History Deep Dives: Mexico’s “lost decade”, the organised crime & fiscal policies
- The EPF Atlas
- Sep 2, 2025
- 3 min read
After a long period of economic boom, Mexico has been experiencing an underwhelming rate of growth in the last decade - and the reasons for this failure are structurally deepened into every aspect of the country’s economy.
The “Lost Decade” of instability
Mexico's trajectory of GDP growth was abruptly disrupted in the early 1970s following the 1973 oil crisis when OPEC countries restricted the oil supply, causing prices to surge. Similar to other countries, Mexico experienced cost-push inflation, but together with mounting external debt which made its macroeconomy highly vulnerable to shocks. Memories of Mexico's “lost decade” were also characterised by political instability, with many high-profile assassinations, kidnappings and violence. During the 1994-95 period, also known as the “Tequila crisis”, the Mexican government's US dollar reserve ran dangerously low, forcing the country to abandon its fixed exchange rate system between the peso and dollar - making its currency devalued to roughly half of its value.
Why is Mexico's productivity still low post NAFTA?
Despite Mexico’s effort to adopt various structural reforms, including privatisation of state enterprises and most notably, joining the North American Free Trade Area (NAFTA) in 1994, the country still failed to stimulate economic growth. Per capita GDP rose only 18.6% over 20 years post-reform, roughly half the average across Latin America (CEPR, 2014). Furthermore, the gap between Mexico's labour productivity and that of advanced economies widened from 50% of U.S. levels in the 1990s to only about one‑third by 2020. There are many explanations for why the Mexican economy keeps being held back, but the most discussed ones are its high percentage of informal sector business, heavy red tape, income inequality and persistent violence in the country.
Problems with Mexico's fiscal policies
According to the Federal Reserve Bank of Dallas, approximately 60% of workers in the Mexican economy are in the informal economy but they only account for 25% of the country’s total GDP, and up to 2022, this percentage remains at 24.4% of GDP. Firstly, there is a cost-benefit disincentive for small businesses (also called “microbusinesses”) to become formal. That is, the benefit of getting registered under bureaucracy is too little compared to the process and tax “punishment” they have to go through. In the World Bank’s Doing Business 2020 economy profile for Mexico, a standard mid-size firm spent about 241 hours per year on tax compliance, with 30% corporate income tax (CIT) taking up about 55% of companies’ profit and high employer social-security contributions. Empirical evidence from a longitudinal study spanning from 1980 to 2022 has shown that rising taxes, alongside unemployment and wage pressures, significantly drive growth in informal employment, indicating that taxation can discourage formalisation without sufficient compensatory incentives.
In addition to this discouraging taxing system, the other side of Mexico's fiscal policies - spending on benefits also weakens businesses’ incentives to formalise. The health insurance covered for formal employment was quoted as “just as good” as what people can get for free from publicly financed health coverage for the uninsured. Furthermore, Mexico does not operate a federal unemployment insurance scheme except for several sub-national programs - therefore, the Mexican people see no benefits of becoming formal or paying taxes.
Violence & Organised crime rings
In Mexico, armed drug trafficking cartels often thrive in the nation by either hiding from, or pressuring local politicians to let them set up businesses. Often, formal businesses would attract too much attention from these cartels and would end up having to pay more for extortion charges (taxes to cartels). While formal and registered businesses are more visible to both state tax inspection and extortion from criminal groups, informal businesses exchange their scale for a lower profile. A Banco de México general-equilibrium model calibrated to Mexican microdata formalises this mechanism: when property protection is weak and victimisation rises, private businesses switch to informality to cut costs, divert resources into private security, and a second margin of workers is pushed into informal self-employment. A report from the Mexico National Institute of Statistics and Geography (INEGI) reports that in 2023, 27.2% of business units suffered at least one crime, with extortion being the single most frequent offence against firms nationwide. In addition, organised crimes also kill thousands of Mexicans per year with about 150,000 estimated deaths, thus leaving negative effects on the country’s labour force and economic growth. In 2006, the Mexican government led by President Felipe Calderon declared war on drug cartels, one of the most brutal wars of the 21st century.
In conclusion, the problems of Mexico surround decentralised crime gangs that threaten ordinary people, government policies that “punish” business to expand scales, together with bad memories from the lost decade still haunting the mind of the people - growth seems to have become almost “threatening” and non-rewarding, which persistently hold the country’s back from its potential during the last few decades.
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