AN INVESTIGATION INTO SIGNIFICANCE OF FDI, REMITTANCES & AID ON ECONOMIC DEVELOPMENT WITHIN MEXICO

8/17/2019 AN INVESTIGATION INTO SIGNIFICANCE OF FDI, REMITTANCES & AID ON ECONOMIC DEVELOPMENT WITHIN MEXICO

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AN INVESTIGATION INTO SIGNIFICANCE OF FDI,

REMITTANCES & AID ON ECONOMIC

DEVELOPMENT WITHIN MEXICO

TAYLOR, Walter Terence David

Lancaster University Management School


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Lancaster University Management School Page | 2

ACKNOWLEDGEMENTS

I would like to first pay tribute to my family who have supported me throughout my time here at Lancaster University,

they have always believed in me and have encouraged me to the best I possibly can. I would particularly like to thank

my mother and father who have worked tirelessly to provide for us and ensure my sisters and I have the very best

opportunities in life.

I also wish to thank Dr. Robert Read for the opportunity to undertake the Msc in International Business. It was he

who had faith in me and gave me the chance to prove myself at master’s level. I would also like to thank him and the

Economics department at Lancaster, who have taught me over t he past four years, I’m most certainly better as a result

of being at this fantastic institution.

May I also express my gratitude to my colleagues on the course from whom I have learnt so much over the past year.

I would especially like to thank Luiza Speranskaya , George Wilds, Frankie Xue, Crystal Chan, Pushkar

Agarwal, Arthi & Sundhir Madaree and Kwabena Addo for their support throughout my studies, I’m extremely

grateful to have such good people around me who are always there to help.

Finally I would like to pay my upmost respect to Vudugari Balasubramanyam, who I have had the honour of

assisting in research over the past year. His guidance on the course and throughout my dissertation has been superb and

I cannot praise him highly enough for the effort he makes to help us in Msc International Business.


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ABSTRACT

This paper investigates some of the key factors in spurring Mexican economic growth, analysing the impact and

significance of Foreign Direct Investment, Diaspora Remittances & various forms of aid on GDP per Capita and

Human Development at a national and state level, as well as other influential factors such as Mexico’s membership of

NAFTA. We find that Remittances has a significant impact on development at a national level where as opportunity

aid is most significant at regional level with 29 of the 32 Mexican states showing signs of significance at a 99%

confidence interval.


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CONTENTS SIGNIFICANCE OF FDI, REMITTANCES & AID IN MEXICO


CONTENTS

I. INTRODUCTION.............................................................................................................................. 6

P URPOSE OF S TUDY ........................................................................................................................................... 6

H YPOTHESIS ..................................................................................................................................................... 7

S TRUCTURE OF S TUDY ...................................................................................................................................... 8

II. PREVIOUS STUDIES ...................................................................................................................... 10

I NTRODUCTION ............................................................................................................................................... 10

H OW C AN FDI B E H ARNESSED F OR GROWTH ? .............................................................................................. 10

A NALYSING R EMITTANCE EFFECTS ............................................................................................................... 13

AID & E NCOURAGING ECONOMIC GROWTH .................................................................................................. 15

OTHER F ACTORS F OR M EXICAN D EVELOPMENT ........................................................................................... 16

K EY I SSUES F OR OUR S TUDY ........................................................................................................................... 18

III. THE MEXICAN ECONOMY: AN OVERVIEW ............. ............. ............. .............. ............ ......... 19

I NTRODUCTION ............................................................................................................................................... 19

P REFACE ........................................................................................................................................................ 19

B ACKGROUND ................................................................................................................................................. 21

Stagnation, Deception & Liberalisation (1980-1994) ..................................................................................... 21

Entering NAFTA (1994-2008) ................................................................................................................ 22

Global Financial Crisis & Beyond (2008- Present Day) .................................................................................. 23

Development in Mexico .............................................................................................................................. 24

IV. METHODOLOGY ......................................................................................................................... 26

I NTRODUCTION ............................................................................................................................................... 26

D ATA ACQUISITION ........................................................................................................................................ 27

S ELECTING T HE M ODEL ( S )............................................................................................................................. 28


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CONTENTS SIGNIFICANCE OF FDI, REMITTANCES & AID IN MEXICO


M OTIVATION F OR V ARIABLES ....................................................................................................................... 33

W HAT ARE W E E XPECTING T O ACHIEVE? .................................................................................................... 34

S UMMARY ....................................................................................................................................................... 34

V. EMPIRICAL ANALYSIS AT NATIONAL LEVEL ............ ............. ............. .............. ............ ........ 36

OVERVIEW OF R ESULTS ................................................................................................................................. 36

M ODEL 1: N ATIONAL T IME S ERIES R EGRESSIONS F OR GDP P ER CAPITA (1983-2011, A NNUAL ).................... 36

M ODEL 2: N ATIONAL T IME S ERIES R EGRESSIONS F OR H UMAN D EVELOPMENT (1983-2011, A NNUAL ) ........ 38

D ISCUSSION OF F INDINGS ............................................................................................................................... 40

V. APPENDIX ................................................................................................................................................. 42

VI. EMPIRICAL ANALYSIS AT STATE LEVEL ............. ............. ............. ............. ............. ............. . 50

OVERVIEW OF R ESULTS ................................................................................................................................. 50

M ODELS 3 & 4: P ANEL R EGRESSIONS F OR C OMBINED R EGIONS OF M EXICO (2003-2012, QUARTERLY ) ......... 50

C OMPARISON W ITH N ATIONAL A NALYSIS ..................................................................................................... 52

M ODEL 5: R EGIONAL T IME S ERIES R EGRESSIONS F OR GDP P ER C APITA (2003-12, QUARTERLY ) ................... 53

D ISCUSSION OF F INDINGS ............................................................................................................................... 56

VI. APPENDIX ................................................................................................................................................ 60

VII. CONCLUSIONS ............. ............. ............. ............. ............. ............. .............. ............ .............. ..... 68

VIII. REFERENCES ............ ............. ............. ............. ............. ............. ............. ............. ............. ........ 70

IX. APPENDIX .................................................................................................................................... 76


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SIGNIFICANCE OF FDI, REMITTANCES & AID IN MEXICO


I. INTRODUCTION

Purpose of Study

The aim of this paper is to investigate the impact of Foreign Direct Investment, Diaspora

Remittances and other forms of Aid within Mexico to determine which factors are significant to its

continued growth. Recently Mexico has started to develop at a significant pace, with growth rates of

3.9% in 2012, an impressive return comparative to the stagnating economies of its North American

Neighbours and European counterparts. The outlook currently is reasonably good but Mexican

fortunes haven’t looked so good in the past, with a history of economic stagnation and continuous

crisis from the late 1970’s onwards.

Graph 1.1: Growth Rates For Mexico Compared To Developing Economies

Data collected from the World Bank (2013)


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Economic growth may be starting to rise now but Mexico has been lagging behind as this graph

comparing Mexico to developing economies shows us. The linear line in red is average growth for

developing countries whilst the linear line in green is average Mexican development. How can this

be? Foreign Direct Investment (FDI) has increased significantly, with inflows of FDI soaring from

$17 Billion in 1994 to $66 Billion in the next decade. On the surface this should be ideal to the

Mexican economy as it would help bring more trade and more capital into the country. Another

aspect for review will be the volume of remittances and how they tend to grow in relation to trade.

