Made in Mexico: Energy reform and manufacturing growth

- An assessment of the real effects of a recent energy reform in Mexico is conducted.
- We look at one particular channel, which operates through the change in the structure of electricity generation in favor of cheaper sources of energy, such as natural gas.
- We find that the reform could increase manufacturing output by up to 3.6%, and overall real GDP by 0.6%.

We assess the real effects of a recent opening of the energy sector in Mexico to private investment. We look at one particular channel, which operates through the change in the structure of electricity generation in favor of cheaper sources of energy, such as natural gas. We look at the potential impact of this structural change on electricity prices and ultimately on manufacturing output using subsector and state-level manufacturing output data. We first document that electricity prices-relative to oil and gas-are more important to the manufacturing sector, with a one-standard deviation reduction in those prices leading to a 2.8% increase in manufacturing output. This elasticity, together with estimated decreases in electricity prices on the back of the reform, could increase manufacturing output by up to 3.6%, and overall real GDP by 0.6%. Larger effects are possible in the long run if increased efficiency in the electricity sector leads to further decreases in electricity prices. There can also be larger effects stemming from output in the services sector which we find to also respond statistically significantly to electricity prices; and from the endogenous response of unit labor costs, which decrease with lower electricity prices.