Mexico Policy Notes

Mexico’s economy has grown moderately over the last quarter century, with annual per capita GDP growth averaging just 1.2 percent between 1990 and 2017. The country’s weak economic performance reflected a decline in productivity, which fell by 8 percent during that period. Mexico’s productivity challenges are associated with large and widening regional disparities and the misallocation of resources between sectors and firms. Large productive firms integrated with Global Value Chains have not developed backward linkages to the rest of the economy and lagging regions. Meanwhile, widespread labor and firm informality contributes to the misallocation of productive resources. Reversing the decline in productivity will require an integrated strategy encompassing multiple policy areas and sectors. This broad strategy should include strategies discussed in other policy notes: (i) alleviating rigidities and distortions in labor markets and improving access to credit; (ii) alleviating existing rigidities and obstacles to competition across sectors and sub-sectors while following through with the structural reforms enacted; (iii) designing and implementing effective interventions at the subnational levels to enhance both product and factor markets; (iv) dealing with the financing of social insurance schemes; and (iv) strengthening rule of law institutions at the federal and local levels. This note focuses on critical aspects of the diagnostic around the productivity dynamics in Mexico. It also links the aspects of the strategy above-highlighted to specific policy recommendations on other Policy Notes of this set given the cross-cutting nature of productivity growth. It also focuses on providing policy directions on: (i) strengthening institutions and programs working directly on the productivity agenda; (ii) selected sub-national interventions to ease the regulatory burden; and (iii) proposing a broad and integrated strategy for fostering formalization.