Mexico has a huge amount of remittances, with $22.4 Billion received in 2012 alone (Multilateral

Investment Fund, 2012). How can these remittances help growth in Mexico, can these funds being

much more beneficial than the returns from aid for Mexico’s poorest citizens?. These variables

along with Mexico’s large oil revenues and NAFTA member should mean growth is possible, this is

why we are going to test the significance of each variable to see how Mexico can encouragedevelopment in the future.

Hypothesis

Our hypothesis is that the increases of FDI over the past 30 years, no matter how large, have been

insignificant in inspiring economic growth in Mexico, as studies using other countries have

demonstrated (Alfaro, 2003; Carkovic et al., 2002).We believe that remittances have a greater effect

on development within Mexico because the money sent isn’t going to the multinationals or rich at

the top of the system, but those in poverty who need it most. With FDI most of the profits never

see those at the ‘bottom of the basin’ because of corrupt officials, greedy managers and ineffective

methods of distributing such wealth as to actually benefit those in need. One can argue that it brings

benefits to infrastructure but this is seen mostly in lower-income developing economies where the

infrastructure is primitive so any investment would likely see great improvements. Mexico differs

from these countries and is at a stage in development where the infrastructure, whilst still poor, isnot a primary concern in most areas. With poverty estimates at nearly 50% by Mexican standards

(Cohen, 2013), the primary focus should be in helping to lift people out of poverty by providing key

essentials such as education, health and employment. The benefit of diaspora remittances is that

they don’t take into account skilled or unskilled labour because the person receiving the money


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doesn’t need any qualifications, so in theory everyone can benefit. One problem with FDI is such

that workers need a certain type of education, with others either going into non-skilled labour or

highly skilled labour which has been diminishing in Mexico recently (Waldkirch, 2008).

We will also look at the impact of various types of aid within Mexico, first with a examination of

foreign aid on Mexico at a national level, and then with government aid at a regional level. Whilst aid

should normally be beneficial to development, we believe that the amount of aid given is too small

to truly make an impact on development.

Structure Of Study

This study will have nine chapters consisting of an introduction, a review of previous studies,

contextual chapter, methodology, empirical analysis at national level, empirical analysis at state level,

conclusions, references and appendices. This structure will make it easier to explain our thesis and to

analyse our results accordingly. We will now give a brief breakdown of the contents of each chapter

and its purpose to the study. Chapter one is self-explanatory so I have not chosen to explain the

introduction any further.

Chapter two will focus on previous studies, primarily within the field of our chosen variables FDI,

remittances and aid. This type of study where our three chosen topics are analyse together is rare,

especially when said analysis involves empirical work. For this reason our research into previous

studies may consist of more theoretical studies, with the majority of research on how we can analyse

this empirically coming from our methodology chapter later on. This chapter is vital because it

provides an outline for our study, using previous works to formulate new ideas and incorporate

existing methods which may prove effective to evaluating development in the Mexican economy.

Chapter three will provide a context into the Mexican economy over the past thirty years, the period

to which we are analysing national development. This will give us background of development

specifically related to Mexico, factors that may be important to consider later on when analysing

particular trends that surface from our regressions. This chapter should have all the information


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needed to understand the materials within our study, so the reader will have a preliminary

understanding of significant events within recent Mexican history.

Chapter four will discuss the approach to our empirical analyse, providing insight into how different

variables were selected, how data itself was collected and the method to which we will run our

regressions to investigate how significant our variables are to economic development in Mexico. The

chapter will provide rational behind our model selection, regression techniques and the expected

outcomes we hope to gather from the study. It’s important because it explains our hypothesis in

greater detail and what aspects of development we are specifically looking for.

Chapters five and six will follow with the results from our regression analysis. Chapter five will focus

on our results at national level, using data taken from 1983-2011. These time series regressions usingGDP per capita and HDI (Human Development Index) will show two different aspects of

development, one on a monetary basis and one of a social economic basis. These results will be

explained using other forms of data in the shapes of tables and graphs to apply context to our

results and help formulate conclusions for our study. Chapter six will be similar in vain but will

consist of individual time series regressions for each state within Mexico with panel regressions for

the all thirty-two states combined. These regressions will differ from chapter five as they use

quarterly data from 2003-2012, providing insight into more recent developments within Mexico. Our

results for our panel regressions will be analysed against our national regressions to see if the effects

of FDI, remittances and aid have changed over time, with further analysis into the effects on each

state with insight into with methods perform best statistically. Both these chapters will end with an

appendix section displaying supplement material which are vital to the chapters.

Chapter seven will summarise the conclusions of our study, reflecting upon our original hypothesis

and comparing our research to our expected results and other works. The chapter will also include

limitations to our study and possible areas for future discussion. Chapters eight and nine will be

references any other appendix material which wasn’t used in chapters five and six, but was deemed

necessary for this paper.


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II. PREVIOUS STUDIES

Introduction

To build a foundation for our research and to effectively understand the condition of Mexico today,one needs to sample a wide range of literature. This gives us an opportunity to examine different

studies, critiquing the methods used to assess the effects of FDI, Remittances and Aid in different

regions of the world, creating a background of information which may be applicable to Mexico, and

help form select of the techniques that we use later in our methodology and empirical analysis.

Whilst we are fortunate that a large volume of analysis is available for FDI, Remittances and Aid,

the majority of said is theoretical, with existing empirical literature comparing these variables being

scarce. This means that the majority of our research will encompass the theory behind our study

with any empirical studies being loosely relatable to our topic. The literature that is available comes

in a large variety of different interlinked topics, with the majority not closely related to this topic.

The research we use will also have to be taken in two different languages, English and Spanish to get

a full grasp of the issues involved. This however does create some contrasts as the academic work is

written from an American point of view and might not give us the complete picture. This is true of

any nationality as we perceive different areas of importance within our research, and so a western

perceptive might differ slightly from that of a Latin American. This is why we have tried to researchjournals originating in Mexico to grasp the finer details of trends within the country, possibly giving

insight that has been neglected from previous studies. We also have to include research concerning

other countries with similar characteristics to Mexico to help formulate ideas for my own empirical

work. These will be mostly developing countries with similar issues on FDI and diaspora remittances.

How Can FDI Be Harnessed For Growth?

To measure the effectiveness of FDI inflow into Mexico, one needs to look at quantitative methods

of analysing FDI, firstly looking at similar work for different regions in the world and then with

respect to work on FDI within the Mexican economy.

Meyer & Sinani (2009) investigate how the FDI can forge positive spill overs in a variety of different

countries. They do this through a series of Cross-sectional and Panel data regressions where GDP


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per capita is used as their control variable with a variety of different explanatory variables. These

included data such as the technology gap between home and host countries, number of patent

applications, and research and development expenditure within host economy, economic freedom of

host economy and the spillover effects on education. The data used for these regressions was

collected via the EconLit database and the Internet, searching terms such as ‘’spillovers from

technology transfer’ and ‘productivity FDI spillovers’ to acquire data from previous cross-sectional

& panel data studies. Their analysis found that “a curvilinear relationship between spillovers and the

host country’s level of development in terms of income, institutional framework and human capital”.

