Good Intentions, Bad Outcomes: Social Policy, Informality and Economic Growth in Mexico

Transcript

SANTIAGO LEVY:  There’s an incoherent set of social programs that inadvertently are pushing firms and workers into informality and that informality is not innocuous. That informality actually has social costs, because, in fact, when workers are informal, they're not as protected from risks as they are when they're formal. But that informality also has economic costs because the interaction of workers and firms in the labor market produces actions by firms and actors -- and actions by workers that are from the social point of view inefficient. And they reduce labor productivity, and they reduce capital productivity. And this will persist. Investments will occur and through time the economy will continue on a path characterized by low growth, high informality, low productivity. And that I try to show in the book this results in a framework in which even if nothing else was malfunctioning, and I ignore the credit market and I ignore many of the distortions, even if nothing else was malfunctioning, the pure isolated effect of this incoherent set of social programs induces informality and informality thwarts the government’s social objectives and is actually negative for productivity growth and for economic growth.

So that’s what the book does. The book does, in this part, it also argues that this incentive structure is particularly pernicious for the poor. And the government’s best intentions, which is let me do more social programs for the poor, conditional particularly upon their being poor, and conditional upon their being informal, is actually counterproductive.  And it’s counterproductive because it traps the poor in poverty. And we have to answer the following puzzle: if the poor have less assets than anybody else, one would expect most poor workers to be salaried and, in fact, to be formal. But, in fact, we observe the opposite: most poor workers are informal and a large number of them are illegal in the sense that they're not complying with the institutional framework of Mexico.

So the book tries to provide a story as to why, in fact, this is an equilibrium outcome of a set of social programs.

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