Background:

Regional Economics and Economic Growth focus on the question of whether trade leads to a greater concentration of economic activity. Nevertheless, little empirical work has assessed the impact of trade on regional convergence. Therefore, this paper studies the regional convergence that has occurred in Mexico since NAFTA came into effect. Unlike previous papers, working with municipal-level data allows us to both observe the convergence patterns across space more clearly and to identify the effect of NAFTA.

Methods:

A conditional β-convergence model and conditional club β-convergence model were performed. However, in contrast to previous empirical studies, we use municipal panel data to identify more clearly the relationship between trade and regional convergence, and include the 2009 economic census to observe whether, after fifteen years of NAFTA, the economy has decentralized away from Mexico City to the US border regions.

Results:

The result shows that after NAFTA came into effect, the convergence in regions near the US border grew faster than it did in those further from it. However, there is a significant reduction in the β coefficient after NAFTA, indicating a slowdown in the rate of convergence. Furthermore, we find that rather than becoming integrated into world markets, municipalities in the south have instead lagged behind their counterparts since the signing of NAFTA.

Conclusions:

Even though centrifugal forces are starting to function, there is a significant reduction in the β coefficient after NAFTA came into effect. This suggests that better policies will be needed in order to control the increase in regional disparities.