“Early studies use cross-sectional data, yet as panel data techniques have become more available,

most recent studies use panel data, in total 43 of 66 studies” this is something to be aware of when

analysing previous studies as empirical approaches can change constantly, with the data available forsuch regressions also constantly increasing in availability.

Anghel (2005) hypothesises that countries whose governments are highly ranked according to

various indices of the quality of institutions tend to do better in attracting foreign direct investment.

In an empirical analysis of cross-section data, the paper finds that diff erent aspects of the quality of

institutions from a country (corruption, protection of property rights, policies related to opening a

business and maintaining it, etc.) are almost alw ays significant, regardless of the other control

variables that are used in the least-squares and instrumental variables estimation. While there is

evidence of institutions being a catalyst when attracting FDI, there is little research that investigates

the effectiveness of foreign investment or that links institutions to the quality of development from

FDI or diaspora remittances.

“Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs”, a paper

published by the OECD (2002) clarified the overall benefits of FDI for developing country

economies. It stated that “given the appropriate host-country policies and a basic level ofdevelopment, a preponderance of studies shows that FDI triggers technology spill overs, assists

human capital formation, contributes to international trade integration, helps create a more

competitive business environment and enhances enterprise development”. These triggers are

important to analyse as they can contribute to relieving poverty and improving social conditions


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within a country, with Mexico being a primary example of how FDI can lead to improved social and

environmental conditions.

As mentioned before Mexican inward FDI has increased primarily because of the opening of the

Mexican economy in the late 1980s, as stated by Jordaan & Rodriguez-Oreggia (2012). They also

speculate that the increase of investments is partly down to a “chang es in the location pattern of

economic activity within Mexico”.

Nunnenkamp et al. research into Mexican industry from 1994-2006, taking a sample of over 200

different industries to investigate whether FDI has had a profaned effect on employment within

Mexico. They found that there was some form of a link although there was evidence to suggest that

multinationals had forced smaller local employers to lose trade and consequently go out of business.

Robert Lucas (1988) discussed “On The Mechanics Of Economic Development” and looked into

how the accumulation of human capital lead to a rise in per capita growth. He stated that schooling

could have a positive effect on growth, which whilst being theoretically correct is difficult to prove

using statistical analysis. He also studied the advancement of technology and noted the “rapid

physical capital growth” associated with countries which used advanced equipment. In my study I

will be relating this research to FDI and remittances, indicating how the money has possibly aided

Mexico and technological development since joining NAFTA.

Weiss and Rosenblatt (2010) explore regional growth in Mexico from 2001-2005, looking at key

variables such as economic growth, good governance and corruption. The panel dataset is applied to

a OLS regression which demonstrates a correlation between corruption and higher levels of poverty.

This case is interesting because it shows that FDI taxes might not be fully utilised in Mexico.

FDI benefits can vary across sectors as shown by Alfaro (2003). He examines the effects of foreign

direct investment on growth in the primary, manufacturing, and services sectors. He used cross-

sectional data on countries from 1981 until 1999 and found that the effects of FDI on growth were

‘ambigous’. He did however find that FDI has different effects on certain regions, with a negative


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effect on growth within the primary sector, positive growth within the manufacturing sector, and

negligible impact on the services sector.

Analysing Remittance Effects

When analysing the effects of diaspora remittances, it’s important to distinguish between the

amount of assistance and the effectiveness of the remittance. I believe that remittances can only aid

development up to a point where the receiver starts experiencing diminishing returns of productivity.

This is because as the receiver of the remittance becomes more wealthy, the marginal benefit of

remittances goes down, and the receiver will become less productive as a result because they will

only work for a wage far above and beyond his/her current earning.

A key aspect to discuss is the poverty trap, where one cannot relieve themselves from poverty

because they experience difficulties acquiring multiple forms of capital, so they are trapped in a cycle

of poverty. Barham et al. (1995) analyse whether individual wealth is related to educational

attainment, Using a stochastic two ability model to discover that liquidity constraints mean children

invest in a lower quality of education. This is one of the effects of both FDI and remittances that

isn’t uncovered when using empirical analysis because the factors involved can’t be quantified, so

reasoning will have to be deliberated through qualitative methods. In this instance the child may see

the uneducated parent as a reason not to study take studies seriously, or the parent may not see

education as vital so doesn’t push their children to pursue their studies. These factors are logical but

don’t have any direct relation to investments of FDI or Remittances, an example that will have to be

remembered when analysing the significance of certain variables with my model.

Problems occur in poorer families where children are confined within the poverty trap because they

cannot finance the necessary education or cannot afford to devote time to education due to other

working commitments that earn income for the family. This is where the benefits of FDI should betargeting, what is Barham et al. notes as ‘redistribution policy’ which allows some revenues to reach

the truly deprived areas. In Mexico with extreme poverty at 13%, this sort of policy is currently

being implemented in the form of opportunity aid, as mentioned in the next chapter. We are


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looking into how people can break the poverty trap, and how Mexico itself can become more

productive, more growth, one along the lines of BRIC Economies.

As explained previously with FDI, remittances are not being used to full effect with “unattractive

investment environments and restrictive immigration policies which interrupt circular migration

patterns prevent the high development potential of migration from being fully realised” (Haas,

2005) Although he finds evidence to suggest that specific policies have an impact can enhance

development potential, Haas believes the key underlying factor is circular migration where

population have the opportunity to move territories freely. Instead of trying to stop what he labels

‘inevitable migration’, immigration policies allowing for freedom of movement would enhance the

contributions of migrants to the development of their home countries.

Our study on diaspora remittances and NAFTA doesn’t have freedom of movement written into

the original agreement due to the understandable reluctance of the US to freely allow Mexican

labour to flood there economy. In more recent times however, there has been data () that suggest the

amount of Mexicans trying to enter America has declined, with the global financial crisis of 2008

being one of the reasons why Mexicans are heading home in search of opportunities. Freedom of

movement within NAFTA alike that of the European Union would mean more diaspora have the

opportunity to send remittances back, but the argument itself doesn’t hold as the effectiveness of

the use of these remittances wouldn’t change.

Adams and Page (2005) is a relatable study as it looks for the effect of remittances in the decline of

poverty, the only difference from my proposal being that they do this over a cross section of 71

developing countries, using household surveys to gather information. These surveys are an option

for my research although I believe that the results from such methods are sometimes unreliable,

whilst it’s somewhat unfeasible to garner such results for Mexico the limited timeframe available as it

can take years to collect. Adams & Page used instrument variables in their study to allow for the

control of reverse causality. They found that “a 10 percent increase in international remittances in a

developing country will lead to a 3.5 percent decline in poverty ”. Also there results showed that a 10

percent increase in the share of international migrants from a developing country will lead to a 2.1

percent decline in poverty on average.


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Goldring (2004) makes two arguments in a study of “Family and Collective Remittances to Mexico”,

the first being the importance of ‘extra-economic dimensions’ of remittances, looking into social

and political meanings of remittances. The second is the impact of the money being sent and how

remittances are reinvested into families and the local community. He looks at how the remittances

are received and the social norms of with remittances are used. In this respect remittances are used

not simply as a means of survival through the purchase of food, but can be used as a tool for

investment, in construction as we have seen, or even for political purposes. Goldring concludes that

policy and programme interventions need to distinguish between types of remittance. He states that

while initiatives to expand the share of remittances allocated to savings are a good idea, that and the

amount of remittance used on other ventures such as investments in business require a wider range

of intervention, or more incentives for those to used there remittance for investments.

