The curiosity of Santiago Levy (Mexico City, 1956) lives in the social contract. The economist admits that he spends a lot of time wondering why so many people in Latin America, despite having jobs, are excluded from the guarantees and rights enjoyed by those who work in the formal sector. “The tacit social agreement we have in these countries is dysfunctional,” he emphasizes.
Levy, a former undersecretary of the Ministry of Finance, former director general of the Mexican Social Security Institute (IMSS) in the 1990s and former vice president of the Inter-American Development Bank (IDB), is best known in his native Mexico as the father of social aid in the country. He was the architect of the first aid program called Oportunidades, launched in 1997. The premise was simple: offer women a cash transfer if they send their children to school. According to the World Bank, the program is the most repeated program in the world. Fifty-two countries have adopted it.
Today he is an adviser to the United Nations Development Agency (UNDP) and a researcher at the independent center of the Brookings Institute in Washington, from where he connects with EL PAÍS via video call.
Questions: Let’s talk about the changes made to workers’ conditions and rights under the current government. One is the way in which unions are being reconfigured, as the United States can force the review of collective bargaining agreements, as the T-MEC allows.
Answer: This seems good to me, but it is a relatively minor problem since the number of companies that are under the T-MEC umbrella and can have more transparent union processes is relatively small. This will help make the election of union leaders more democratic in some large export companies. This is good and changes the bargaining power of these workers with the company, but it will not change the union landscape in the country.
Q. What do you think about the increase in the minimum wage, employer contributions to pensions and the tightening of subcontracting?
R. Some are indeed a setback, others have very unclear effects, so it cannot be said that they have clearly helped Mexico’s workers. I’ll start with the most complicated and controversial one: the minimum wage. This applies to employees in companies that comply with labor and social security regulations, i.e. work formally. 55% of workers in Mexico are informal workers and remain excluded from the minimum wage increase. You might think that it’s okay if the conditions of 45% improve because the minimum wage is raised while the other 55% stays the same. But the answer is no, because by raising the minimum wage you make it more difficult for workers in the informal sector to enter the formal sector by increasing the cost of hiring these workers. Large companies have no problem increasing salaries, but they only account for 1% of companies in the country. The vast majority are small businesses with 3 or 4 employees. The salary increase reduces the likelihood of a formal hire.
Q But there was a decline in poverty because family income increased.
R. Yes, except that there is controversy over whether the 2022 income-expenditure survey is comparable to the 2020 survey. Perhaps INEGI has improved its measurement techniques, however well, but seeing whether this compares accurately to other years presents a problem. It is important to say that extreme poverty has not decreased, in fact it has worsened. These are the people who obviously will not benefit from the minimum wage increase because they work informally or live in rural areas and for whom it is now more difficult than before to enter the formal sector. When we talk about outsourcing reform, it is a very good thing. Increasing resources for the Afores would not have done it.
Q Because?
R. In Mexico, a big mistake is made when it comes to work formalities, because people forget that the same workers sometimes have a formal job and sometimes an informal job. The average Mexican worker spends only 46% of their working time in the formal sector. The same people, with the same training, the same commitment, the same skills, sometimes they are formal, sometimes they are informal. Sometimes for their own reasons. The legislation states that before the law change you had to contribute to IMSS for 1,250 weeks to be eligible for a pension. However, if you only pay half of your working hours, you will not have a pension. For this reason, one in two employees who are currently paying contributions to their Afore will no longer receive a pension when they reach retirement age.
Q Perhaps the elegant solution is not to increase employer contributions to the Afores, but is the situation worse?
R. Yes, because it increases hiring costs. The bosses will deduct something from salaries to pass on to those in front, so you get people to save more, but you haven’t done anything fundamental in the labor market to change the way it works. On the contrary, the formality becomes more expensive. In a labor market where people move between formality and informality, the typical tools used in OECD countries, the United States, Spain, France, etc. do not work well in Mexico, Peru and Colombia because they are markets involve very different workforces. In Mexico we legislate as if the informal part of the country did not exist, as if by magic it would no longer be there tomorrow. And this has been done in all administrations. There is an idea in the Chamber of Deputies, the Senate and the federal executive that if we enact formal laws, conditions will change for everyone. We have 30 years in which this has not happened.
Q He said the social contract in Mexico is dysfunctional. How do we get here?
R. The 1980s were terrible due to macroeconomic catastrophe, hyperinflation, banking crises and currency crises. In addition, we had a closed economy that was not competitive. Then we finally decided to make a profound change in the early 1990s. We decided to stabilize the economy, improve fiscal balance, regulate banks well, have an autonomous central bank, reduce inflation, open to international trade and join the free trade agreement with the United States and Canada. We have created competition regulators in Mexico such as the Federal Competition Commission, the Federal Telecommunications Institute, etc. There was a misconception, including myself, that if we did all of this and invested in education, Mexico would grow faster and the economy would become more formalized. That all this mass of informal workers that we have, without social security, without social protection, etc., would gradually be integrated. That was the vision and many things were done very well. But the central thing has not happened: the rapid increase in formality.
The dilemma was solved by creating a parallel system for these informal people. We call it social programs because the terminology is extremely different in Mexico, but it is a parallel social security. This is a highly exclusive system in which two workers have different rights and guarantees depending on whether they work formally or informally. The question that has not been asked and needs to be asked is: why does the institutional framework we have in the country to protect workers not cover everyone? It is no coincidence that we still have such a large informal sector in 30 years. Mexican workers are not stupid or lazy and Mexican businessmen are not stupid or lazy either. Everyone responds to the incentive structure, the benefits, the costs, the form of financing and what is best for them. The rules of the game are inconsistent.
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