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.


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