Mexico Has a Productivity Problem
Walk down the side-streets just off Mexico City’s iconic Paseo de la Reforma boulevard, and you’ll see dozens of examples of something that is holding back growth: the informal economy.
Workers on the taco carts or shoe-shine stands don’t pay taxes, foregoing the benefits of a social safety net. And they often sit idle for most of the day.
Hector Lopez, 50, is one of them. For the past 25 years, he’s sat on the street for 10 to 11 hours a day waiting for about as many clients, who each pay 30 pesos ($1.53) for five minutes of waxing and buffing. He spends 90% of his time reading the newspaper, or just waiting.
That helps explain why Mexico’s economy hasn’t been growing much. It tops the 36 OECD nations for hours worked – but it’s the least productive. Like other countries that got stuck in the middle-income bracket, it ranks about halfway down the Drivers and Disrupters index for productivity – the key to unlocking long-term growth.
How Mexico Scores on The New Economy Forum Drivers and Disrupters Index
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“The money that I make isn’t enough, and it would be very expensive” to pay taxes, Lopez says. He acknowledges that widespread tax evasion comes at a cost – lower quality public services. “Here we don’t get any benefits. The blessing of God, nothing more.”
Mexico’s economy has grown at just 2.4% a year over the past 25 years, half the emerging-market average. This year will likely be worse, with growth forecast at 1% or less.
To reach growth rates anywhere near the 4% that President Andres Manuel Lopez Obrador is targeting, higher productivity is a must, says Manuel Molano, director of the Mexican Competitiveness Institute.
But Mexico’s oversupply of cheap labor means there’s little incentive to innovate, Molano says. Labor excess can be seen everywhere, from Mexico City restaurants with two waiters per table, to beach resorts filled with workers competing for the same tourist dollars.
When businesses do boost output, they’re often extorted by everyone from union bosses and politicians to organized crime, Molano says. Families hire from within, out of concern that outsiders will steal – or learn the business model and then leave to become a rival.
“Mexico is basically a dual economy,” says Alberto Ramos, chief Latin America economist at Goldman Sachs. “Some enclaves are globally integrated. And then there’s the countryside, with low levels of human capital and education, violence, where productivity growth has been zero for 50 years.”
AMLO, as the leftist president who took office in December is known, hails from the poor southern state of Tabasco and is keenly aware of the inequality.
Some of his biggest infrastructure programs, including a cross-country freight rail line meant to compete with the Panama Canal, are geared toward the poorer southern states. AMLO has also realigned spending to focus on social services, particularly direct cash transfers to students and the elderly.
But the twin problems of informality and tax evasion leaves the government short of resources to tackle poverty and build infrastructure.
Mexico’s collects about 16% of GDP in taxes, less than half the OECD average. And to get even that meager amount, it relies much more on corporate taxes, and less on social security contributions, than its OECD peers.
Former Finance Minister Carlos Urzua argued that Mexico needed a tax overhaul to strengthen the rule of law and make more resources available. He cited AMLO’s refusal to pursue one as a reason for his surprise resignation in July.
“To lift productivity, Mexico needs three things,” Molano said. “Institutions, institutions, institutions.”