The effects of the global financial crisis is omitted from some of the work I have discussed so far,

possibly because some might see it as an outlier in the grand scheme of growth, with the aftermath

only directly harming developed economies. “Many economists agree on the fact that the current

financial crisis may have stronger negative repercussions on economic growth in Africa because of

the potential reduction in foreign capital flows. Although, the literature bonds on papers that study

the causal link and relationship between FDI and economic growth, the key basic assumption

common to these papers is that economic growth is a good proxy for welfare” Gohou & Soumare

(2009). This will have to be assed in our work because the global financial crisis had a heavy impact

on Mexico with gdp growth of negative 6.3% in 2008. The variables in this study are also interesting

and will be discussed in the methodology section, in particular the use of FDI per capita and the

Human development index as dependent variables.

Aid & Encouraging Economic Growth

When looking at development within Mexico, it’s important that we mention the role of

development aid in spurring economic growth. Minoiu & Reddy (2010) analyse the growth impact

of official development assistance to developing countries. Note, aid is considered as “grants or

loans provided by governments or multilateral institutions to developing countries” in this instance.


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They analyse the situation of developing countries using a series of cross-sectional analysis, creating

a distinction between types of developmental and non-developmental aid.

The Minoiu & Reddy study analyses the effects of aid by using time lags over the course of three,

five and ten years to see long term effects with results showing that development aid promotes long-

run growth. Overall there main findings were inconclusive with some forms of aid being effective

and others less so. This was put down to some regions having more efficient administrations,

operating with lower overhead cost, or being less bureaucratic which resulted in more aid per US

dollar reaching its intended recipients.

While this research and others (Riddell, 2007; Hansen & Tarp, 2000) may have been shown the

positive of aid on development there is substantial evidence of the waste of such revenues. Rajan &Subramanian (2008) found when applying cross sectional and panel data that there was little

evidence of a relationship between aid inflows into a country and economic growth. They

concluded that there was no certain form of aid which was particularly effective and that the

concept of aid, or at least its apparatus, would have to be rethought in the future. Aid is a big issue

for many developing economies and will be discussed briefly with relation to Mexico. This being

said, the amount of aid received in comparison to FDI and remittances is small, so when I look at

poverty in regions of Mexico, this may have to be taken into consideration.

Other Factors For Mexican Development

Duade & Stein (2007) look at the importance of institution and their impact on FDI and its

effectiveness. They find that “better institutions have overall a positive and economically significant

effect on FDI, some institutional aspects matter more than others do. Especially, the unpredictability

of laws, regulations and policies, excessive regulatory burden, government instability and lack of

commitment play a major role in deterring FDI”.

Results show that “the quality of institutions has positive effects on FDI, The impact of

institutional variables is statistically significant, and economically very important”. When considering

the effectiveness of FDI in Mexico, this has to be a key consideration because the quality of


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institutions within developed economies such as the United States and Canada will greater than

Mexico which is still developing. This could be one of the reasons why Mexico can’t harness the

spill over effects from overseas investment or NAFTA itself.

It proves that countries that improve their institutional framework, especially by ‘establishing a

predictable framework for economic policies and enforcement’, can increase the amount of FDI

into the country, and improve the effectiveness of the distribution of FDI taxes. The development

strategies also have positive spillovers to other economic activities concerning economic growth and

development with findings showing that Government Stability increases FDI by seventeen percent.

Whilst we are not looking at increases in FDI but the effectiveness of the revenues gained, the

matter of institutions could be a factor which we will discuss through qualitative means. This paper

is also significant as it uses OLS estimates with a lag on the dependent variable of the model. Thisalong with the application of the Arellano-Bond GMM estimator will be discussed further in the

methodology chapter.

One of the many text to refer to in the instance of NAFTA and Mexico is the work by Angeles

Villarreal who specialises in the processes of NAFTA. In “NAFTA & The Mexican Economy”

(2010) he states about the difficulties involved in carrying out tests about the effects of NAFTA in

the early days because of the position of the Mexican economy comparative to their American and

Canadian counterparts. “The effects are difficult to isolate from other factors that affect the

economy , such as economic cycles in the United States (Mexico’s largest trading partner) and

currency fluctuations. In addition, Mexico’s unilateral trade liberalization measures of the 1980s and

the currency crisis of 1995 both affected economic growth, per capita gross domestic product

(GDP), and real wages”.

He notes that while NAFTA may have brought economic and social benefits to the Mexican

economy, these benefits have not been evenly distributed throughout the country. He cites the

example of the agricultural sector which experienced a high amount of worker displacement after

NAFTA, in part because of increased competition from the United States.


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Key Issues For Our Study

Its clear that for our study we will have to use theory combined with empirics when analysing our

regression results. Its also clear that these pieces of work use more than one model to investigate

development, and experiment with time lags to see if variables change overtime. Its also important

that there is method behind each variable that we may use in our study because they may be

interlinked to our dependent without us realising initially. This and different sections of our research

will be incorporated into our methodology later on.


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III. THE MEXICAN ECONOMY: AN OVERVIEW

Introduction

The objective of this chapter is to explain any background details that may be relevant in our study,

giving an overview of Mexico’s recent past so that one can understand our methods later on in thepaper. This will be a brief but informative insight into key considerations when analysing economic

development and will provide a context for theoretical discussions when interpreting results our

results.

Preface

Mexico is the largest speaking Spanish nation and the second largest economy in Latin America after

Brazil. Hence the influence of Mexico within the region is great, with its close cultural ties with theSouth America combined with its economic relationship the US and Canada to the north. The

country is a developing economy with an annual growth rate of 4%, putting it in a bracket just

below the BRICS economies (Most prominently China, India & South Africa). It is predicted to be

one of the largest economies in the world within the next 40 years, with Pricewaterhousecoopers

(2013) predicting it to be the world’s 7th largest economy in 2050. At the present moment in time,

the economy is 11th in the world with an annual GDP of $ 1.153 trillion with a GDP per capita of

$ 10,047 according to the World Bank (2012). With the many ties Mexico has, and the substantial

investment into the country, its somewhat a mystery why so many people are in poverty, estimated at

47% from the latest INEGI figures.

The country is traditionally a religious one, with just under 94% following Christianity with 82.7%

Roman Catholic and 9.7% comprising of other Christian religions according to the 2010 general

census. Its political scene was dominated by the Partido Revolucionario Institucional (PRI) which

translates into English as the Institutional Revolutionary Party. It relinquished power in 2000 when

the Partido Acción Nacional (PAN), national action party took control.

The geographical makeup of Mexico is 31 states and 1 district (District Federal) although the district

is considered a state in annual census collection and we will be considered a state for the duration of

this study. We have highlighted the areas in blue to show states which incomes come from service


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based activities. As you can see, most of Mexico’s income is primarily from manufacturing based

services, as we will discuss later.

