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Dynamic Markets: A tale of two Mexicos: growth and prosperity in a two-speed economy

In the 20 years since the North American Free Trade Agreement went into effect, Mexico has become a global manufacturing leader and a prime destination for investors and multinationals around the world. Yet the country’s economic growth continues to disappoint, and the rise in living standards has stalled. The root cause is a chronic productivity problem that stems from the economy’s two-speed nature. A modern, fast-growing Mexico, with globally competitive multinationals and cutting-edge manufacturing plants, exists amid a far larger group of traditional Mexican enterprises that do not contribute to growth. These two Mexicos are moving in opposite directions. The largest companies are raising productivity by an impressive 5.8 percent a year, while the productivity of small, slow-growing enterprises is falling by 6.5 percent a year (exhibit). And with employment growing faster in the traditional Mexico, more labor is shifting to low-productivity work

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