Mexican economist Luis de la Calle has a name for one of the challenges facing his country’s small businesses: extortionomics.
It’s not just a threat from organized crime or corrupt public officials: Red tape, regulations and a baffling fiscal system amount to a prohibitive tax on small and growing businesses, De la Calle told AQ.
“As soon as small businesses start to become successful, they are subjected to extortion and that creates a vicious cycle that obliges them to stay small,” De la Calle said.
It’s a challenge President Andrés Manuel López Obrador will need to address if his promised transformation of Mexico’s economy is to be a success. His 2019 national development plan, presented to the lower house on April 30, foresees 6% GDP growth by the end of his six-year term in office. To get there, the plan lays out steps to tackle corruption, provide small businesses with easier access to credit, and simplify paperwork for entrepreneurs looking to start new businesses.
If the plan becomes a reality, it will be not a moment too soon. A large portion of Mexico’s small businesses are informal, employing 57% of the labor force but generating just 22.7% of the country’s GDP. Many small enterprises face almost insurmountable challenges to growth, and business owners often prefer to keep their operations under the radar.
This is partly because of the threat of traditional extortion from organized crime, which in Mexico City increased 127% in the first quarter of 2019. Of Mexico’s small business owners who say they don’t want to expand, fear over security is the most common reason why, according to a government survey.
But small businesses are also kept in check by the broader notion of extortion set forth by De la Calle. Opportunities for this type of extortion grow in proportion to the number of government entities a business has to deal with in the process of formalization.
“We have a ‘Peter Pan’ economy, where small businesses in Mexico don’t want to grow because as soon as you step out of your family circle you enter the radar of an illegitimate labor union, or deal with the tax or social security authority,” said Manuel Molano, General Director of the Mexican Institute for Competitiveness (IMCO), a think tank.
Indeed, extortion can come from almost anywhere. Negotiations with labor unions that have tenuous or non-existing ties to workers are a regular part of doing business for owners in industries from construction to food services.
“They don’t care about the wages, benefits or working conditions,” De la Calle told AQ. “What they care about is the money.”
One small business owner, who asked to remain anonymous, told AQ that as his transportation business started to expand, he was asked to pay $2,600 from labor leaders threatening to shut down his business with a strike – even though the purported union had no formal relationship with his workers.
“They said I was breaking the law because my employees had no representation and I needed to pay or else ‘I was going to have a hard time,’” he said. “From that point on I stopped hiring people.”
A recent labor reform may go some way in reining in some illegitimate labor unions. But the challenge of reducing extortion across the economy remains. Mexico’s inability to incorporate informal workers into the formal economy and safeguard small businesses’ opportunities to expand is part of why the country’s economy has struggled to grow over the past two decades. The IMF recently lowered its outlook for 2019 to just a 0.9% increase in GDP. If Mexico is going to get anywhere close to the 6% growth rates that López Obrador promises, its small businesses will need more opportunities to thrive.
Uriegas is an editorial intern for AQ