Figure 2.1: Map of United Mexican States

Table 3.1: Supplementary Key for Mexican States and Their Locations

Key For Diagram of Mexican States

1. Aguascalientes 9. Mexico, D.F. 17. Morelos 25. Sinaloa2. Baja California 10. Durango 18. Nayarit 26. Sonora

3 Baja California Sur 11. Estado de

México

19. Nuevo León 27. Tabasco

4 Campeche 12. Guanajuato 20. Oaxaca 28. Tamaulipas

5 Coahuila 13. Guerrero 21. Puebla 29. Tlaxcala

6 Colima 14. Hidalgo 22. Querétaro 30. Veracruz

7 Chiapas 15. Jalisco 23. Quintana Roo 31. Yucatán

8 Chihuahua 16. Michoacán 24. San Luis Potosí 32. Zacatecas

Service Based State Manufacturing Based State


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Background

Stagnation, Deception & Liberalisation (1980-1994)

During the 1970’s the Organization of Petroleum Exporting Countries (OPEC) began to effectively

manipulate the price of petroleum, limiting supply and driving up prices by seven hundred percent.

Mexico and the Soviet Union were the only large exports not to join OPEC, thus Mexico was

considered a vital to the United States and Western Europe who channelled money into the country.

With such a large influx of funds and readily available loans, Mexico took advantage of the situation

and borrowed heavily to fund large public investment projects. While investment was considered

necessary (citation needed) the projects undertaken were ill-conceived, failing to make any returns

and failing to relieve long term problem (Watkins, 2008).

One instance was the water shortages in Mexico City where development projects were made to

transport water from other regions instead of sorting out the actual problem. As Watkins (2008)

states “The real problem is that residential water use in Mexico City was not metered. Residents paid

a flat fee and the fee did not go as they used more and more water. There was nothing to discourage

middle and upper income families from creating landscaping that required vast amounts of water”

hence water was wasted in some respect and no returns were made from the initial investment. In

fact electronic pumps had to be used to dispose of excess water in the hills of the city.

With petrol prices falling in the early 1980’s due to a combination of surplus oil supply and Western

economies transferring energy resources to coal, nuclear and renewable energies, Mexico was in

trouble. President José López Portillo announced he intended to “defend the peso like a dog”

against speculative attacks (Haufbauer & Schott, 2005) and tried a series of methods to raise oil

prices, even firing the director of the state oil company Pemex for reducing the price of Mexican

crude oil when prices were plummeting on international markets (Porter, 2013).

The measures were ineffective and the peso was devalued to help improve the bleak economicsituation. In August of 1982 and about to default on its debt, Mexico had to be bailed out by the

IMF with loans of $3.9 billion (Farnsworth, 1982) being given in exchange for austerity cuts and

liberalisation of the economy, an offer given to most Latin American countries during this crisis.

The following years were tough for the country with extreme poverty at 28.4% and large periods of


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negative growth. There was even scandal in 1988 when PRI representative Carlos Salinas de Gortari

was elected as president in what was later announced as a rigged election by his predecessor Miguel

de la Madrid (Thompson, 2004).

Corruption allegations aside, Mexico was starting to show signs of recovery by the late 1980s with

real wages starting to rise and liberalisation policies were well and truly being implemented. The

Gotarti presidency was stringent with budgets (partly down to the IMF terms several years

previously) and held tight controls on currency. The economy was seen as unstable by some and

upon the election of Ernesto Zedillo, policy decisions were re-written within the PRI party, with a

sudden devaluation of the Peso which led to the 1994 Peso crisis. Mexico had previously operated

under a fixed exchange regime and the sudden depreciat ion meant that it didn’t have enough foreign

reserves to maintain the pegged rate (Mankiw & Taylor, 2007).

Entering NAFTA (1994-2008)

The North American Free Trade Agreement was signed in 1994 between Canada, Mexico & the

United States of America with the “primary importance in providing investor protections to foreign

direct investment” (Maurer, 2006). The agreement was sold on the promise of access to a market of

over 400 million people, with the opportunity of increased cross border investments. Mexico saw its

proposed benefits and coming off the end of protectionist policies in the early 1980s, it had been

warming to the concept of trade organisations, joining GAAT in 1986.

At the beginning of the decade Carlos Salinas de Gortari approached then US President George

H.W. Bush with the proposal of forming a free trade agreement between the two countries. The aim

for Gortari was to try to increase growth via foreign direct investment in the expectation that the

new jobs created and an increase in exports would stimulate Mexico’s flagging economy. He believed

that free trade would lead to an increase in export diversification, with FDI creating new jobs,

increasing real wages of workers, and reducing high poverty levels in Mexico which were….. at this

point in 1994. With NAFTA coming into effect, many believed the agreement would have a positive

impact on the Mexican economy, with the perceived downside being mostly an American problem

(Villarreal, 2010). Commentators in the US feared that lower wags south of the border would drive


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jobs away from America and destroy the domestic economy (an accusation which in fact has been

thrown at China more recently). Mexicans feared that the technological superiority of the US would

mean that jobs would be lost, with labour intensive manufacturing being replaced by capital intensive

production (Blecker & Esquivel, 2010). The proposal itself had advantages in the reduction of trade

tariffs (direct & indirect) between member countries. This would help lift Mexican trade with more

inward investment as well as the advantages from increased competitiveness through dealings with

American and Canadian firms (Bertrab,1997).

During this time Mexico was still experiencing economic crisis, with inflation spiralling out of

control and peaking at 52% in 1995. Poverty was escalating, peaking at 20% (headcount ratio at $2 a

day, PPP) in 1996 and a new peso was brought in to rebalance the situation. Emergency funds were

given from the IMF and the United States which helped with the balance of payments problems. The problems soon eased whilst FDI was increasing considerably in part to NAFTA, relieving any

change of another major Mexican crisis.

At the turn of the millennium, the PRI party which had dominated the Mexican political landscape

for so long, was ousted from power with the PAN breaking seventy years on uninterrupted PRI

governance. This was significant as it saw a change in policy and the start of stable growth within

Mexico, with the economy not being hit with crisis until the 2008 global recession.

Global Financial Crisis & Beyond (2008- Present Day)

In 2008 Mexico was badly affected by the global financial crisis as its main trading partner (United

States) saw a huge downturn which had negative consequences for FDI and remittances to the

country. The peso saw an appreciation in value due to firms within Mexico trying to cover dollar

demanded debt. This increase in the value led to the Mexican central bank having to use 11% of its

dollar reserves within a 72 hour period and increased interest rates on public debt to maintain

confidence in the peso and avoid speculative runs on the currency. (Munoz-Martines, 2008). Mexico

experienced negative growth of nearly six percent in the aftermath of the crisis (graph 1.1) but has

since started to recover with exports to the US increasing in 2012.


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Development in Mexico

As we have mentioned in the introduction chapter, Mexico has received large quantities of FDI and

diaspora remittances, with Mexico being the second largest receiver of remittances in the world after

India, with the money being Mexico’s second largest foreign source of income after oil revenues

(BBC, 2009).

Figure 3.1: Percentage of Population in Poverty within Mexico

As you can see from the graph above, poverty in Mexico started to decline up until 2006 where

Felipe Calderon took office. The Green line represents the percentage of people within Mexico who

would fail to purchase a basic food basket if the entire household disposable income was devoted

only to buy these goods, this is known as food poverty or extreme poverty within Mexico. The

second line in blue denotes Capability poverty, when a family income cannot supplement the

purchase of food and essential expenses such as healthcare and education. The red line indicates

these measures plus other expenses such as clothing, housing and transportation costs and is

estimated at $189 a month for a household of four (Botello, 2013).


