Mexico’s economy has grown moderatelyover the last quarter century, with annual per capita GDPgrowth averaging just 1.2 percent between 1990 and 2017. Thecountry’s weak economic performance reflected a decline inproductivity, which fell by 8 percent during that period.Mexico’s productivity challenges are associated with largeand widening regional disparities and the misallocation ofresources between sectors and firms. Large productive firmsintegrated with Global Value Chains have not developedbackward linkages to the rest of the economy and laggingregions. Meanwhile, widespread labor and firm informalitycontributes to the misallocation of productive resources.Reversing the decline in productivity will require anintegrated strategy encompassing multiple policy areas andsectors. This broad strategy should include strategiesdiscussed in other policy notes: (i) alleviating rigiditiesand distortions in labor markets and improving access tocredit; (ii) alleviating existing rigidities and obstaclesto competition across sectors and sub-sectors whilefollowing through with the structural reforms enacted; (iii)designing and implementing effective interventions at thesubnational levels to enhance both product and factormarkets; (iv) dealing with the financing of social insuranceschemes; and (iv) strengthening rule of law institutions atthe federal and local levels. This note focuses on criticalaspects of the diagnostic around the productivity dynamicsin Mexico. It also links the aspects of the strategyabove-highlighted to specific policy recommendations onother Policy Notes of this set given the cross-cuttingnature of productivity growth. It also focuses on providingpolicy directions on: (i) strengthening institutions andprograms working directly on the productivity agenda; (ii)selected sub-national interventions to ease the regulatoryburden; and (iii) proposing a broad and integrated strategyfor fostering formalization.
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