and Are More Unequal

question by exploiting variations in export growth across Mexican municipalities between 2004 and 2014 to identify the impacts on poverty and inequality at the municipal level. Understanding the impacts of trade at the local level is crucial in a context such as Mexico because, as shown in this study, about 75 percent of total inequality is explained by inequality within the municipality, rather than between municipalities.

Identifying the impacts of exports on poverty and inequality is challenging because there are a variety of factors (several of which are unobservable to researchers) that affect international trade and the income distribution and can thus generate spurious correlations between both sets of outcomes. Even though municipalities with higher levels of exports are richer and more unequal, for example (see figure 3.1), this does not necessarily imply that the former explains the latter. To overcome this challenge, this case study pursues an empirical strategy that isolates changes in exports at the local level from other changes that may introduce a bias in the estimates.

The results show that Mexico’s increase in exports to richer countries did not necessarily lead to better welfare indicators at the local level. Although exports, as expected, have a large and positive impact on total labor incomes, their impacts on poverty reduction and household incomes per capita are negligible. Several factors mitigate their potential effect on poverty rates and average incomes.

FIGURE 3.1 Municipalities with Higher Exports Have Less Poverty, Have Higher Incomes, and Are More Unequal

Poverty, per capita incomes, and inequality in municipalities with relatively high and low levels of exports, 2015

a. Poverty b. Average per capita income c. Gini index

Percent 45 40 35 30 25 20 15 10 5 0 40.6

28.7 2,500

Income (US$) 2,000

1,500

1,000

500

0 2,361

1,738

Percent 45 40 35 30 25 20 15 10 5 0 38.9 38.0

High exports Low exports

Source: Original calculations for this publication are based on household surveys (poverty, average per capita income, and Gini), population census (workers), and customs data (exports). Note: The sample is restricted to the urban and semiurban municipalities with complete data. A municipality has relatively high (low) exports if its exports-to-workers ratio for 2000 is above (below) the median at the municipality level. Poverty is measured as the FosterGreer-Thorbecke (0) index with the official food poverty line. Monetary values are in real terms at 2014 prices and were deflated using the average National Consumer Price Index (base December 2010). Poverty, average per capita income, and the Gini index are computed as simple averages across municipalities.

■ Exports led to both a positive labor demand and a labor supply shock.

In particular, although exports increased the total labor income at the local level, they also increased labor force participation and the size of the working-age population, resulting in no significant changes in labor income per worker. ■ Higher exports led to lower out-migration and higher inflows of return migrants from both the United States and other Mexican municipalities, which led to an increase in the size of the working-age population, as well as a change in its composition. Exports increase the number of unskilled workers at the municipal level disproportionately, which tends to raise poverty and inequality. ■ An increase in exports led to a decline in nonlabor income by reducing the volume of remittances. These results are consistent with the hypothesis put forward by Robertson (2007), who argues that the lack of positive labor market impacts from trade integration could partly be explained by migration.

It should be mentioned, however, that, even though the expected impacts of exports on welfare at the local level were negligible, this does not imply that the average individual in Mexico did not see any gains. Take, for example, a case in which a municipality’s exports did not affect the incomes of current residents but attracted migrants who would have been worse off otherwise at their previous location. The fact that labor mobility was very responsive to exports means that this mechanism cannot be discarded.

The study also finds that, although exports did not have a significant effect on the level of household incomes per capita, they do affect relative incomes in a progressive way. A 10 percent increase in the export-to-worker ratio reduces income inequality as measured by the Gini coefficient by 0.17 points (using a 0 to 100 scale). The fact that exports have a progressive impact on incomes at the local level contrasts with findings of plant-level studies that exports increase wage inequality within plants and industries.

On the policy front, these findings suggest that, if developing countries want to fully reap the benefits of greater integration with rich economies, it is essential to foster stronger links between the tradºable and nontradable sectors so that the positive effects of exports spread beyond the former. Specifically, critical bottlenecks contribute to weak linkages between NAFTA export-oriented firms in Mexico’s northern and central states and a large share of low-productivity, often informal firms not linked to those global value chains (World Bank 2019). These bottlenecks included the following:

■ Significant obstacles to competition. As of 2013, product market regulations were relatively restrictive compared with other Organisation for Economic Co-operation and Development countries. Coupled with other distortions,