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The fact that extreme poverty held steady since 2008 is attributed to targeted social protection

programs such as the Oportunidades which offers conditional cash transfer initiative for education

and the Seguro Popular universal health insurance. Opportunades (opportunity) is the aid program

which we will be looking at in our regional analysis, this form of aid is given through cash and food

to provide nutrition and help young people into education.


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IV. METHODOLOGY

Introduction

To investigate the development of Mexico we will split our analysis into two areas, first concerning

the development on a national basis, and secondly analysing different regions of Mexico to assess

how various factors of growth such as FDI & Remittances can differ from state to state, giving

insight of more recent developments over the past decade.

Before we begin, let remind ourselves of our hypothesis:

(1) We believe that FDI has been ineffective in aiding Mexican development, and any

significant windfalls of FDI have been wasted, with diaspora remittances being a more

effective way of reducing poverty within the region and helping to improve development

within Mexico because it reaches those who need it most.

(2)

NAFTA has not had a significant effect on the Mexican economy in terms of

development and growth, with growth rates being negligible for a developing economy

since 1994. This assumption is made on the basis of FDI not being significant on

development in Mexico

(3) Aid will also be insignificant although it will demonstrate a positive relationship with

GDP and human development. This will become more evident in our regional analysis

where opportunity aid only accounts for a small percentage of GDP.

To define each of these theories we will run a series of different regressions to determine the

credibility of the original hypotheses with the first section focusing on the national Mexican

economy whilst the second section focused primarily on different states within Mexico. This will

allow for a thorough examination of the factors that have plagued the Mexican economy with an

analysis of the results also given briefly within this chapter. Chapter six then follows with further

analysis combined with a theoretical approach to aide our empirical analysis.


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Since this is an investigation into certain development factors and the effect of certain variables such

as oil and NAFTA on the Mexican economy we need to analyse a significant time period to give

some insight of where Mexico was previously and how it has developed over the past few decades.

To do this we used data from 1983 onwards in an attempt to give a reasonable view of growth

within Mexico without having considerable outliers which could affect the final result. This being

said, we still have to take into account other economic factors which have been explained before,

primarily the crises that plagued Mexico in 1982 and 1994, both which caused serious damage to the

strength of the Peso with the later leading to rapid hyperinflation and the introduction of the New

Mexican Peso and a default on Mexican debt (Feridun, 2007). It is for that reason that all monetary

variables have been measured in current US Dollar values to offset any exchange rate fluctuation as

this study will not focus on the Mexican Peso’s proximity to the dollar. When analysing our results it

will be important to take into account financial crises and other outliers which could influence ourindependent variables, the United States in particular because of its savings & loans crisis in the late

1980s, the dot.com bubble burst of 2001 and the global financial crisis of 2008, all of which had

serious consequences on the US economy, and would naturally have knock on effects on the

Mexican economy, FDI into the country and Remittances sent from the United States.

Data Acquisition

The data sources used for the first set of regressions came primarily from The IMF and World Bank

statistic websites. This provided most of the information from FDI to foreign aid provided from

other countries. The data on remittances was retrieved from Instituto National De Estadistica y

Geographia (INEGI) and was manually converted into current US Dollars, as are all the variables

apart from our NAFTA Dummy. The oil price variable was devised using data of barrels sold per

day (INEGI) multiplied by 365, this was then multiplied by the average cost of oil each year in

current US Dollars, with this information being acquired from the World bank (2013).

= 1 + ( 1)2 1

1−1


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The formula above will be applied to interpolate data when trying to determine missing entries for

variables such as the human development index, where some information for a small number of

years may not be available. This should not impact significantly on our results and we have taken the

stance of not using variables such as the Gini coefficient or Poverty rates because of the lack of

information available and to keep a element of integrity to our results.

Selecting The Model(s)

Our first regressions will be a times series model based studies by Polaski (2004) And Weiss &

Rosenblatt (2010). Whilst this method may mean sacrificing an element of accuracy when running

our regressions, it will allow for a model which can analyse both remittances and FDI, giving an

insight into which has been more effective in terms of Mexican development.

Our dependent variables will be GDP per capita and the human development index. This has been

done to give greater insight into the possible merits FDI and Remittances because as we have

discovered in chapter two, development can’t simply be measured in monetary terms. Whilst we

would have liked to have use Gini coefficients or poverty rates, both datasets were inadequate due to

the amount of missing entries for years. One could use interpolation but this won’t help as there are

not enough original entries available for this to be a fair study.

= 0 + 1(

)+ 2(

)+ 3(

)+ 4(

)+ 5 + (1)

= 0 + 1(

)+ 2(

)+ 3(

)+ 4(

)+ 5 + (2)

These models will provide the reference for our future studies into regional development and will

give us an insight into development including pre-NAFTA conditions where Mexico was less

dependent on FDI and more so on oil.


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Table 4.1: Variables for National Regression Analysis

Variables For Mexico National Regression Analysis

Dependent Variable Description

GDP Per Capita (GDPCap) Real GDP measured in US Dollars divided by

population of each state (Current). Thenlogged.

Human Development (HDI) Human Development Index for Mexico as a whole from 1983 with some interpolated values included.

Independent Variables Description

Foreign Direct Investment / GDP (FDIG) The net amount of revenue earned fromForeign Investment per state, measured in USDollars (Current) as a percentage of TotalGDP.

Diaspora Remittances/ GDP (DiasG) The amount Remittances received from

abroad, measured in US Dollars (Current) asa percentage of Total GDP.

Foreign Aid/ GDP (AidGDP) The amount of foriegn aid given to Mexico,measured in US Dollars (Current) as apercentage of Total GDP.

Oil Revenues/ GDP (OilGDP) The amount of oil revenue, measured in USDollars (Current) as a percentage of TotalGDP.

NAFTA A dummy variable with 1= after entry and 0=

before entry.

The panel regressions and individual state regressions use variables that mirror those of models one

and two with one significant difference being the replacement of our NAFTA dummy variable with

ones concerning manufacturing states and drug related crime within Mexico. The NAFTA dummy

was dropped because this analysis only begins in the first quarter of 2003, thus the issue of NAFTA

cannot be fully determined from these regional regressions although our dummy variable for

manufacturing does link back to NAFTA, with NAFTA promoting increased industrial performancein some states. The variable for drug related crime is used for seven states (Baja California,

Chihuahua, Guerro, Michoacan, Nuevo Leon, Sinaloa & Tamaulipas) starting from the final quarter

of 2006 (the official start of Mexico’s war on drugs), as taken from the Stratfor annual report of drug

crime in Mexico (Stewart, 2010).


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Another change of significance is the replacement of our foreign aid variable with that of

opportunities aid. This was because foreign aid itself doesn’t have any data for individual states

where as the Mexican opportunities programme ( Oportunidades in Spanish) follows the same lines of

aiding those in poverty, but for different states and is issued by the Mexican government for each

state. This anti-poverty program has come to prominence is the past decade, starting life as

‘progressa’ in 1997 and taking on its current form in 2002. It focuses on helping poor families in

rural and urban communities, with government investment being invested in human capital, aiming

to improve education, health and nutrition of children, with the intended effect of reducing poverty

in the future (Braine, 2006). The calculation of this variable was taken from INEGI, and averaged

over a quarterly basis. The currency of this variable and GDP per capita were given in Mexican

peso’s (current values) and had to be converted to US dollars to match our other data. Whilst this

may lead to some minor discrepancies over different exchange rates over the course of a quarter, itshould not have any significant impact on our results.

