Throughout this period, growth was dismal: output per worker has grown at less than 1 per cent a year since 1980. Mexico’s GDP per head (measured at purchasing power parity) was 30 per cent of US levels in 2012, exactly the same as in 1990.
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For those who believe that opening up to trade is a guarantee of rapid growth, this is a sobering tale: the ratio of trade to GDP jumped from 39 per cent in 1990 to 65 per cent in 2011. Exports to the US rose sixfold under Nafta. Yet the economy underperformed.
First, companies remain small and informal because the regulatory and fiscal burdens of becoming large and formal are high. The solution is to lower burdens on formal businesses and raise them on informal ones.
Second, small businesses lack access to credit. At 33 per cent of GDP, outstanding loans are extraordinarily small. They are also expensive. McKinsey argues that “The unmet capital needs of firms with 10 to 250 employees represent 75 per cent of what we estimate to be a $60bn credit gap in Mexico.” The solution must include improvements in property rights, legal processes and, perhaps, targeted guarantees.
Third, infrastructure, energy costs, supply of skills and quality of governance leave much to be desired. This affects businesses both big and small but makes it particularly hard for small and midsized companies to prosper. The solutions are to upgrade governance at all levels, and deregulate and enhance competition. Public-private partnerships, including foreign capital, should play a role in the supply of infrastructure.
Only once these businesses are formalised can they hope to obtain credit and other crucial services. China’s soaring wages offer a new opportunity to Mexico’s export-oriented businesses. But exports alone will not transform economic performance. Dynamic and innovative businesses must emerge in all parts of the economy.
Mexico’s past offers a warning; its present offers hope. But it is far from certain that the programme of reforms, albeit necessary, will also be sufficient to generate the much-improved performance the country needs. The further an economy has progressed, the more difficult rapid growth tends to become. That has been true for Mexico for some time. A big part of the answer must be to make the formal sector better and less regulated, and the informal sector better and more regulated.