Fixing Mexico

Mexico’s GDP growth has risen by only 2.3 percent a year, on average, since 1981 and Mexico lags behind countries whose GDP per capita it once surpassed, despite more than 30 years of market-opening measures. The country has an urgent need to reconcile the two Mexicos because its demographic dividend—the rapid labor-force expansion that has contributed more than two-thirds of GDP growth—is about to fade. Unless Mexico can nearly triple productivity growth from the recent 0.8 percent a year average, the country could be headed toward 2.0 percent annual GDP growth rather than the 3.5 percent goal the Bank of Mexico estimates for 2014.

Mexico an meet the productivity challenge and raise GDP growth to the 3.5 percent target. But that will happen only if Mexico can raise productivity in traditional small businesses, move more businesses and workers into the modern sector, and continue to raise the productivity of large, modern corporations. Policy changes will be required to remove both perverse incentives that discourage small companies from growing and barriers to launching and expanding businesses. In addition, Mexico will need to invest in broad enablers, such as reducing the cost of energy, expanding infrastructure, and improving labor-force skills.

Transform the traditional sector with reasonably priced financing

Traditional, low-productivity businesses are pervasive across the Mexican economy and often constitute the majority of establishments in a given sector. For example, more than 90 percent of the baking industry is made up of small local shops, which have, at best, one-fiftieth of the productivity that the largest top-performing industrial bakeries achieve. In auto parts, 80 percent of all enterprises have ten or fewer employees. These firms provide low-cost assembly work to suppliers working directly for Mexico’s seven global auto manufacturers and are only about 10 percent as productive as these large suppliers. This reduces the sector’s overall productivity to just 21 percent of the US average.

The report examines how to raise productivity in small, low-productivity enterprises in three sectors: the manufacture of food, the manufacture of auto parts, and the retailing of food and beverages. These measures include investments in technology—even adopting simple tools (such as point-of-sale terminals) in mom-and-pop stores could have significant effects. Many small companies have not invested to raise growth and productivity, because they lack access to reasonably priced financing.

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