Labor Mobility, Capital Mobility, and Government Size in Mexican States

• Bookmarks: 36


Mexico is known for its open economy; in recent decades, treaties like GATT and NAFTA have facilitated a even greater levels of capital mobility. Scholars who analyze the connections between the openness of a country’s economy and other national characteristics find a positive correlation between economic openness and the proportional size of government.

One explanation of this phenomenon, from scholar Dani Rodrik, is that open economies have more economic instability, and therefore need larger governments to absorb economic shocks. Alberto Alesina and Romain Wacziarg, on the other hand, argue that smaller nations need larger proportional governments because of economies of scale, and that smaller governments, eager to grow, are more likely to be open than their larger peers.

In the February 2012 Center for International Development Working Paper, “Capital and Labor Mobility and the Size of Sub-national Governments: Evidence from a Panel of Mexican States,” author René Cabral Torres examines the correlation between the size of government and economic openness at the subnational level by analyzing the governments of 32 Mexican states from 1996 through 2006.

Since trade data are unavailable at the state level, Torres uses two alternative measures of openness: labor openness, in the form of the average international migration rate (outflows minus inflows divided by total population), and capital openness, in the form of Foreign Direct Investment (FDI) as percentage of the state GDP. He measures government size as a ratio of government spending to state GDP.

Torres finds statistically significant positive correlations between state government size and both the migration rate and the amount of FDI. A one percent increase in FDI to GDP ratio correlates with a 0.006 percent increase in the size of the state government. A one-point increase in the labor mobility ratio correlates with between a 0.078 and 0.084 percent increase in the size of government. Interestingly, Torres also finds a negative correlation between the size of the population and the proportional size of government, lending some credence to Alesina and Wacziarg’s hypothesis. However, the correlation between government size and openness remains even when accounting for this relationship.

Cabral Torres also analyzes how state spending on education, health, and poverty reduction programs correlate with labor and capital mobility. He finds that capital mobility has no impact on spending on social programs, but that states with larger net population outflows had higher spending on health and poverty alleviation programs. Torres theorizes that in states where many of the heads of the household emigrate, governments need to provide more social programs for the remaining family members.

Besides substantiating the hypothesis that the correlation between government size and openness extends to the subnational level and illustrating a correlation between labor mobility and social spending, Torres’s work suggests that international migration might be an effective measure of the openness of Mexico’s economy, and that migration might measure openness for other nations as well.

Feature photo: cc/kjmatthews

41 views
bookmark icon