The roots and costs of Mexico’s vast informal economy

by Macario Schettino.

For some time now, there has been a belief that previous generations lived better than today's. Many young people, for example, complain that they cannot afford to buy a home in a central location, as their parents or grandparents did. In the United States, there is nostalgia for the 1950s — a nostalgia that, as always, erases the negative parts, such as racism and discrimination against women, among other things.

In Mexico’s case, this nostalgia was fed in classrooms when emphasis was placed on something called the “Mexican economic miracle,” or by its local name: desarrollo estabilizador (stabilizing development). The story goes that from 1946 to 1971, Mexico achieved very high growth rates (6% annually, 3% in per capita GDP), and nostalgia paints a picture of orderly, clean cities with abundant jobs.

As with all legends, there’s some truth — but not too much. In Mexico, during the time being referred to, the country was still essentially rural. It wasn’t until 1960 that half the population lived in cities, and it was precisely that process of urbanization that began to complicate everything. Cities could not expand their infrastructure at the same rate as the population was growing, and even less so when the demographic growth rate exceeded 3% annually. By the 1970s, medium and large cities in Mexico already had belts of poverty and “lost cities”: towns swallowed up by urban expansion.

If in the 1960s it seemed like there were jobs for everyone, it was because only half the population lived in urban areas. As that urban population grew, the myth of full employment began to fade. To prevent this urban growth from spinning out of control, Mexico took on excessive external debt in the 1970s — just as all Latin American countries did — taking advantage of abundant petrodollars and the end of restrictions on international capital flows. In 1981, with anti-inflationary programs in the US and UK, everything collapsed.

Since then…