Eduardo Porter: Can Mexico find a path to true prosperity?

Eduardo Porter, Bloomberg Opinion on

Published in Op Eds

The upcoming presidential contest between Claudia Sheinbaum from the ruling Morena party and Xóchitl Gálvez of the opposition Frente Amplio is billed as an epic clash between diametrically opposed visions of Mexico: between a technocratic neoliberal dream and an old nationalist mirage; between elite ambitions and the aspirations of the poor; the clean against the corrupt; a democratic struggle against authoritarian rule!

Yet for all the heated rhetoric and existential battle imagery, the political forces behind both Gálvez and Sheinbaum share more interests than they would have us know. These two supposedly antagonistic forces both propose the same kind of Mexico. They have both had their shot at running it, and have steered it roughly down the same path.

Unfortunately for most Mexicans, both camps have failed to build Mexico into an inclusive, prosperous nation. The nation would be lucky, and grateful, if their candidates Sheinbaum and Gálvez raised their heads above the parapet and seized the opportunity to take a new course.

Mexico has done some things well over the last few decades. Following the debt crisis of the 1980s it built a political consensus on the need for prudent fiscal management and macroeconomic stability that survives, more or less, to this day. At the turn of the century, it shook off decades of one-party rule to embrace multiparty democracy.

Nafta, its free trade agreement with the United States and Canada, underpinned a sustained export boom that has allowed for a sophisticated manufacturing economy. Mexico’s exports amount to nearly 35% of its gross domestic product, up from 5% in 1990. It ranks 22nd on the Harvard Growth Lab’s economic complexity index, ahead of Spain, Malaysia, Denmark and the Netherlands.

And yet Mexico remains a struggling, unequal economy. Its GDP per capita grew barely more than 1% per year from 1990 to 2018, less than in the US or Canada and way below the rate achieved by the developing nations of East Asia. Total factor productivity declined, on average, by 0.5% per year over the period. Workers’ earnings declined too, including in the comparatively modern north — plugged into the U.S. market.

Democracy didn’t do much for governance. From control of corruption to rule of law and government effectiveness, Mexico ranks lower on the World Bank Governance Indicators than it did in 2000. And what democratic government Mexico had has proved hapless in the face of organized crime.

President Andrés Manuel López Obrador’s “Fourth Transformation” has done next to nothing to right the ship. Economic growth remains lackluster, underperforming Mexico’s Latin American peers. Over a third of the population is considered poor by the government. Mexico remains the second most unequal country in the Organization for Economic Cooperation and Development.

Inclusive economic development is not impossible. In 1992 Mexico and South Korea had roughly the same GDP per person. Today, Korea’s is 2.4 times Mexico’s. Its inequality is significantly lower. And from regulatory quality to corruption, it outstrips Mexico on every governance measure.

The Mexican economist Santiago Levy has followed the turns in policy since joining the Ministry for Industry and Trade in the early days of Nafta, evolving through stints running the Competition Commission and the Social Security Institute, and building what was Mexico’s main antipoverty program over most of the past two decades. His explanation of Mexico’s failure to progress from macro stability to inclusive growth is straightforward. It revolves largely around the blinkered economics of the Washington Consensus.

The builders of Mexico’s modern economy believed that the combination of more education with macro stability, privatization and trade liberalization would pave a path to more investment, higher productivity and shared prosperity. But they were blind to the impact of distorted policies and institutions that would prevent the deployment of resources to where they could be productively used.

Continued corruption and weak enforcement of competition regulations, bureaucratic obstruction and ineffective contract law all got in the way. But it wasn’t just poor governance. The rules, incentives and constraints faced by businesses and workers curbed growth — encouraging labor informality and discouraging productive deployment of physical and human capital.

In 2018, according to Levy, 90% of Mexican firms outside of agriculture or government were informal, paying no social security contributions. They accounted for about 40% of employment and had a 23% market share of goods and services. They were, to put it mildly, not very productive.

Levy points out that there were more low productivity firms in 2018 than in 1998. In an analysis of Mexico’s three decades-plus of failure, he wrote, “this should not occur in a well-functioning market economy, where capital and labor are allocated to their most productive use.”

Consider just the waste of human capital. Mexico invested in education: Workers’ schooling increased by about one year per decade between 1990 and 2019. The investment was a dud, though: Not only did the college wage premium shrink over this period, real wages of college graduates declined. That’s not what happens when demand for skilled work is on the rise.

What Mexico’s economic architects built was a bifurcated ecosystem where a small number of big, formal, highly productive firms largely concentrated in the north of the country had access to foreign capital, markets and legal institutions via Nafta. These shared the economy with an enormous number of small, informal firms that faced an array of incentives to stay that way, including outright tax credits for smallness and high costs for formal employment.

