The Black Market Economy: A Very Large Shadow

Mexican economy. The International Monetary Fund expects the U.S. economy to contract 5.6% this year, and new unemployment claims in the country at the time of publication stand at 22 million. For Mexico, this means that there are far fewer buyers of Mexican goods and that the country can’t trade its way out of the crisis, even considering the strong decline in the peso’s value relative to the dollar so far this year.

To escape its mild 2019 recession, Mexico had planned to turn to foreign direct investment in 2020. And even before a global recession became imminent, the government was struggling to attract foreign investment over concerns of regulations, crime and general doubts over management. Now, the United Nations estimates that foreign investment will drop by 30-40% globally this year. For Mexico, this means investment will be difficult to come by and require fierce competition with others. Foreign investment is no longer a viable option to stimulate the economy. Lastly, other major financial sources, such as oil and tourism, not only remain out of Mexico’s control but have poor prospects this year.

Admittedly, state-owned oil company Pemex has been struggling for years, but even in the company’s best-case scenario, it can do little to address low oil prices, let alone change them. As for tourism, travel restrictions and personal fears mean the cancellation of many summer trips.

The Mexican government has offered little to mitigate the recession’s impact on the formal economy because the influence of external factors will outweigh much of what it can offer. The government says it only has about $10 billion available from various rainy day funds. This means the bailouts, tax breaks and fiscal stimulus called for by businesses in the formal sector cannot be executed on a scale that would have an impact on a $1.3 trillion economy. Effectively stimulating an economy takes massive amounts of money, which often means taking on debt — and the concern over government debt in Mexico predates AMLO. The government currently does not have enough reserves to cover its debt in the event of an emergency, and incurring new debt would make matters only worse. Additionally, spending money on the formal economy would largely put the two other major segments of the economy on the sidelines. The government’s financial authorities did loosen liquidity rules on banks, which they assert are well equipped to handle the pending economic crisis, but aside from that, it has taken a largely hands-off approach.

The Informal Economy: Opportunity for Impact

The Mexican government has directed its efforts toward the informal economy because its potential for impact is higher and the informal economy plays a critical role in the workforce.

Mexico defines the informal economy as one that includes any economic activity that is legally produced and marketed but the production or distribution units are not formally registered. It also includes all economic activities that operate from family resources, such as micro- and small businesses that are not constituted as companies. Because informal workers tend to have lower-quality jobs, lower wages and no insurance compared to those with formal-sector jobs, they are more vulnerable to recession. And since the latest official figures from the end of 2019 show that Mexico’s informal sector employs 56.2% of all workers, a sizable portion of the country’s working population is highly vulnerable to recession.

The actions the Mexican government has taken to mitigate the impact of a recession on the country’s economy have focused on supporting the continued employment of informal workers. Earlier this month, the government said it would provide a 25,000-peso ($1,000) credit for small and micro-companies that have retained employees and not reduced wages, offering low interest rates that increase slightly by company size. The plan allows for a million total recipients, though an estimated 5 million will request access, and money will arrive in May and June. This low-interest-rate credit will need to be paid back in three years, with payments starting after the fourth month. Lopez Obrador also announced additional credit for the creation of 2 million more formal jobs this year, but such a project was already in the works prior to the global recession.

One wild card that could impede the government’s task of easing the recession’s impact is remittances, which play a key role in many household incomes, particularly in poor segments of the economy. BBVA estimates that, this year, remittances will decline by 17% to $29.9 billion due to the recession and mass unemployment in the United States. Nevertheless, from the government’s perspective, it’s still more cost-effective to support working programs now than deal with millions of people eventually out of work amid economic collapse.

Though Mexico’s organized crime groups are not often considered in terms of their contribution to economic activity, they must also be factored in to efforts to combat the recession. For better or worse, the large scale and high value of their operations do create jobs and support economic activity at local levels.

The pervasive nature of organized crime means it touches the pocketbooks of hundreds of thousands of Mexicans. And these groups are not immune to the recession, though they are positioned better than most to confront it. Like many multinational companies, organized crime groups in Mexico experienced supply chain disruptions with the slowing global economy, particularly with respect to the chemical precursors from China used to make fentanyl. The disruptions hurt major fentanyl suppliers, such as the Sinaloa and Jalisco New Generation cartels. Meanwhile, alternative revenue flows, including human trafficking, fuel robbing and extortion, are not currently available due to increased border restrictions, low oil prices and businesses going on hold for quarantine. Of course, the addictive nature of drugs means that demand in that area remains. And that, in turn, has meant an increase in price due to supply chain shortages and stricter border measures.

AMLO’s government will have to face the threat of increased social and political encroachment by organized crime. The recession and health crisis have already presented organized crime groups with opportunities to intensify their presence in socioeconomic gaps in place of the government. Big-name cartels like Golf, Jalisco New Generation and Sinaloa have also started community outreach and charity programs to provide locals with goods at a time when supplies and funds are scarce. In this area, AMLO finds

The Only Real Option

Lopez Obrador was forced to choose sides in preparation for mitigating the impact of Mexico’s deeper recession, and his outlier approach of rejecting stimulus measures reflects the reality of three very distinct economic segments, none of which overwhelmingly dominates the others. He does not have the funds or enough control over the formal economy to risk stimulus; he does not have the reach or security ability to take on organized crime. What remains is the country’s informal sector, where the bang for the buck (or punch for the peso) is larger, and where efforts generally align with longer-term goals of integrating the informal economy into the formal one, thereby improving economic standards for Mexico’s lower socioeconomic classes. This may not be considered the ideal move by many, but it’s AMLO’s only decent option.

Allison Fedirka is the director of analysis for Geopolitical Futures.