Mexico’s New President Must Tackle Inequality

The new president of Mexico has a unique opportunity to turn a period of relative economic stability for the country into more prolonged prosperity that is more widely shared in a country were income poverty and inequality remain extremely high.

Andreas Manuel Lopez Obrador after casting a vote in Mexico. Photo: Getty Images.

Andres Manuel Lopez Obrador, known as AMLO, was elected in July on the promise of reducing crime and corruption as well as bolstering social spending in order to address the country’s wealth disparities.

The International Monetary Fund (IMF) has this month released its latest economic assessment of Mexico and the outlook is cautiously bright.

“A new political landscape is shaping up in Mexico following the July elections. President-elect López Obrador has promised to reduce corruption and crime, and boost social spending and public investment while maintaining fiscal prudence,” the Fund said.

“The incoming administration will inherit an economy with very strong fundamentals and policy frameworks that have exhibited resilience in the face of a complex external environment. But Mexico still confronts significant challenges—namely to strengthen growth while reducing poverty and inequality—and has yet to win the fight against corruption and crime.”

Mexico’s poverty rate remains startling, encompassing over 43% of the population.

One reason why poverty rates remain high is Mexico’s meager per capita growth in recent decades,” the Fund said.

Another, according to the IMF,  is that social policies “have not been targeted as well as they could have been.”

While conditional cash transfer programs have been very effective at reducing inequality, other social programs have disproportionately benefited individuals at the top rather than at the bottom of the income distribution.

“Further, the redistributive role of fiscal policy—targeted government expenditures to help lower-income inequality—is generally weaker in Mexico than in other members of the Organization for Economic Co-operation Development (OECD) and could be expanded.”

The Fund expects Mexican growth to accelerate modestly in the near term, reaching 2.1 percent in 2018 and 2.3 percent in 2019. That’s lower than a July forecast of 2.3 percent for this year and 2.7 percent next year.

“There was agreement that the balance of risks is tilted to the downside,” the IMF said.

Weaker global growth or a deepening of trade wars between the United States and other major economies would hurt Mexico’s prospects given its relative openness to global markets. Mexico is also “exposed to the risk of renewed volatility in global financial markets and a sharp pull-back of capital from emerging markets,” the Fund said. 

The IMF’s policy recommendations including ongoing reform of the energy sector to expand private participation in oil gas exploration; better enforcement of labor market rules; the introduction of unemployment insurance; improvement in the defined contribution pension system; and a stronger social safety net that “encourage formal employment and help reduce poverty and inequality.”

Mexico should “redouble” its efforts to help women enter the workforce, the report said.

Despite significant improvements in female labor market participation and pay equality, women remain heavily underrepresented in the Mexican economy,” the Fund said. “Lowering participation gaps for mothers remains a priority. Childcare and maternity and paternity benefits remain well below OECD peers and could help close these gaps.”