EFFICIENCY DIVERGENCE BETWEEN FORMAL AND INFORMAL MICROENTERPRISES DURING THE TRADE LIBERALIZATION OF MEXICO

Abstract

Efficiency is a crucial determinant of economic development, especially among microenterprises, which tend to be the prevalent economic units. This article estimates the efficiency of both formal and informal microenterprises in Mexico in the context of NAFTA (North American Free Trade). The Oaxaca-Blinder decomposition method is used to explain the factors behind the observed differences. Additionally, a detailed analysis with a decomposition by quantiles is provided. Formal microenterprises are found to be more efficient than their informal counterparts, with a narrow difference in 1994 widening by 2012. At the same time, the efficiency level declined for both groups of microenterprises over time. Two main conclusions are derived. First, microenterprise size distribution and the characteristics of the private sector influence the success of trade liberalization policies. Second, the overall decrease in efficiency, regardless of whether microenterprises are formal or informal, supports recent studies suggesting that economic, institutional and social constraints limit firm performance.