Fixing this should not be impossible. Reforming social insurance and labor laws to discourage informality and expand the coverage of the safety net to all Mexicans would be a good place to start. So would reforming the tax code to eliminate incentives to informality and improving judicial institutions, to properly enforce credit and commercial contracts.

The important question at this juncture, though, is why, 30 years after Nafta came into being, all of this remains to be fixed. The answer is mainly political.


For all the reforms that took place since Nafta came into being — multiparty democracy nearly a quarter century ago; President López Obrador’s “transformation” — Mexico’s political arrangements have not changed much over the last half century. Mexico’s social contract remains the same.

“In the end, the institutional arrangement during the 1990-2018 strategy was stable because all along neither ideas nor interests changed in any essential way,” Levy wrote. Five years into López Obrador’s administration, they still haven’t. “The political equilibrium,” he told me, “is exactly the same as it has always been.”

Three decades ago elites accepted economic reforms that eroded their hold over Mexico’s captive markets because they got juicy things in return: the promise of economic stability, for one — particularly valuable after the roller coaster of the 1980s. They got access to U.S. capital, markets and institutions. The government sold them back the banks, which it had expropriated two administrations earlier. In fact, it sold them pretty much every state company except for those in the energy sector.

The poor got transfers — in López Obrador’s administration mostly cash pensions for the elderly — which are relatively cheap and politically popular. But the reform packages didn’t touch much of the difficult stuff, like raising taxes, seriously pursuing corruption, opening captured markets, reforming social security or labor law. It didn’t even include unemployment insurance. These glaring gaps made it hard to build an inclusive social compact.

Mexico’s tax take, as a share of GDP, is still the lowest in the OECD and near the bottom among the countries in Latin America. And yet not even Lopez Obrador, who rails every morning against corporate elites, has dared raise their taxes.

Social security contributions, which countries usually use to pay for not unimportant things like unemployment insurance, disability, healthcare and pensions amount to just 2.3% of Mexico’s GDP. That compares with an average of 3.7% across Latin America and the Caribbean and 9.2% across the OECD.

On the other end of things, the vaunted reforms to open Mexican markets to competition have not freed some of the most critical markets from the de facto uncontested control of the most powerful members of the elite. For all the corporate complaints against López Obrador’s heavy-handedness, Mexico’s captains of industry and finance are doing remarkably well.

Rent-seeking and corruption remain a standard feature of the economy. In 2022 Mexico was more corrupt than before López Obrador took power in 2018 according to the World Justice Project, in 134th place among 140 countries in the ranking (and 30th among 32 Latin American countries on the list).

A lot of Mexicans hope nearshoring will finally deliver Mexico into the ranks of the developed. These are misguided expectations, though. Even the explosion of exports under Nafta was insufficient to pull Mexico from underdevelopment. For Mexico to achieve inclusive growth and lasting prosperity, it needs a different social contract, and a different political deal.

As Levy puts it, Mexican workers must be convinced that the road to prosperity requires a productive job in a formal firm covered by formal social insurance institutions that offer protections regardless of the vagaries of the job market. Firms must operate in a formal setting, which will ease their access to capital and allow them to create productive, better paid jobs.

But the government must lay the groundwork. And the comfortable elite, which has opted out of Mexico’s rules, happy with its rents, low taxes and easy access to the United States, must be made to shoulder some of the costs of transforming the country into this formal, competitive, productive economy.

“You don’t have to convince the elites of the virtues of an open economy. Mexico is already open and competitive,” said Guillermo Ortiz, former minister of finance and governor of the Banco de México. “What elites must understand is that this country will not emerge with the kind of inequality of social status and opportunity that we have.”

López Obrador’s fiery promise of a grand transformation, unfortunately, looks set to end up as an incoherent mishmash: a higher minimum wage and more old age pensions, but poorer public health services and fewer transfers to the young; needed infrastructure in the south alongside white elephants that include a pointless refinery and a train, but less investment in clean energy. And nothing to change the decades-old status quo. If anything, his efforts to undermine many independent authorities will further weaken the poor governance holding the country back.

Mexico can only hope that a President Sheinbaum or a President Gálvez test their political limits and work to bring about the reforms that help Mexico become a prosperous, inclusive nation.


Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, U.S. economic policy and immigration. He is the author of "American Poison: How Racial Hostility Destroyed Our Promise" and "The Price of Everything: Finding Method in the Madness of What Things Cost."

©2023 Bloomberg L.P. Visit bloomberg.com/opinion. Distributed by Tribune Content Agency, LLC.


blog comments powered by Disqus



Kirk Walters Dave Granlund Dana Summers Drew Sheneman Christopher Weyant Al Goodwyn