Levy Shifts the Spotlight to Informality: the Structural Brake Behind Mexico’s Low Growth
Mexico’s economy carries a divided labor and business market that limits productivity, tax collection, and access to social security.
Ahead of the 89th Banking Convention, economist Santiago Levy once again put an uncomfortable issue at the center of the debate: Mexico’s low growth is not explained by an alleged lack of macroeconomic stability or weak export performance, but by a web of public policies that, over decades, has encouraged a “split” economy between the formal and informal sectors.
The paradox, Levy argues, is that Mexico successfully integrated into global trade chains—with solid export performance, particularly in manufacturing—but failed to translate that integration into broad-based gains in productivity and well-being. In his diagnosis, informality is not the primary cause of the country’s problems, but rather the result of rules and incentives that push firms and workers to operate outside the formal economy, at smaller scale, with less investment, and with lower adoption of technology.
The economist said this phenomenon is not new: it is a problem that has persisted for at least a quarter century. His reading is that, even with progress on financial stability, relative fiscal discipline, and a competitive export sector, Mexico’s economy retains a structural “drag” due to segmentation in the labor market and across the business landscape. In his figures, more than half of workers are employed informally, and an overwhelming share of businesses operate outside the formal framework.
In that context, Levy viewed it as a positive that Mexico is seeking the best possible outcome in talks with the United States over the USMCA. However, he warned that even if the negotiation ends favorably, the agreement by itself will not fix the low-productivity problem: it already coexisted for years with insufficient growth and with a business ecosystem in which informality keeps reproducing itself.
The Economic Cost of Informality: Low Productivity and “Small Businesses Forever”
Informality is often seen as a labor issue, but its impact is broader: it shapes how businesses are created, operate, and grow. When a firm chooses to stay outside the formal system, it typically limits its access to bank credit, insurance, more sophisticated supply chains, and contracts with compliance standards. That reduces investment, training, and technology adoption—factors directly tied to productivity. In practice, many economic units get stuck at a small scale, with thin margins and high turnover, preventing growth from “spilling over” to the rest of the economy.
From a public-finance perspective, a productive base dominated by informality also constrains tax collection and puts pressure on the design of social spending. The result is a difficult cycle: fewer formal taxpayers mean less capacity to fund high-quality public services, while limited social security coverage and regulatory unevenness reinforce the decision not to formalize.
USMCA, Nearshoring, and the Domestic Challenge: Opportunities Don’t Capture Themselves
External conditions offer a window: the relocation of production chains (nearshoring) has increased interest in investing in Mexico, in part because of its proximity to the United States, its export platform, and its manufacturing base. Still, the potential payoff depends on domestic conditions. Reliable energy availability, logistics infrastructure, water in industrial regions, and regulatory certainty all influence whether projects arrive; but beyond that, the country faces the challenge of connecting more workers and firms to that export-driven momentum. Without more attractive pathways to formalization and an environment that rewards business growth, investment may concentrate in certain industrial corridors without transforming the rest of the economic fabric.
In the financial system, the challenge shows up in how deep credit is for small firms and in overall financial inclusion. Growth in intermediation requires information, track records, and compliance—elements that informality undermines. For that reason, the productivity debate is not only about social and labor policy, but also about the ability to expand financing, increase competition, and strengthen local value chains.
In sum, Levy’s argument points to a structural diagnosis: Mexico can remain stable and continue exporting successfully, but if it does not fix the incentives that sustain informality, growth will remain constrained. The challenge going forward is to design policies that make it profitable to grow within the formal economy—for firms and workers—and that allow the opportunities of the USMCA and nearshoring to translate into productivity and higher incomes more broadly and sustainably.
