How Much Is Informality Holding Back Mexico’s Economy?

Editor’s note: In the Featured Q&A of the Inter-American Dialogue’s daily Latin America Advisor, Andrés Rozental reflects on why many Mexican businesses have remained small, unproductive and informal, as well as the likely impact of Peña Nieto’s economic reforms.

Andrés Rozental

Nonresident Senior Fellow, Latin America Initiative

Mexico is not alone in having contrasting economies that are seemingly contradictory in terms of their sophistication, competitiveness and productivity. What is, however, characteristic of the country’s informal economy and the difficulty small- and medium-sized enterprises have in operating in this environment is the relative difficulty in obtaining credit from domestic sources, a high degree of corruption and bureaucratic requirements, and their inability to produce with the quality needed for local and regional markets. With an informal economy estimated by some to account for almost half of Mexico’s GDP, the country’s ability to move forward is severely hampered.

President Peña Nieto’s ambitious reforms will hopefully help create a more level playing field and push the financial sector to be more supportive toward Mexico’s underfunded SMEs, but the business culture that needs to develop in order to encourage the slower-speed part of the economy to catch up with its rival sophisticated track will take longer to change. The fiscal and financial reforms that Congress approved late last year aim to encourage the large number of participants operating in informality to gradually move to the formal sector of the economy and benefit from some of its advantages. The government hopes to make it more difficult for informal businesses to operate by implementing stricter tax, regulatory and supplier surveillance, but it remains to be seen whether this strategy works and whether the dismantling of the country’s economic monopolies also opens up new opportunities for competitors to enter the formal economy.

This piece, along with other expert responses, was initially published in the Inter-American Dialogue’s daily
Latin America Advisor