Good Intentions, Bad Outcomes

Good Intentions, Bad Outcomes: Social Policy, Informality, and Economic Growth in Mexico

Santiago Levy
Copyright Date: 2008
Pages: 372
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  • Book Info
    Good Intentions, Bad Outcomes
    Book Description:

    Despite various reform efforts, Mexico has experienced economic stability but little growth. Today more than half of all Mexican workers are employed informally, and one out of every four is poor. Good Intentions, Bad Outcomes argues that incoherent social programs significantly contribute to this state of affairs and it suggests reforms to improve the situation. Over the past decade, Mexico has channeled an increasing number of resources into subsidizing the creation of low-productivity, informal jobs. These social programs have hampered growth, fostered illegality, and provided erratic protection to workers, trapping many in poverty. Informality has boxed Mexico into a dilemma: provide benefits to informal workers at the expense of lower growth and reduced productivity or leave millions of workers without benefits. Former finance official Santiago Levy proposes how to convert the existing system of social security for formal workers into universal social entitlements. He advocates eliminating wage-based social security contributions and raising consumption taxes on higher-income households to simultaneously increase the rate of growth of GDP, reduce inequality, and improve benefits for workers. Good Intentions, Bad Outcomes considers whether Mexico can build on the success of Progresa-Oportunidades, a targeted poverty alleviation program that originated in Mexico and has been replicated in over 25 countries as well as in New York City. It sets forth a plan to reform social and economic policy, an essential element of a more equitable and sustainable development strategy for Mexico.

    eISBN: 978-0-8157-0163-7
    Subjects: Political Science, Sociology

Table of Contents

  1. Front Matter
    (pp. I-IV)
  2. Table of Contents
    (pp. V-VIII)
  3. Foreword
    (pp. IX-XIV)
    Strobe Talbott

    For reasons that hardly need belaboring—geographic contiguity, immigration, trade, and the nexus between a healthy economy and political stability—few countries are as important to the United States as Mexico. That is why Mexico looms large in U.S. domestic politics—and why it should loom larger than it does in U.S. foreign policy. Hence the perennial timeliness of this book.

    Over the last decade, Mexico has increased the resources that it spends on social programs in order to raise the welfare of its workers and redistribute income toward those in need. InGood Intentions, Bad OutcomesSantiago Levy argues...

  4. Acknowledgments
    (pp. XV-XVI)
  5. Introduction
    (pp. 1-10)

    Three features of Mexico’s development over the period from 1997 to 2006 stand out. One, per capita GDP and productivity growth was slow by international standards, despite the fact that Mexico experienced a decade of macroeconomic stability and implemented some reforms to increase efficiency.¹ Two, growth in formal employment was equally slow.² And three, there was a large expansion of health, housing, day care, and pension programs for households lacking social security coverage.³

    The first two features generally are not associated with the third, at least not in the sense of there being a causal relationship between the increase in...

  6. 1 Institutions, Workers, and Social Programs
    (pp. 11-32)

    Mexico’s social policy makes a critical distinction between social security programs, which target salaried workers, and social protection programs, which target nonsalaried workers—in both cases regardless of income level—and between those programs and poverty reduction programs, which target poor people regardless of their salaried or nonsalaried status. Understanding those distinctions is essential to identifying the mechanism through which social programs influence workers in general and poor workers in particular. The distinctions serve in turn to identify the nature of the monetary resources channeled to social spending and to measure the relative magnitude of the efforts made to provide...

  7. 2 Formality and Informality
    (pp. 33-46)

    As discussed in chapter 1, workers in Mexico are divided according to their employment status, salaried or nonsalaried. Salaried workers are covered by social security, firing and severance pay regulations, and labor taxes, and nonsalaried workers are covered by social protection programs. However, the Social Security Law is massively violated in Mexico, ruling out a one-to-one correspondence between salaried and nonsalaried status and coverage of social security and social protection programs, respectively.

    This chapter elaborates on the concept offormalandinformal workers. Formal workers are defined as salaried workers employed by a firm that registers them with IMSS; given...

  8. 3 Workers’ Valuation of Social Programs
    (pp. 47-70)

    Social programs exist because the government has social goals. It is essential to identify those goals clearly in order to ensure that the programs implemented to realize them are the most appropriate. A program may, for example, confuse the government’s redistributive goal with its goal of protecting households against risks and ultimately accomplish neither effectively. It also is essential to decide whether social goals apply—or should apply—to all salaried and nonsalaried workers or to only a subset of them, in the latter case identifying clearly the reasons for any discrimination. Are social security and social protection programs instruments...

