Poverty in Mexico, Economic Crisis
And 21st Century Welfare

The importance of understanding poverty in Mexico

The country’s GDP is about the same as that of Spain, South Korea or Australia and yet its GDP per capita of US$14,000 is more than 3 times lower than that of these countries.

Only 4 years ago its GDP per capita was almost half that amount (around $7,000) so in a way things have got better.

At least until the drug war broke out and the economic crisis made things more complicated. Let’s see how.

Underdeveloped institutions

Poverty in Mexico is reflected in the country’s poor ratings in all sorts of fields: infrastructure and institutions, education, labor market efficiency, innovation among others.

The direct consequence of this is that over 12 million Mexicans work in the black market without any social security of any form (so they're often exploited).

Nearly 25 million Mexicans make less than $14/day, 25% of the workforce is underemployed and over 5% million is unemployed.

Poverty in Mexico - Between rural poverty and globalization

The average salary in rural areas is 3 to 4 times less than that of urban areas which explains emigration from the country to the US.

Globalization and free trade agreements have made the country one of the more opened one to the world which in theory should mean more opportunities for business. And Mexico has indeed become the 2d biggest exporter to the US after China, but still poverty in Mexico thrives on drug wars, corruption and quasi-institutional inequalities so that only the rich get richer (sorry for the cliché).

In fact the urban upper middle class has also been better than ever. But since the 1950s the government has been trying to reduce poverty by alternating between two opposing approaches: social spending and spurring economic competitiveness. However, quite often the best approach is not about an “either/or” competition but rather about a balanced “A+B” one. So let’s see how that worked out for Mexico.

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Economics and extreme poverty in Mexico

A history of fighting poverty

Mexico is a very good example if you want to show how economic cycles and poverty are intimately related.

With 40% of the population living below the poverty line and more than 10% in extreme poverty (i.e. on less than $1.25 per day), poverty in Mexico has nonetheless come a long way. From about 65% of extreme poverty in the 1950s, the number went down to 20-25% from the 1960s to 1995.

The number of Mexicans living below the poverty line increased with the 1980s economic crisis and in the same way the 1995 crisis caused extreme poverty to surge to 35%. Since then things have been getting better just as the economy was recovering… until the global financial crisis and the chaos with the drugs cartels started recently.

Reduction in absolute poverty

But Mexico also reacted so as to limit the impact of the crises. Each time the country answered with improved social assistance programs targeted at the poorest. It’s estimated that if extreme poverty didn’t increase that much it’s in great part thanks to these policies.

Likewise the decrease (by 20-25%) in extreme poverty since 1995 is attributed to social welfare, which has also got a lot more efficient along the way. However there is extreme and relative poverty and the overemphasis on social programs also obscured (if not threatened) the development of the economy.

Links between growth and poverty in Mexico

The Mexican case is also very enlightening concerning claims that economic growth equals poverty reduction. A recent study comparing data over the past twenty years shows in fact a more complex picture. The results show that in most of the 1990s growth has benefited only the rich and deepened the income gap (i.e. it created more inequalities).

However for the years that followed it effectively contributed to reducing poverty. What’s more the picture is even more nuanced with some years contributing to reducing absolute or extreme poverty, and others helping with relative poverty all while making absolute poverty worse. Conclusion (as usual), growth alone isn’t enough either.

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The limits of welfare

What researchers have found out is that social spending becomes useless up to a certain point (in this case 10% of extreme poverty), and increasing spending won’t change anything past this point. Unless new programs prove otherwise (maybe conditional cash transfers), decision-makers have far too often forgot to balance social security with economic growth and institutional development.

For example cash transfers alone in a country like Mexico spurs the black market where the poor often work and do not have any incentive to change that. Or at least they don't understand all the benefits of turning to the formal sector. Often it’s detrimental to both the people and the government (no tax revenues). But often times too, an insanely heavy bureaucracy makes any honest person run away and remain unregistered (and at the mercy of corrupt officials or ill-intentioned bosses for example).

A simple example is the difficulty to simply start a business. The weeks and weeks necessary to set up a business, the administrative complexities of registering a shop, the maze-like tax system and the tedious rules to hire and fire workers are among the biggest reasons for which entrepreneurship isn’t widespread. These are just as many artificial barriers that slow down the fight against poverty in Mexico.

What the Mexican government forgot is to invest in programs that spur economic competitiveness, promote education and technological readiness (i.e. maturity of technological adoption). Of course it’s had to face a huge rise in poverty so it reacted the most logical way it seemed at the time, but it’s been 15 years and now social spending is twice that of spending on economic development. And consequently, even as the GDP has been on a beautiful rise, GDP per capita has increased very slowly from 1990 to 2007. Especially when comparing to similar countries in terms of wealth, Mexico has stunning levels of poverty.

