The Three Economic Fronts
Lopez Obrador’s strategy to confront the economic recession preserves his big-picture plan to “transform” the Mexican economy and wrestles with the fact that the Mexican economy can be clearly divided into three distinct subeconomies, each playing by its own set of rules. The formal economy is characterized by services, finance and high-end manufacturing with intricate supply chains. It generates 77.5% of the country’s gross domestic product and is concentrated in the central and northern parts of the country. The informal economy — a “gray zone” not taxed or regulated by the government but still legal — generates 22.5% of the country’s GDP and is characterized by precarious employment, basic manufacturing and low wages. It exists in much higher concentrations in the country’s south. The black market economy, run by organized crime, is prevalent throughout the entire country. Its economic contribution is not clearly known given the illicit nature of its activities, but recent estimates put Mexican drug sales to the United States at $19 billion to $29 billion annually. Despite its illegality, the black market injects a massive amount of capital into the economy, which generally speaking is a good thing. On the other hand, it also deters investment and infrastructure development and breeds extortion, corruption and violence. The result is a mixed bag of economic effects that is not easy to define or calculate.
AMLO’s proposed solution for dealing with the segmented nature of Mexico’s economy involves diminishing the economic and development disparities across the country through youth education and job training programs, labourintensive infrastructure projects, support for small businesses, anti-corruption measures and government austerity. In other words, he is attempting to reduce the informal economy and merge it with the formal economy. His approach has been controversial and viewed by the opposition as contrary to the ultimate objectives of developing and growing Mexico’s economy. Indeed, the segmented nature of the country’s economy makes it extremely difficult to pursue a policy that helps one segment without hurting the other two. But in the face of the recession, the government has opted to direct the few funds it has toward the informal sector, an approach that aligns with long-term goals and exists as the most viable short-term solution available.
Formal Economy: Severe Limits
Mexico’s formal economy has a high degree of exposure to external forces and is therefore largely out of the government’s control. For starters, the Mexican economy is largely dependent on the health of the U.S. economy. Mexican exports to the United States are equivalent to about 31% of the country’s GDP, and the United States is the leading supplier of foreign direct investment to Mexico. Remittances, which totalled $36.05 billion last year, are Mexico’s largest source of U.S. dollars, and 95% come from senders in the United States.
When the U.S. economy performs poorly (or restricts border crossings), the effects are often amplified in the