March 30, 2014 12:47 pm
Mexico struggles to break shackles that bind productivity
When a small Mexican company finds that taxes and the red tape needed to open a plant push up operating costs by as much as 50 per cent, it is not hard to understand why it can be tough to find the money to invest in boosting productivity.
How to increase output per worker in Mexico has become of the most urgent challenges facing the government of Enrique Peña Nieto as it implements a host of structural reforms designed to get the country out of its long-term growth rut.
But a new study by McKinsey, the consultancy, found the task is trickier than it looks: Mexico is a tale of two economies, and the gap between them is getting wider.
There is the Mexico of the high-tech auto, aerospace and electronics sectors, sleek factories and slick multinationals, such as bakery giant Bimbo or cement firm Cemex.
Alejandro Pulido García, a partner at data destruction company Corporativo Urios, which employs 15 staff, said taxes and the red tape required to secure permits to open a new laboratory had “increased the cost of production by 40 to 50 per cent”.
For mid and small-firms, therefore, innovation is often scarce and output low. Many firms exist in the vast informal sector, which Mr Zamora says employs six out of 10 Mexican workers and where productivity is 40 per cent lower than the formal one.
While productivity at the modern enterprises has risen by 5.8 per cent a year since 1999, McKinsey found, those gains have been eroded by Mexico’s smallest firms, where it has fallen 6.5 per cent annually. In addition, the “traditional” sector of small and mid-sized firms is hiring faster than the top firms and shifting more labour to low-productivity work.
All this matters because Mexico is struggling to fix its lacklustre economic growth, which has averaged just 2.3 per cent a year since 1981. The economy expanded a measly 1.1 per cent last year and the government’s 2014 forecast of 3.9 per cent is widely considered to be optimistic.
“The low productivity of traditional companies is at the heart of Mexico’s growth challenge,” said McKinsey’s report, entitled “A tale of two Mexicos: growth and prosperity in a two-speed economy”.
It added: “Mexico’s slow income growth in the past three decades – GDP per capita has risen by just 0.6 per cent per year on average and only 0.4 per cent during 2013 – is due to weak labour productivity, which fell from $18.30 per worker per hour (in purchasing power parity) in 1981 to $17.90 in 2012.”
The task is all the more urgent because the so-called “demographic dividend” – a rapid growth in the labour force that has fuelled GDP growth for three decades – is running out. “To reach GDP growth of 3.5 per cent a year as labour-force growth slows, the productivity growth rate would have to rise by almost three-fold from the 0.8 per cent per year average since 1990,” the report said.
To tackle the problem, Mr Zamora is spearheading what he calls a “joint effort” between the government, private sector, unions and academia to boost efforts to get companies in the informal sector to pay tax and social security benefits. It also seeks to support small businesses, improve investment in science and technology – which only 8 per cent of firms bother with – and invest in training and incentives. “We want to revert the trend and generate a virtuous circle,” he says.
Underlining the task force’s sense of urgency, the government says it will meet at least once a month this year instead of once a quarter.
Faustina García Reyes, who runs Bester Mexicana, an adhesive and paints firm, says her decision to plough 40 per cent of profits back into innovation and technology in her business is paying off. Not only has she been able to open a factory in Honduras and another in Costa Rica, but in the last quarter of 2013 profits rose 42 per cent.
But not all companies have the cashflow or access to credit to do so. McKinsey reckons Mexican companies have a $60bn credit gap, and three-quarters of that represents the unmet capital needs of small and mid-sized firms.
“When it comes to productivity, most very small Mexican firms wouldn’t know what you’re talking about,” says Ms García Reyes, who praised what she saw as the government’s unprecedented initiative. “They’re just trying to stay afloat.”
Eduardo Bolio, head of McKinsey Mexico, said he remained optimistic about the outlook. But he added: “There is no magic bullet.”
Copyright The Financial Times Limited 2014
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