But on the other hand, it’s estimated that even if all public expenditures would go to boosting economic growth only, it would take as much as 50 years to eliminate poverty… assuming that the growth is evenly distributed!

The lesson is valid for any country: “neither extreme is optimal”. Governments should strive for a balance between social and economic spending programs (e.g. in infrastructure and institutions) as the best solution to reduce poverty in Mexico or elsewhere. To reap the benefits of its open market, the country has a dire need for more and better educated workforce as well as more flexibility in the labor market. Furthermore, future social policies should focus on education and health to make sure that everyone can participate in the economy.

Remains the part of improving the country's infrastructures and developing efficient institutions… good luck with that. Especially given the official neoliberal positions of the past governments which relied on the inherent justice of the market to solve everything, all while using social security spending on the sly.

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CCT program for poverty in Mexico

Conditional cash transfer (CCT) programs are becoming more and more popular throughout the world as new poverty-reduction policies, and Latin America counts the most programs.

Mexico’s CCT programs – Progresa & Oportunidades – have been quite studied, so let’s have a look at their outcomes.

Simply put, CCTs consist in cash rewards in exchange of people’s investment in education, health or food. In other words, it should help fight child malnutrition and nurture social capital. The conditions can then vary from sending a child to school to looking for a job in order to receive that money.

The Mexican Progresa program has proved a great way to avoid any “dependency effect” (no one’s taking holidays in the midst of poverty) and to significantly reduce poverty, including by creating unintended work incentives.

As for the Oportunidades CCT program, which focuses on schooling and work for the young, results have been just as successful, in particular in the longer term. Expected increases in school attendance were met, and so were those of young people working rate. The program also contributed to shift young workers to the manufacturing and services sector, away from agriculture. Obviously, the longer it’s around, the more that kind of program is successful (because the more people know about it).

Yet, frequent monitoring is still needed in the years to come to understand the impact of the higher school attendance rate on the level of income and poverty.

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A closer look at "Progresa"

Progresa is one of the first conditional cash transfer programs.

Its goal is to help parents in rural areas invest in their children’s future (education) via investment in their good health, especially by fighting diseases and malnutrition.

The program rests upon the belief that investing in human capital is the only way to break the cycle of poverty that is being transmitted from generation to generation. In addition, the program is grounded on the observation that rural poor have very limited access to health care in general.

For kids, poor health means affliction for life. It starts by missing school, or at best performing worse than everybody else, and overall getting severely sick at an early age means a poor health for life. Among the most common diseases and causes of child death in Mexico – as in many other countries – you’ll find diarrhea and lung diseases (which affect over 40% of kids in certain regions). As mentioned before, families living in rural areas have serious issues accessing basic services such as health care (doctor, hospital, but also social security) or water.

So one of the first positive outcome of Progresa has been to reduce the risks of illness for children under age of 5, with a huge drop (30%) in diarrhea infection rates in the first year of the program. The CCT has proved a vital source of income (literally speaking) that makes up for many households’ lack of resources, especially in terms of investing in basic medication.

The success of Progressa had it applied nationwide and turned into a wider program: “Oportunidades” (Opportunities). What the program has shown is that it’s essential to intervene as early as possible to protect children’s health otherwise early disease is a major factor of lifelong bad health, plus the poverty that comes with it.

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Micro-credit: fixing the market and poverty in Mexico

Micro-credit programs are a great opportunity to bypass traditional financial organizations that deem the poor too risky clients to lend them anything. The experiment of ALSOL in Chiapas shows how micro credit offers wholly new opportunities to get out of poverty in Mexico. Be they private or public micro-credit organizations, it shows that traditional markets do fail to cater to everyone’s needs, typically the poor who are often deemed unprofitable customers in most sectors.

Most of all micro-credit breaks common clichés concerning the poor. It shows that they’re capable of borrowing money responsibly and to develop their own business ventures, at their own scale. Moreover by allowing them to engage in new businesses, you finally include them in the “normal” market and eventually in the society at large. This is after all the end goal of poverty reduction.

But this also means that micro-credit programs against poverty in Mexico work better and faster in urban areas where the poor have easier access to local markets. This implies that the country should also invest in public infrastructure (roads, public transportation) to reduce poverty.

Finally, there’s also the challenge of making micro-credit programs sustainable since for many of them there are still too high administrative costs due to the lending of very small amounts ($30-40 a year) as well as the monitoring and operating costs.

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