In Mexico there are three elements that act as anchors that prevent higher rates of economic growth from being achieved. The worst thing is that the public policy implemented in recent years, including changes in the institutional arrangement resulting from modifications to the legal framework, instead of mitigating the burden that hampers growth, have increased it.
The first is the fact that total factor productivity, which should be the main source of economic growth, has fallen. Companies, in the production process, combine fixed capital (plant, machinery and equipment) with the labor services of the workers they employ and with intermediate inputs (raw materials, energy, water, etc.). How these three factors of production combine is determined by the technology inserted in the capital and the quantity of goods and services produced reflects the productivity of the factors of production used.
A company can increase total factor productivity by increasing operational efficiency (for example, improving processes and cutting unnecessary expenses) or by using capital more intensively; However, these are once-and-for-all gains. The main source of increases in total factor productivity is the technological change that the company introduces in production through investment in new capital that replaces the previous one.
What we observe in Mexico is a duality. We have, on the one hand, companies that have modernized technologically, particularly those linked to foreign trade, whether they produce exportable or importable goods, coexisting with other economic units that produce with obsolete technology. The former grow and the latter grow less or, worse still, are stagnant. What we observe in the aggregate explains, to a large extent, the very low average growth rate during recent years. Thus, for the period 2019-2024, total factor productivity did not increase and even in 2024 it fell by 0.35%, with another additional fall expected this year.
Intimately linked to the fact that factor productivity is stagnant, the second burden is the increasing participation of the informal sector in GDP and employment. We are talking about economic production units that are not formally established, so they are not registered with the federal authorities (SAT and IMSS) or with the local state and municipal authorities. These companies are generally very small, do not generate economies of scale and work with obsolete technology. Consequently, total factor productivity is very low and is also stagnant or even falling, a fact that is reflected in the stagnation of aggregate productivity.
There are several elements that determine whether a company operates in the informal sector, among which stand out high regulatory barriers to entry into the markets (notaries, permits and licenses seasoned with corruption), high costs of complying with tax obligations and employers’ obligations with the social security system, which act as an implicit tax on formal employment.
The INEGI reported that in 2024, companies operating in the informal sector of the economy employed 28.1% of the total employed population and contributed only 14.5% of GDP. If we include other forms of informality (employed people who lack access to social security), these represented 54.4% of the employed population and produced only 25.4% of GDP. In contrast, in the formal sector 45.6% of the total number of employed people were employed and produced 74.6% of the GDP.
What is even more serious is that the participation of the informal sector in the economy is increasingly greater. Thus, while in 2013 informal companies contributed 11.7% of the GDP, by 2019 this increased to 12% and by 2024 it rose to 14.5%, with an additional increase expected this year, given that, as the economy will practically not grow and there was no significant creation of formal jobs, the people who joined the labor market were employed in the informal sector, such that in October of this year the population employed in the informal sector represented 29.6 percent.
The third element that constitutes in itself a drag on economic growth and that also influences the fact that total factor productivity does not increase and encourages the growth of the informal economy is the set of changes in the legal framework, including constitutional modifications, which have deteriorated the rule of law and reduced legal certainty.
The destruction of institutional counterweights, the judicial reform that eliminated the independence of the Judicial Branch and subordinated it to the Executive Branch, the energy reform that discriminates against the private sector and the reform of the Amparo Law that leaves individuals and companies defenseless against arbitrary acts of the government are all elements that have inhibited private investment, technological modernization, the creation of formal jobs and economic growth.
Don’t expect things to be significantly better in the next few years than you experienced in the past seven years. Anyway, I wish you a happy and prosperous 2026.