  9. 4 Social Programs and Poor Workers
    (pp. 71-84)

    Poor workers in Mexico, rural or urban, own few productive assets, including land. The expectation therefore would be that most of them are salaried, employed in the formal sector. But as shown in chapter 5, the opposite is observed: less than 7 percent of all poor workers are formally employed. Furthermore, poor workers account for a disproportionate share of workers who evade social security: while they constitute only 23 percent of all workers, they represent almost 58 percent of evading workers. Understanding the role played by social programs in contributing to those outcomes is central in designing effective poverty reduction...

  10. 5 Mobility of Workers in the Labor Market
    (pp. 85-133)

    This chapter serves as a bridge between the description of Mexico’s social programs and workers’ valuation of their benefits presented in the first four chapters and the analysis of the behavioral response of workers and firms to those programs presented in chapters 6 through 8. After salaried and nonsalaried workers in Mexico’s labor force are identified and classified by wage level, a heuristic discussion of workers’ movements between sectors based on ethnographic case studies is presented. The registries of IMSS and Consar are analyzed to allow for a more systematic assessment of the patterns of worker mobility over the 1997...

  11. 6 Social Programs, Welfare, and Productivity
    (pp. 134-165)

    It is important to understand how workers and firms react to social programs, because their reactions affect the composition of employment, labor productivity, wage rates, workers’ utility, and the achievement of the government’s social objectives. To increase that understanding, I begin by sketching the objectives of the actors and the processes through which they interact to determine outcomes in those dimensions. The results are driven by the following logic:

    —Workers maximize utility, choosing between salaried employment with social security benefits orcomisionistaor self-employment with social protection benefits. They make their choices on the basis of the wages that...

  12. 7 Productivity and Illegal Firms
    (pp. 166-207)

    Chapter 6 associated formal employment with salaried workers and informal employment with nonsalaried workers and traced the impact of social programs on the distribution of the labor force between the two types of employment. But as table 5-1 shows, in Mexico there is a large category of employment made up of illegal, informal salaried workers that has not been captured in the analysis so far. This chapter explores the illegal dimensions of informality, first explaining why illegal employment occurs and then expanding the framework presented in chapter 6 to incorporate informal salaried workers. It gives reasons why some firms choose...

  13. 8 Investment and Growth under Informality
    (pp. 208-233)

    This chapter focuses on the impact of social programs on the investment decisions of Mexican firms. I argue that the distortions introduced in the labor market by the formal-informal dichotomy spill over into the allocation of investment and reduce the productivity of capital even when there are no imperfections in the credit market;as a result, the GDP growth rate is lower.I also argue that social programs contribute to the persistence of informality and that economic growth per se will not eliminate it. Finally, I argue that when the growth path is characterized by persistent informality, it is unlikely...

  14. 9 Social Programs and the Fiscal Accounts
    (pp. 234-252)

    Social programs have fiscal implications. Subsidies to social security have an impact on the labor market, increasing formality and the tax base. In contrast, because social protection programs subsidize evasion of social security, as informality increases the fiscal constraints under which social policy operates get tighter: more workers receive free social benefits, and the tax base erodes as fewer firms and workers pay taxes or contribute to social security. To analyze this issue, this chapter begins by introducing subsidies to social security within the framework presented in chapters 6 through 8 and then discusses the impact of social programs on...

  15. 10 Can Social Policy Increase Welfare and Growth?
    (pp. 253-292)

    Mexico’s government needs to escape the dilemma posed by the formal-informal dichotomy. An alternative model is required, one that will both provide social benefits to all workers and accomplish the government’s social objectives more effectively, bypassing the distortions in the allocation of labor and capital. There must be deep change in the scope and financing of social security, and that change must be carried out in the context of a strategy that integrates social and economic policy. This chapter presents such an alternative, elaborates on the fiscal changes required to sustain it, and sketches its redistributive impacts. Appendix 9 elaborates...

  16. APPENDIX 1 Resources for Social Programs
    (pp. 293-297)
  17. APPENDIX 2 Regional Coverage of Social Programs
    (pp. 298-303)
  18. APPENDIX 3 Land Holdings of Progresa-Oportunidades Households
    (pp. 304-305)
  19. APPENDIX 4 Estimation of Mexico’s Economically Active Population
    (pp. 306-312)
  20. APPENDIX 5 Mean Wage-Rate Comparisons by Matching Methods
    (pp. 313-316)
  21. APPENDIX 6 Equilibrium in the Labor Market with Differences in Workers’ Valuations
    (pp. 317-326)
  22. APPENDIX 7 Equilibrium in the Labor Market with Evasion of Social Security
    (pp. 327-328)
  23. APPENDIX 8 Profit Maximization under Informality
    (pp. 329-335)
  24. APPENDIX 9 Further Remarks on Retirement Pensions as a Social Entitlement
    (pp. 336-342)
  25. References
    (pp. 343-348)
  26. Index
    (pp. 349-358)
  27. Back Matter
    (pp. 359-360)