Mexico Must Increase Productivity to Achieve Medium- and Long-Term Economic Growth

Latin America needs institutional reforms to boost productivity, which will require the region to promote a more efficient allocation of resources and incentivize innovation, according to CAF’s 2018 Economy and Development Report (EDR), presented April 29 at the Monterrey Institute of Technology, in Santa Fe, Mexico.

To comment on the report, Valeria Moy, director of investigative portal Mexico, Como Vamos?, joined Global Economic Group president Elisa Mariscal and Monterrey Institute of Technology professor Edgardo Ayala in a discussion panel, where the experts examined the productivity problem facing the country .

"In order to get a better understanding of why our productivity is lagging behind and therefore address the issue, it is necessary to understand the fundamental barriers that prevent companies from innovating and markets to allocate productive factors efficiently," CAF Directorate of Socio-Economic Research senior economist Fernando Álvarez said. CAF representative in Mexico Emilio Uquillas said that public policy-makers should heed the report in order to “build what the bank promotes,” calling it a “pact for productivity.”

The study blames the region’s lagging behind on an overall lack of production across its economic sectors, more so than a higher concentration of its resources among certain particularly unproductive sectors, compared to developed countries. The report goes on to point out that such general low productivity is in turn the result of faults in the processes in which businesses enter and exit the market, as well as low innovation and production levels of surviving companies, and an inefficient distribution of labor and capital among businesses, including informal ones.

In general terms, the assessment for Mexico is no different for other countries in the region, but it does have certain nuances. For example, between 2004 and 2014 Mexico displayed a total-factor productivity of 43 percent when compared to that of the United States, a figure slightly higher than the regional average of 37 percent. On the other hand, informality is particularly high - especially when compared to that of countries with similar incomes in the region - and, at 28 percent, the wage gap between formal and informal workers is the third highest in a group of ten Latin American countries averaging 24 percent. This gap is a manifestation of an inefficient allocation of the labor factor and an indication that informality is an important feature of the low productivity issue.  

The 2018 EDR focuses on factors with an impact across companies regardless of their sectors, such as the degree of competition, access to inputs and cooperation between businesses, labor relations, and financing. The evidence presented in the report shows that Latin American economies face significant challenges in all these areas. The evidence shows that Latin American markets have lower competition conditions than more developed regions, which results in high price margins, especially in the services sector. In order to make headway in this area, it is vital to increase the capabilities of antitrust agencies, reduce barriers for the entry of companies, and boost international trade and integration, which are still limited by para-tariff and logistics barriers.

Finally, the ERD concluded that, in order to make the leap, it is essential to adapt the institutional framework to a more productive environment that encourages more innovation, as well as a more efficient allocation of resources and a greater productive integration.

Through its 2018 EDR, CAF aims to disseminate knowledge about the most useful initiatives for building bridges and advancing on the path toward further development in the region.