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

by Santiago Levy

Overview

"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. Go od 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.

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Product Details

ISBN-13:	9780815752196
Publisher:	Rowman & Littlefield Publishers, Inc.
Publication date:	05/06/2008
Edition description:	New Edition
Pages:	372
Product dimensions:	5.90(w) x 9.10(h) x 0.90(d)

About the Author

Santiago Levy is former general director of the Mexican Social Security Institute. From 1994 to 2000, he served as deputy minister of finance in Mexico and was the main architect of the Progresa-Oportunidades program.

Table of Contents

Foreword   Strobe Talbott     ix
Acknowledgments     xv
Introduction     1
Main Hypothesis     6
Organization     9
Institutions, Workers, and Social Programs     11
Salaried and Nonsalaried Labor     11
Labor Status and Social Programs     16
Resources for Social Programs from 1998 to 2007     26
Formality and Informality     33
Definitions     33
Interpretation and Implications     40
Workers' Valuation of Social Programs     47
Determinants of Workers' Valuation of Social Security     47
Determinants of Workers' Valuation of Social Protection     61
Wages and Social Benefits     63
An Assessment     66
Social Programs and Poor Workers     71
Households and Workers in Progresa-Oportunidades     71
Poor Workers' Valuation of Social Programs     79
Mobility of Workers in the Labor Market     85
Labor Force     85
Mobility of Workers: Some Examples     91
Evidence of Mobility from Social Security Registries     96
Evidence of Mobility from Employment Surveys     111
Mobility and WageRates     114
Implications of Mobility for Social Policy     129
Social Programs, Welfare, and Productivity     134
Demand for Salaried and Nonsalaried Labor     136
The Labor Market with Formal and Informal Sectors     142
The Static Efficiency Costs of the Formal-Informal Dichotomy     155
Empirical Estimates of Static Efficiency Costs     160
The Labor Market with Different Valuations for Poor Workers     163
Productivity and Illegal Firms     166
The Labor Market When Social Security Is Evaded     166
Illegal and Legal Firms     177
Informality and the Size Distribution of Firms     179
Informality and the Demand for Legal and Illegal Labor     193
Informality and the Composition of Output     199
Investment and Growth under Informality     208
Investment in the Formal and Informal Sectors     208
Social Programs and the Allocation of Aggregate Investment     211
Investments in Labor Training and Technology Adoption     214
Remarks on Saving under Informality     216
Growth and Job Creation under Persistent Informality     219
Static and Dynamic Efficiency Losses under Informality     223
Implications for Poverty Reduction and Progresa-Oportunidades     225
Social Programs and the Fiscal Accounts     234
Government Subsidies for Social Security     234
Feedback from Social Programs to the Fiscal Accounts     240
Is Social Policy Redistributive?     243
Can Social Policy Increase Welfare and Growth?     253
The Case for Reform     253
A Reference Equilibrium: Universal Social Entitlements     256
What Should Universal Social Entitlements Be?     269
How Much Would Universal Social Entitlements Cost?     270
Implications for Noncontributory Pensions     280
From Here to There: Isolated Reforms versus Step-by-Step Reform     283
A Final Word     288
Appendixes
Resources for Social Programs     293
Regional Coverage of Social Programs     298
Land Holdings of Progresa-Oportunidades Households     304
Estimation of Mexico's Economically Active Population     306
Mean Wage-Rate Comparisons by Matching Methods     313
Equilibrium in the Labor Market with Differences in Workers' Valuations     317
Equilibrium in the Labor Market with Evasion of Social Security     327
Profit Maximization under Informality     329
Further Remarks on Retirement Pensions as a Social Entitlement     336
References     343
Index     349

What People are Saying About This

Ravi Kanbur

"The central thesis of this monograph is that the way Mexico's social programs are structured vis-à-vis the labor market is inequitable and inefficient. This excellent book argues that such programs, which the author strongly supports, should be delivered in a manner that does not discriminate between different types of employment arrangements. Benefits should be financed with general taxes, not employment-specific contributions by firms and workers. It will become a standard reference in the development literature because although the focus of the study is Mexico, the issues considered are faced by most developing countries, in Latin America and beyond."--(Ravi Kanbur, T. H. Lee Professor of World Affairs and Professor of Economics, Cornell University, and former Chief Economist for Africa at the World Bank)

François Bourguignon

"Santiago Levy demonstrates how important it is that we consider the systemic implications of individual actions when designing economic and social policies. His comprehensive analytical framework, his thorough interpretation of an unusual data set, and his acute sense of how real people behave combine to make for a fascinating and constructive critique of Mexico's social protection system that would also apply to several other emerging economies."--(François Bourguignon, Director, Paris School of Economics, and former Chief Economist and Senior Vice President of the World Bank)

James D. Wolfensohn

"Santiago Levy makes a compelling case for the reform of the Mexican social protection system. He provides a brilliant in-depth analysis of the shortcomings of the current approach that fails to achieve the basic goal of protecting those in need and also seriously harms Mexico's growth prospects."--(James D. Wolfensohn, former president of the World Bank)

Nancy Birdsall

"This is a rare study linking misguided social programs to low productivity and wages and disappointing growth in Mexico. Clear, compelling, and worrying, justifying a bold policy prescription, from an author who knows his economics, his politics, and his Mexico."--(Nancy Birdsall, President, Center for Global Development, and former Executive Vice President of the Inter-American Development Bank)

Editorial Reviews

"Santiago Levy demonstrates how important it is that we consider the systemic implications of individual actions when designing economic and social policies. His comprehensive analytical framework, his thorough interpretation of an unusual data set, and his acute sense of how real people behave combine to make for a fascinating and constructive critique of Mexico's social protection system that would also apply to several other emerging economies." --Francois Bourguignon, Director, Paris School of Economics"

"The central thesis of this monograph is that the way Mexico's social programs are structured vis-a-vis the labor market is inequitable and inefficient. This excellent book argues that such programs, which the author strongly supports, should be delivered in a manner that does not discriminate between different types of employment arrangements. Benefits should be financed with general taxes, not employment-specific contributions by firms and workers. It will become a standard reference in the development literature because although the focus of the study is Mexico, the issues considered are faced by most developing countries, in Latin America and beyond." --Ravi Kanbur, T. H. Lee Professor of World Affairs and Professor of Economics, Cornell University"

"Levy presents an insightful analysis of Mexican social policy. This rare book combines the familiarity and impressive knowledge of one of the main architects of this policy with the type of critique more often provided by outsiders." -- "CHOICE"

From the Publisher