The aggregation of Total Factor Productivity (TFP) from micro to macro: evidence from Mexico, 1998-2023

Economic growth is often measured by how much a country produces, but the true engine of long-term prosperity is something more subtle: how efficiently a nation uses its resources. This concept, known as total factor productivity, looks beyond simple inputs like the number of workers or the amount of machinery to ask a deeper question: are businesses getting more out of what they have? When a factory produces more with the same amount of steel and labor, or when a shop serves more customers without hiring extra staff, the economy becomes more productive. This efficiency is the difference between a country that stagnates and one that thrives. For decades, Mexico has struggled to break out of a pattern of slow growth, a situation economists call the "middle-income trap," where a nation gets stuck because it cannot improve its efficiency fast enough to compete with wealthier economies. Understanding where this efficiency comes from, and where it fails, is essential for designing policies that can lift the entire country forward.

A recent study by Alejandro Ramirez-Guerra at Newcastle University Business School offers a fresh look at this problem by examining the economic heartbeat of Mexico over a twenty-five-year period, from 1998 to 2023. Instead of relying on broad national averages, the researcher dug into the detailed records of millions of individual businesses, from tiny corner stores to massive oil refineries. By tracking these establishments over time, the study reveals how the country's overall productivity has shifted, which specific industries are driving that change, and how the constant churn of businesses opening and closing affects the nation's economic health. The findings paint a picture of an economy that is deeply uneven, where the success of the whole depends heavily on a few specific sectors and the constant arrival of new, efficient companies, while the businesses that have been around the longest are actually dragging progress down.

The data, drawn from Mexico's national economic census, allows for a granular view of the country's economic landscape. When the researcher aggregated the performance of all these individual businesses, a clear pattern emerged regarding the timing of productivity. The overall efficiency of Mexican businesses rose to a peak in 2003 but then suffered a sharp decline during the global financial crisis of 2008. While there was a period of recovery in the years that followed, the productivity levels in 2023 had not yet returned to those pre-crisis highs. This fluctuation suggests that the country's economic efficiency is tightly linked to the broader business cycle, dipping during recessions and struggling to fully bounce back afterward. The study also highlights that this story is not the same everywhere in the country. Productivity varies wildly depending on where you look, with some states performing significantly better than others.

The states with the highest productivity levels fall into two distinct groups. One group, located in the southeast, includes states like Tabasco and Campeche. Their high efficiency is driven largely by the extraction of oil and gas, a sector that benefits from the country's natural resources. The other group includes states like Nuevo León and Querétaro, which are powered by dynamic trade and manufacturing sectors. These areas show how different economic engines can drive success: one through natural wealth and the other through the concentration of commerce and industry. At a more local level, the study found that within these productive states, the most efficient cities are often the ones that lift the entire state's numbers. However, the picture is complex; a state might look good on average, but that average can hide a wide gap between its most efficient cities and its struggling rural areas.

When looking at specific industries, the results challenge some common assumptions about what drives an economy. The sectors with the highest productivity levels are not the heavy manufacturing industries often associated with industrial might, but rather trade and resource extraction. Wholesale and retail trade, along with mining and oil extraction, consistently maintained high efficiency levels throughout the study period. In contrast, the manufacturing sector, which employs a vast number of people, actually sits in the bottom tier of productivity. This suggests that Mexico has undergone a structural shift where the economy is moving toward services and trade, but the manufacturing sector has not kept pace in terms of efficiency. The oil sector, while highly productive, faces its own challenges; its dominance is tied to the output of a state-owned company, and as oil reserves decline and the world moves toward new energy sources, this sector may no longer be able to carry the weight of national productivity growth alone.

Perhaps the most revealing part of the study comes from analyzing how businesses enter and leave the market. The researcher broke down the growth in productivity to see what was happening to the companies that survived, the new ones that opened, and the ones that closed. The results were surprising: the businesses that stayed in the market for the entire period actually contributed negatively to the country's productivity growth. They were, on average, becoming less efficient over time. The engine of progress was instead the new businesses that entered the market. These entrants brought higher efficiency and pushed the overall numbers up. However, this dynamic was severely disrupted by the 2008 financial crisis. During that period, even the new businesses struggled, and the existing ones saw a sharp drop in performance. Since then, the older, surviving businesses have not fully recovered their ability to drive growth, leaving the economy dependent on the constant arrival of new, more efficient firms to make up the difference.

This reliance on new entrants while older firms stagnate points to a specific type of economic friction. The study suggests that the Mexican economy is characterized by a dysfunctional cycle where unproductive businesses are able to survive and remain in the market, while resources are not being efficiently reallocated to the most productive firms. This is not just a matter of new companies being better; it is also a matter of the old ones failing to improve or exit. The data indicates that the crisis of 2008 left a lasting scar, preventing the established businesses from regaining their momentum. For policymakers, this offers a clear direction: strategies to boost the economy cannot rely solely on hoping that existing companies will get better. Instead, they must focus on creating an environment where resources can flow more freely to new, efficient enterprises and where the barriers keeping unproductive firms in the market are removed. The path to breaking the middle-income trap lies in fixing these underlying dynamics of how businesses survive, grow, and compete.