= 0 + 1(

)+2(

)+3(

)4 + 5 + (3)

= 0 + 1(

)+2(

)+3(

)4 5 + (4)

= 0 + 1(

)+2(

)+3(

)4 + (5)

= 0 + 1(

)+2(

)+3(

)4 + (6)

Models three, for, five, and six don’t differ too much from our original analysis of Mexico in the firstpart of this chapter, this is intended to keep some sort of continuality so that we can compare our

panel regression results to our previous results to highlight any contrasts and possible discrepancies.

The only difference from our panel regions and state by state time series regressions are that the


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variable of manufacturing has been removed because it would hold no significance for a regression

of one individual state.

Table 4.2: Variables For Regional Analysis

Variables For Mexico State By State Regression Analysis

Dependent Variables Description

GDP Per Capita (GDPPCAP) Real GDP per state measured in US Dollars

divided by population of each state (Current).

Then logged for our regressions.

Human Development Index (HDI) Human Development Index for each state as

seen in table 10.1

Independent Variables Description

Foreign Direct Investment (FDI) The net amount of revenue earned from

Foreign Investment per state, measured in US

Dollars (Current) as a percentage of Total

GDP for the state.

Remittances Received (REMIT) The amount Remittances received from

abroad, measured in US Dollars (Current) as

a percentage of Total GDP for the state.

Opportunity Aid (OPP) The amount of opportunity aid given to each

state, measured in US Dollars (Current) as a

percentage of Total GDP for the state.

Drugs (DRUG) A dummy variable for 6 states which suffered

drug crime from the last quarter of 2006

onwards.

Is state in Manufacturing Sector? (MANU) A dummy variable determining whether a

state’s primary income is earned from themanufacturing sector (1=Yes, 0=No)

When running our model, it is important that we run test to maintain the integrity of our data and

our study. One such problem we should be aware of is whether our model demonstrates signs of


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multicollinearity. Multicollinearity is where two or more variables are highly correlated with each

other, so in theory we could be using the same information twice unknowingly with the model

(Pindyck and Rubinfeld, 1998). This could be problematic as we need to obtain least square

estimates later in our analysis and even thought we could still obtain these values with

multicollinearity, they would prove to be statistically insignificant as there is little or no variance in

the variable used. Variance inflation factor (VIF) asses the severity of multicollinearity in our OLS

Regression (Koop, 2005). We will calculate the VIF using Stata and we will be looking for a number

greater than the formula of: VIF= 1/(1- R^2 ) We will also have to check the mean VIF to discount

serious multicollinearity, this value has to be smaller than 5.

As we are using cross sectional time series data (panel) we must also look for Heteroskedasticity in

our models. This could be a key issue for our research because heteroskedasticity normally indicatesthat while the smaller values of the model may be correct (those at the beginning of the scatter plot)

as the value of Y (GDP Per Capita) increases, the accuracy of the plot is becoming weaker as the

constant variance of the coefficients cause OLS to calculate inaccurate estimates of standard error

of coefficients (Studenmund, 2010, P99). So while our model might be performing well at

generating coefficients for smaller GDP growth, it could be experiencing large problems for those

with proportionately larger GDP growth. This shouldn’t be a problem with our results as we have

taken the measure of using natural logarithms for our GDP per capita variable with our other

variables being divided by GDP to reduce the difference between higher and lower values between

our variables.

We will also have to perform checks for serial correlation within that model. Serial Correlation is

when there is a violation of the classical assumption IV that different observations of an error term

are uncorrelated with each other. If we find serial correlation, it means that our error term is not

independently distributed across the observation and that the error term may not be truly random.

One of the most likely causes of serial correlation within time series data is data misspecification,

where a statistically significant variable has been omitted from the model, thus there is a disturbance

in the error term which would skew our results significantly. Our datasets are complete using the

interpolation formula and I don’t foresee any problems with misspecification although we will run a

Durbin-Watson test to confirm this.


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Motivation For Variables

GDP Per Capita was selected as the dependent variable in this regression because data on poverty

was not available for different states within Mexico from 2003 onwards. This was unfortunate

because we are trying to look at how those in less fortunate circumstances can lift themselves from

poverty. GDP per capita does provide a basis to look at this and can be a key determinant in

eradicating Mexican poverty. We have selected human development as our second dependent

variable to try to measure the social impact of FDI, remittances & aid. This measure was created by

Mahbub Ul Haq & Amartya Sen in 1990, using a combination of life expectancy, education and

GNI per capita to explain development (UNDP, 2012), with the measure itself being slightly

revamped in 2010 with modified weightings to certain aspects and the replacement of literacy rate

with an education index which includes a broader range of measures.

HDI has been applied successfully in many studies of development (Mayer-Foulkes, 2010; Highum,

2008; Sabi, 2007) although the measure has been criticised for its ‘flawed composition’ with Mark

McGillivray denouncing the measure upon its inception (1991) stating that it doesn’t provide any

more information than GNP per capita. This response is not uncommon with many ( 3 ref)

criticising the method of calculating human development and the validity of results using this

measure although some authors such as Sagar & Najam (1998) and Farhad Noorbakhsh (1998) have

found the measure to be somewhat useful with Noorbakhsh performing a regression analysis whichfinds the variable statistically significant. We believe the measure will prove a useful and effective

measure despite certain criticisms and will complement our regressions using GDP Per capita

incomes as there is no better measure widely available that begins to measure human development.

FDI & Remittances have already been stated as vital because the research is based on the

assumptions that Diaspora Remittances will help benefit the poorest in Mexico whilst FDI is being

held by the powerbrokers and wasted. Foreign Aid was also included because it is closely linked to

the first two variables in respect to development, and if anything is a more direct link to povertyrelief. The NAFTA dummy was added as part of our hypothesis to analyse its effects on the

Mexican economy, we would suspect that it would have a positive effect (as with all our variables)

but this won’t be statistically significant. We also presume that aid won’t be statistically significant

because the amounts comparative to GDP are tiny compared to remittances and FDI.


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The expectation of our regressions remains similar to our original models, with FDI/GDP not

expected to be significant for human development but significant in per capita GDP growth. We

expect our remittance variables to be significant in both regressions whereas opportunities aid isn’t

expected to be significant although it would be expected to have a positive effect on both

independent variables if proven significant. We expect the manufacturing variable to not be

statistically significant because 26 out of the 32 states in Mexico have the majority of their income

come from manufacturing, although we expect it to have a positive impact on GDP per capita but

not when regressed against HDI. This is because we expect a positive relation between those states

who are primarily service economies as they tend to have a greater population who can speak

different languages and have more investment which should lead to further development.

The drug variable was included to highlight the perceived negative impact in those states and to

allow us to gain an understanding as to why those states may perform differently to other states who

are not significantly affected by the drugs war.

What Are We Expecting To Achieve?

