The president dismissed the INEGI report that in the third quarter the economy contracted by 0.3% compared to the second quarter and by 0.2% in its annual comparison. In addition, growth for the entire year is expected to be a meager 0.4 percent in the best case scenario.
Although she downplayed the poor data on the economy’s performance, one could assume that she should know that if the economy does not grow, the other relevant variables such as formal employment, real wages, people leaving the condition of income poverty and others, that is, all those that contribute to greater progress and social well-being, would not experience a significant improvement either.
You should also know that, for the economy to grow, it is essential that the quantity and quality of the primary factors of production (capital and labor) increase and, very importantly, that total factor productivity be increased through greater efficiency in the way in which the factors of production are used, as well as by the introduction of technological changes in production processes.
Regarding the accumulation of fixed capital, recent data are not at all flattering; On the contrary, they indicate a fall. Based on the information on gross capital formation, with the 8.4% reduction in September, there were 13 consecutive months with negative annual rates; This had only happened on four recent occasions, all characterized by a recession: 1995, 2001, 2009 and 2020. That the IFB has experienced annual declines since August 2024 indicates the negative effect that reforms to the institutional framework have had that have reduced legal certainty, particularly the energy and judicial reforms and the Amparo Law.
Worse still, if we take into account the effective depreciation of capital (not the fiscal one), the fall in net investment is greater than that of gross investment. This implies that in several private companies and in public infrastructure, the investment made does not even cover depreciation, so effective productive capital is falling. Less capital implies lower GDP and falling net investment implies lower future growth.
The matter is even more aggravated if we consider the contraction of public investment in infrastructure. Works such as generation, transmission and distribution of electricity and communications and transportation routes are necessary as a complement and trigger for private projects. If the public sector does not invest in infrastructure itself and even less in public-private partnerships, there will hardly be more private investment.
Turning to human capital, the matter does not look any better. The abolition of the education reform of 2013 removed the incentive for teachers to invest in their own human capital and this would translate into higher quality teaching. Having returned education to the teachers union makes an improvement in the quality of educational service practically impossible, a fact that is aggravated by the “new Mexican school.”
Graduates from government basic and middle school education with a low level of human capital means, on the one hand, that they do not have the necessary knowledge to be able to have a better education at higher levels, particularly preparatory, and, on the other hand, their insertion into the labor market is difficult and on-the-job training, as well as the introduction of technological changes in production, become more expensive.
The latter leads us to the most important source of growth, which is the increase in total factor productivity, which is derived, mainly, from technological improvements in production processes. An economy with stagnant factor productivity will experience low growth because it would only occur with limited and low increases in the primary factors of production.
In this regard, in Mexico we have a duality. On the one hand, there are sectors linked, directly or indirectly, to foreign trade, whether they produce exportable or importable goods. The fact that companies compete in international markets forces them to be more efficient and continually introduce technological improvements, which is reflected in greater productivity. It is precisely these companies operating in the modern sector of the economy that have made the greatest contribution to economic growth.
We have, on the other hand, a huge informal sector where almost 30% of the workforce works. These are very small companies, without economies of scale and with generally obsolete technology. Consequently, total factor productivity is stagnating, if not falling, so, although they contribute to employment, they do not contribute to the growth of the economy. The prospects are not good, since instead of reducing the costs of operating in formality, with the reforms of the institutional arrangement and other factors such as increases in real minimum wages, they have induced several companies to move towards informality, without simultaneously creating new formal companies or expanding those that already exist.
Don’t be surprised if the economy grows very little over the next few years. The governments of the four countries have worked hard to make this happen.
