Taxation and Labor Laws Hampering Mexico’s Growth: IDB Study

Government policies around taxation and labor protection are hampering economic growth in Mexico, forcing professionals with better skills and expertise to work for meager salaries.

The current policies are propelling the informal sector, which is 50% less productive than the formal sector, said the Inter-American Development Bank (IDB) in an extensive report on Mexican economic challenges.

The government is ignoring the productive sectors of the economy and subsidizing the low productivity segment, exactly the opposite of what is required to create good jobs.

As a result, the informal sector is thriving, leaving productive companies to die or fail to grow. Above all, skilled professionals are not finding the right value for their service. It is “like a paradigmatic engineer driving a taxi,” the report stated.

A poor education system is not the culprit, nor is the substandard infrastructure, states the Bank. It is the result of what the bank calls “misallocation” of resources and incorrect policy decisions.

Despite many reforms, informal firms in Mexico have grown more than the formal ones, capturing a larger share of investment and employment. Today, the informal sector encompasses over 90% of all businesses and 55% of all employment.

“Mexico’s economic performance is a paradox,” says Santiago Levy, IDB Vice-President for Sectors and Knowledge. “No country in Latin America has made greater efforts to integrate into the world economy. Mexico has been prudent in managing its economy and has invested heavily in education, yet it is one of the slowest-growing economies in the region.”

Mexico has a free trade agreement (NAFTA) with the United States and Canada, yet its economy grew an average of 1.2 % between 1996 and 2015 on a per capita basis, well below many of its Latin American peers and far behind the fast-growing Asian economies.

To deal with the crisis, the bank has urged the government to reform its policies as well as the institutes that influence its economic policies.

There is an urgent need for replacing the current social and transfer programs with a single system of social insurance for all, and replacing severance pay and dismissal regulations with proper unemployment insurance.

In addition, the IDB has urged the government to lower payroll taxes and increase the autonomy of judicial institutions in charge of contract enforcement.