INEQUALITY, SOCIAL MOBILITY, AND COVID-19 IN MEXICO -JULIO GALIDO GUTIERREZ

Image: Jezeal Melgoza (Unsplash)

It’s widely been documented that countries with higher levels of income and wealth tend to exhibit lower rates of social mobility, as measured by greater intergenerational income and wealth persistence. Social mobility matters as it is both a matter of theoretical equality of opportunities (i.e. it should not matter where you were born for you to succeed (or fail) in life). A lack of social mobility erodes the foundations of sound economic growth as low growth rates and low social mobility (or high economic inequality), are likely to be related to each other. The lack of upward mobility for individuals at the lower ends of the income distribution might result in talents and investment opportunities remaining unexploited. A lack of downward mobility on the other end can cause persistent gains for a few at the expense of the many, at high-efficiency costs.

A good example of this is Mexico, who is among the 25% of countries with the biggest levels of inequality in the world. According to Oxfam, Mexico from 1996 to 2016, levels of poverty and inequality have remained constant and disposable income of the majority of Mexican households has fallen. In turn, social mobility is rigid and stratified, especially in the lower and higher ends of the income distribution. The social mobility regime in Mexico can be characterised as a pyramid where a class of big employers, top and middle-level managers and salaried employees is at the top of the pyramid,  a class of manual labourers and agricultural workers is at the bottom of the pyramid, and a class of small employers and qualified independent workers is sandwiched between them. Whilst there is a significant amount of mobility from the bottom of the pyramid to the middle, this mobility is precarious given a lack of social security, and individuals from that class face a glass ceiling that denies them further upwards mobility. On the other end, individuals from the top class are safeguarded from downwards mobility .

This situation of high inequality and low social mobility can be worsened by the effects that the Covid-19 pandemic is having in Mexico given that social distancing and lockdown measures have drastically worsened both economic and educational inequality, the two key drivers of low social mobility. According to the ECLAC, the pandemic is threatening the limited social mobility in Latin America given the increase in poverty and inequality rates in the region. One solution to the effects of the pandemic, as seen in many developed and developing countries, is fiscal redistribution. In Mexico, however, the economic recovery plan from the federal government is essentially non-existent and the risk of unemployment will affect people in the middle and lower classes the most given that around 81% of their income depends on their employment.

The importance of fiscal redistribution lies in its impact on inequality. For instance, Nora Lusting examined the redistributive impact of fiscal policy in several developing countries and found that fiscal policy always reduces inequality and so one could argue (as many have), that fiscal redistribution is especially important during the pandemic in order to mitigate some of its economic and social effects. As Lustig shows, success in fiscal redistribution is driven primarily by redistributive efforts (i.e. the level of income redistribution and the size of the budget allocated to social spending (as a share of GDP) are associated), and the extent to which transfers/subsidies are targeted to the poor and direct taxes targeted to the rich. The problem with Mexico is that, since the neoliberal reforms of the 90’s, it has been a notoriously weak State, as it has the lowest levels of both tax collection and social spending amongst comparable OECD economies. We can expect for Mexico’s fiscal policy to have a low impact on redistribution as measured by, the difference between market income, Gini coefficient and the Gini coefficient for income after taxes and transfers. Again, Mexico shows the lowest impact of fiscal policy amongst OECD members.

These figures have many in Mexico practically screaming for a more progressive tax reform that includes taxes on inheritances and higher taxes on capital gains. This would a particularly feasible time to do it given that Mexico’s President Andrés Manuel López Obrador (AMLO) came to power with a policy platform of prioritising poor people and combating the neoliberal model of the past 30 years. AMLO’s left-wing party, Morena, also controls both chambers of the legislature and a majority of state government’s so a progressive tax reform is certainly possible. AMLO is reluctant to even think about this and instead claims that by eliminating the web of corruption that persists in Mexico and which includes law firms that help big companies evade billions of pesos in taxes, he is installing a de facto tax reform.

This hesitancy for advancing a progressive tax reform is aided by the fact that the rich, despite worrying about inequality and social mobility being too high and too low respectively have a low commitment to fiscal redistribution. Whilst people in the lower deciles of the income distribution are willing to have up to 15% of their income taxed, people on the higher decile are only willing to do so with 7.5% of theirs. So, the Mexican elites want to have their cake and eat it too and so far, the AMLO is willing to play their game.

This points towards a grim answer to the question, of “who governs?” in Mexico. AMLO came to power by promising real change, ending corruption, and the neoliberal policies that benefited only the few members of the economic elite in detriment of the poor and whilst so far, it has advanced some policies such as raising the minimum wage and signing the new USMCA deal that will guarantee better labour protection rights for Mexican workers, in the case of a necessary progressive fiscal reform he has sided with the elites, has promised to fight in favour of the poor, even the context of a global pandemic which will leave many people living in poverty and precarious conditions whilst the rich will remain being rich. 

By Julio Galido Gutierrez

Julio holds an MA in International Political Economy from the University of Warwick. He is currently working as an academic in Mexico City and is in the process of pursuing his PHD.

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