Trade liberalization and the balance of payments constraint with intermediate imports: The case of Mexico revisited

Previous studies have found that a tightening of the balance of payments (BP) constraint can explain the slowdown in Mexico's growth after its trade liberalization in the late 1980s. This paper develops a disaggregated model of the BP constraint with two types of exports (manufactures and primary commodities) and two types of imports (intermediate and final goods). Econometric estimates (including tests for structural breaks) show that the BP-equilibrium growth rate did not fall, but instead rose in the post-liberalization period, so this model cannot account for the country's growth slowdown. Instead, the analysis points to the need to consider the real exchange rate as well as internal obstacles and policies.

► A balance-of-payments constrained growth model with intermediate imports.
► Tests for structural change in Mexico after trade liberalization in the late 1980s.
► Income elasticity of import demand rose for final goods but not intermediate goods.
► Equilibrium growth increased post-liberalization, contrary to previous studies.
► Balance-of-payments constraint does not explain slower growth post-liberalization.