports (the _EP_ term) have been the main driver of growth over the last 35 years. Mexico’s entry into NAFTA in the early 1990s caused its exports to skyrocket, lifting growth along. Yet, Mexico’s exports collapsed 5 years later, once China entered the WTO, dragging growth down again. Chinese exports to the US clearly displaced Mexican exports (Figure 17), thereby dragging down Mexico’s _EP_ (Figure 9a). This suggests that the _timing_ of Mexico joining NAFTA—and not NAFTA _per se_ —was an important factor behind its poor economic performance. Had Mexico joined NAFTA 10 years earlier, the rise in its export share could have endured enough to more likely boost the country’s growth.

But the timing of NAFTA relative to the rise of China can hardly be the only explanation of Mexico’s depressed growth. Another reason is that Mexico’s export pull ( _EP_ ), while rising, has lacked buoyancy because Mexico’s export penetration into the US market (Mexico’s dominant destination market) was dampened by the combination of a relatively slow growing US economy and the concentration of Mexican exports on relatively income-inelastic products—that is, products whose demand in the US does not grow faster than US income. Indeed, as illustrated by Figure 18, Mexico’s growth has closely followed that of the US from the time Mexico joined NAFTA (1995) until 2010.<sup>17</sup> While the US is a country with a much higher per capita income than Mexico, hence with an inherently slower equilibrium growth rate, Mexico’s population still grows much faster than that of the US. Thus, coupling Mexico’s GDP growth with that of the US has resulted in a continued _divergence_ of per capita incomes between the two countries.

Moreover, compared to the South East Asian countries, Mexico continues to display a rather weak domestic response ( _DR_ ) to its export pull ( _EP_ ). To be sure, Mexico’s _DR_ recovered somewhat during the China boom period from its earlier collapse. Yet it has continued to drag down growth to the present (Figure 10b). As documented in Ize (2019a), this was partly the result of limited factor mobility inside Mexico, which allowed for a very slow growing South to co-exist with faster growing and more outward-oriented Center and North regions, as well as a sharp worsening of the rule of law associated with a burst of drug-related criminality.<sup>18</sup>

> 15 According to Hausmann et al (2014), “countries whose economic complexity is greater than what we would expect, given their level of income, tend to grow faster than those that are ‘too rich’ for their current level of economic complexity. In this sense, economic complexity is not just a symptom or an expression of prosperity: it is a driver.”

> 16 A deeper analysis of Mexico’s growth challenges, following a similar growth decomposition methodology as in this paper, can be found in Ize (2019a and 2019b).

17 While Mexico’s recently rising exports suggests a welcome ability to adapt and reconstruct export niches while taking advantage of China’s rising wage costs, Mexico’s domestic response has again declined in recent years, suggesting that the rise in exports was partly offset by a concomitant rise in imports.

18 While Mexico’s GDP expanded as fast as that of the Eastern European countries (which underwent a similar process of vigorous trade integration as Mexico), Mexico’s per capita income lagged significantly that of Eastern Europe. This again indicates that, despite its successful shift to manufacturing exports, the Mexican economy has a deep-seated inability to absorb productively its relatively fast-growing labor force, much of which ends up in the informal sector.

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