Understanding Mexico's Economic Underperformance

This report investigates the reasons behind Mexico’s lackluster economic growth, which trails that of many comparable developing nations despite major economic reforms over the past three decades. The author identifies four lines of argument to explain Mexico’s sluggish growth: a poorly functioning credit market, policies that create incentives for informality, inefficient input market regulation, and international competition. The report assesses the relative importance of each of these factors and offers a road map for confronting this disappointing growth record.

Mexico’s poorly developed markets and financial instability impede the flow of credit to the private sector, preventing businesses from making long-term investments essential for economic growth. Growth may also be hindered by the scale of Mexico’s informal economy, which accounts for between one-quarter and one-third of total employment. The author suggests that overreliance on the informal sector likely creates distortions in the economy which result in lower productivity levels. High energy prices, expensive telecommunication services, the scarcity of skilled labor, and the Mexican government’s inability to regulate these input markets also seem to diminish Mexico’s comparative advantage and earning capacity in key industries. Finally, China’s rise in the global economic landscape poses a substantial challenge for Mexico, as the two countries specialize in the export of similar goods.

To improve Mexico's economic position, the author highlights several items worth placing on the country’s policy agenda. These include: improving protections for creditors, eliminating social protection provisions that implicitly subsidize informal employment, investing in the country’s human capital, implementing anti-monopoly provisions in the telecommunications industry, and reforming the energy sector.