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This Is How We Lost the Battle Against Informality, Again

By Alejandro Villalobos - Cumplo Mexico
Managing Director, North Latam


By Alejandro Villalobos | Managing Director, North Latam - Wed, 02/08/2023 - 09:00

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Regardless of the color of the party in government, its strategy, or the characters behind it, there’s one battle that appears to have stopped again: that of ending informality.

From 2003 to 2021, progress was meager, if not non-existent: while in 2003, the informal economy represented 23.6% of the total value of national GDP, by 2021, this figure had risen to 23.7%.

In that period, the statistic managed to drop to a "promising" 21.8%, in 2020, while  reaching a peak of 24.4% in 2009. That’s the range in which the Mexican informal economy has remained throughout this century.

The conclusion: 1 out of every 5 pesos of the value of the country's economy comes from businesses that don’t have the legal documents to carry out their operation, according to INEGI figures. 

In recent years, we’ve seen a constant effort to generate strategies to integrate thousands of small businesses into the formal sector. These haven’t had the desired success because they are measures that mostly seek control without really offering advantages or benefits to small businesses.

Micro-businesses in Mexico face hostile environments for growth and survival: serious public safety problems, few social programs for the growth of these projects, and deficiency of public services in a large part of the national territory are part of the panorama behind the reluctance of micro-entrepreneurs to formalize.

In the National Development Plan presented by the current administration at the beginning of its six-year term, some ideas were outlined that, for the first time in a long time, took on the challenge of the informal economy as one in which multiple government actions were required.

Thus, solutions were identified, such as the simplification of regulations, procedures, and services that previously represented a lot of time, money, and even the manifestation of various acts of corruption.

Another important point has been the creation of tax regimes that encourage formality and facilitate accounting for small taxpayers.

The emergence of the Simplified Trust Regime, which practically replaces the old Fiscal Incorporation Regime, offers attractive tax rates for entrepreneurs in the country.

The government also sought a joint strategy to integrate recent graduates into formal jobs, through its Jóvenes Construyendo al Futuro (Youth Building the Future) program, which initially intended to have 3 million young people join the formal workforce, starting with  scholarships supported by public coffers.

The shift toward an "austere" government, as the current administration has called itself, could be part of this strategy of integrating more people into formality, with lower tax rates, while also reducing the administrative burden that the operation represents as the treasurer of that inclusion. 

The concrete results of these strategies will be revealed toward the end of the six-year term, but  the forecasts are not as encouraging as we would like to imagine.

The latest National Survey of Occupation and Employment (2022) forecasts  that, during this administration, the population employed by the informal sector has increased by 11%, and the people who have been hired after going through the Jóvenes Construyendo el Futuro program are equivalent to less than 10% of the objective, while the pandemic wiped out almost a million formal companies.

Last year, a new law came into force to reduce outsourcing services, which was intended to increase the number of workers formally registered by companies – and it was achieved, with side effects that we are yet to discover.

Everything seems to indicate that, once again, we’ll return to where we started, but with a set of efforts from which we can learn, improve, and optimize based on technology to truly integrate more and more people and businesses into the spectrum of what is formal.

This legitimization of MSMEs is essential if we are looking for an economy of development and innovation, and not manufacturing; if we intend to improve the life expectancy of Mexican enterprises (most of them don’t exceed two years); and if we seek to reactivate the economy from a cornerstone like the financial services industry.

It’s also important if we aspire to a fairer labor market for all; if we want our best organizations to be able to transcend geographical barriers; and, of course, if, as a country, we have an interest in sound public finances.

Beyond the fact that 2023 begins with not very optimistic numbers in this regard, I’d like to think that experience leaves lessons learned, and that even failures are advances toward the objective that as a society we should seek: formality as a meeting point toward development.

Photo by:   Alejandro Villalobos

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