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Economy

The Threat Of Mexico's Massive Undergound Economy

The "black market" accounts for a quarter of Mexico's GDP and employs more than half its workforce. The numbers illustrate a failure of public policy and raise a red flag for the future.

A Mexico market at night
A Mexico market at night
Fernando Chávez*

-Analysis-

MEXICO CITY — Informal, underground, black, "hidden." Economists have used a range of terms for economic activities that basically yield no taxes and don't contribute to bankrolling government services. Strictly speaking, the millions toiling this way in Mexico — and they account for more than half the workforce — are operating on the margins of the law and arguably working themselves into a social vacuum.

In fact, there is new data about the scale of Mexico's underground economy, providing insight into its evolution over the past decade. The research, from Mexico's National Institute of Statistics and Geography (INEGI), shows that the shadow economy accounted for 25% of GDP in 2012, and employed 60% of the working population, around 31 million people. This is clear evidence of a serious imbalance in the Mexican economy.

The government's free-market policies of recent years, efforts toward deregulation, and a dogmatic eagerness to make the employment market more flexible have all contributed to this state of affairs. These have been state policies for decades and have impacted the living conditions of millions of Mexicans.

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The shadow economy employed 60% of the population (2012) — Photo: Jorge Díaz

With only four out of every 10 Mexicans having stable, formal jobs — and the rest living off the books — it's impossible to conclude that Mexico shelters its people instead of creating second- and third-class citizens. The figures effectively confirm the massive failure of public policies.

The report shows that 62% of the shadow economy is in three areas: trade (in a range of goods from the formal sector), small-scale manufacturing and farming, and forestry and fishing activities. The latter industries traditionally employ the country's most marginalized citizens.

In 2012, 93% of farming and livestock production was part of the underground economy, as was 78% of personal, repair and maintenance services and 52% of trade. This economy dominates the generation of, and trade in, basic goods and services. Workers in these areas earn insufficient amounts and have no access to the minimal welfare coverage that would compensate and protect them from turbulent economic trends.

Unfair and less productive

With so many people producing relatively less — 60% of the workforce producing 25% of the GDP — these figures also clearly indicate that the black market is less productive. Productivity per worker in the formal sector is 2.3 times its underground equivalent, which in part explains the low wages.

Personal earnings are falling, and poverty is becoming a mass phenomenon. Though black market workers earn 21% less than workers with official jobs, their wages fell less — 19.5% — over the period studied than those of officials workers, whose fell 22.7%.

Today, it seems there are "incentives" for escaping or at least avoiding the "paradise" of formal work. The figures raise many questions about the underground economy's role, but the government has few satisfactory answers — even as it idiotically persists in "formalizing" the black market.

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Underground economy accounted for 25% of GDP in 2012 — Photo: Alex Efflon

The bleak social scenario and growing size of the off-the-books economy may in fact indicate that our economic model is exhausted, that Mexico has become too distant from democratic norms and objectives. That's to say nothing of the rampant corruption that undermines practically all aspects of society.

People live and survive as they can within the vast miasma of the informal economy, and the social exclusion of its protagonists has many faces. Coexisting in it are illegality and tolerance, opulence and indigence, violence and resignation, deprivation and depravity, tradition, innovation, opaqueness and transparency — and countless other characteristics that will continue.

We should not expect an imminent transformation of this market. Growing economic informality is an immense challenge among numerous other national problems, yet its consolidation threatens moves to build a just society and a solid, efficient economy.

* Fernando Chávez is an economist and professor at the Autonomous Metropolitan University of Mexico.

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