The purpose of these regressions is to assess the relative impact of FDI, Remittances and

Opportunities Aid against one and other, determining which has a greater impact on GDP growthand human development. Our results will show how our variables may/ may not be significant in

certain states, allowing us to make conclusions as to why these processes occur and what sort of

conditions are needed within Mexico to encourage growth. The results may also display the right

conditions to which growth can occur within Mexico, with certain states possibly demonstrating

better signs of growth than others.

Summary

In summary we are going to run six different regressions, two for the national outlook of Mexico

from 1983-2011 using annual data from the IMF & World Bank. The other four consisting of two

time series analysis and two panel data regressions. We will run tests to ensure that the model if free


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of problems before analysing the results. Some of these test will be included in our appendix

although we won’t go into detail about testing because this paper is focused solely on economic

development and not statistical analysis. We expect that remittances will have a positive effect on

both GDP per capita and Human Development at any significance level. We expect FDI to be

insignificant along with both forms of aid. We expect NAFTA to have a positive effect, due in part

to the turmoil Mexico experienced in the late 1980’s before, something that will be accounted for

statistically in our regressions.


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V. EMPIRICAL ANALYSIS AT NATIONAL LEVEL

Overview of Results

Model 1: National Time Series Regressions For GDP Per capita (1983-2011, Annual)

Our first model investigating the correlations between our independent variables and GDP per

capita achieved an r-squared of 0.7473 or 75%, indicating that 75% of all squared deviations from

the mean could be explained by our model. This is somewhat reasonable in time series data but as

we are only using a dataset concerning one country, a certain degree of accuracy should be expected.

Once lags were applied to the independent variables of FDI/GDP, REM/GDP and AID/GDP, we

see our r-squared increase to 84% (0.8438) after a year lag, 93% (0.9034) after 3 years and then

decrease slightly to 92% (0.9155) when a five year lag is applied. This could indicate that the effects

of our variables have an increased effect over time, peaking at 3 years and then starting to diminish

thereafter, as discussed earlier.

Only 3 variables were statistically significant, those being the percentage of remittances to GDP (at

99% confidence level), aid as a percentage of GDP and our NAFTA dummy variable ( 95%

confidence level). Remittances were shown to need a 34.21856 (34 million) increase to increase our

log of GDP per capita by 1 unit, all other factors cetris paribus. This relationship can be seen in

appendix graph 1.1, with the gradient of our line of best fit not altering significantly once lags are

applied. Opportunities also shows similar trends. This confirms the theory in our hypothesis that

remittances do have a substantial impact on the growth of GDP per capita within Mexico, and that

theory with a smaller standard of error each time indicating the further strength of our assumption.


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Regression Results For Mexican National Development AnalysisModel 1: GDP Per Capita

Model 1 Dependent Variable: GDP Per Capita

Lag None -1 -3 -5

FDI/GDP -14.9553(9.820412)

0.141

-7.997087(6.456046)

0.229

5.193079(3.934721)

0.202

12.04939(3.319858)0.002***

REM/GDP 34.21856(12.27946)0.010***

42.74582(8.701649)0.000***

48.29255(5.549673)0.000***

39.13357(5.441009)0.000***

AID/GDP -325.0232(137.2048)

0.027**

-394.8432(105.8229)0.001***

-280.0921(68.98461)0.001***

-194.4469(69.85991)

.012**

OIL/GDP -3.049623(1.785398)

0.101

-3.599569(1.46695)0.023**

-5.73973(1.094112)0.000***

-5.314414(1.248704)0.000***

NAFTA .5444573(.2489141)

0.039**

.2831049(.1645945)

0.099*

-.0065067(.105105)

0.951

-.1828395(.11501)

0.129

Constant 8.217101(.3140097)0.000***

8.187477(.2331728)0.000***

8.153194(.1649399)0.000***

8.319176(.2091093)0.000***

Adjusted R 2 0.7473 0.8438 0.9304 0.9155

VIF 2.89 2.31 2.16 2.36

Observations 29 28 26 24

First results indicate Coefficients of our variables, with the second results (in brackets) indicating standard errorof our variables. The third result (labelled with *) indicates the p values are significant at 90% confidence level,(labelled with **) indicates significance at 95% confidence level, and (labelled with ***) indicates significance at99% confidence level.

FDI was statistically insignificant throughout until a lag of five years was applied, this indicating that

it would take five years for net FDI to have any significant effect on GDP per capita. We shouldn’t

take this result as fact however because of the suspicion of over fitting within our model, so five

years ma possible be an outlier in our study due to the data that was dropped for said regression.


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Model 2: National Time Series Regressions For Human Development (1983-2011, Annual)

The results of our second regression model achieved a greater accuracy than our first, with an r-

squared of 0.8801 or 88%, meaning 88% of all squared deviations from the mean could be explained

from our model, meaning a more accurate result. The only concern was when lags were applied as

the r-squared increased to 92% (0.9188) with a 1 year lag, 97% (0.9702) after a 3 years and then

down to 95% (0.9544) after a 5 year lag. As a rule of thumb any result with accuracy greater than

95% is dubious and could show any number of different traits. We tested for multicollinearity using

Variance inflation factors (VIF) and concluded after testing we can assume the model doesn’t have

any substantial errors which leads to the proposition that the model is subject to ‘ov er-fitting’, where

the dataset in one instance is suited to a regression against our dependent variable where as another

dataset may not experience such high r-squared values (Hand, 1998).


39/91



Regression Results For Mexican National Development AnalysisModel 2: Human Development Index

Model 2 Dependent Variable: Human Development Index

Lag None -1 -3 -5

FDI/GDP -1.23489(.6225473)

0.059*

-.284484(.4231754)

0.508

.3448383(.2228774)

0.137

.9142499(.2304157)0.001***

REM/GDP 3.550653(.7784343)0.000***

3.924752(.5703682)0.000***

3.65419(.3143543)0.000***

3.366546(.3776348)0.000***

AID/GDP -13.75798(8.697851)

0.127

-19.57667(6.936387)0.010***

-18.81878(3.907547)0.000***

-12.64142(4.848647)

0.018**

OIL/GDP -.2635065(.1131821)

0.029**

-.2361169(.0961544)0.022***

-.1469965(.0619746)

0.028**

-3620.171(.0866667)

0.016**

NAFTA .0625401(.0157795)0.001***

.0394679(.0107887)0.001***

.0349781(.0059535)0.000***

.0217269(.0079823)

0.014**

Constant .6542782(.0199061)0.000***

.6451658(.0152838)0.000***

.638262(.0093428)0.000***

.6491868( .0145133)

0.000***

R 2 0.8801 0.9188 0.9702 0.9544

VIF 2.89 2.31 2.16 2.36

Observations 29 28 26 24

First results indicate Coefficients of our variables, with the second results (in brackets) indicating standard errorof our variables. The third result (labelled with *) indicates the p values are significant at 90% confidence level,(labelled with **) indicates significance at 95% confidence level, and (labelled with ***) indicates significance at99% confidence level.

The results themselves show that the remittance and oil variable were statistically significant at a 5%

level, meaning that both could be factors for Mexican development. This is only possible under the

assumption that those revenues have been passed down to the working classes of Mexico,

something we will have to analyse further in the discussion chapter. Oil seems to have a negative

impact on GDP per capita which indicates that oil revenues mu

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AN INVESTIGATION INTO SIGNIFICANCE OF FDI, REMITTANCES & AID ON ECONOMIC DEVELOPMENT WITHIN MEXICO

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