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A protester with a sign reading in Spanish A protester with a sign reading in Spanish "the worst crime is social inequality," Mexico City, Jan. 9, 2017 (AP photo by Rebecca Blackwell).

As Inequality Grows in Mexico, So Does Social Polarization

Thursday, Jan. 19, 2017

Editor’s note: This article is part of an ongoing WPR series on income inequality and poverty reduction in various countries around the world.

Mexico has one of the highest rates of inequality among developed countries, according to the Organization for Economic Cooperation and Development, with the richest 1 percent of the population owning almost half of the country’s wealth. In an email interview, Patricio Solís, a sociology professor at el Colegio de Mexico, discusses poverty reduction and income inequality in Mexico.

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WPR: What is the rate of income inequality in Mexico, what are the latest trends in terms of widening or lessening inequality, and what are the main factors driving income inequality?

Patricio Solís: Income inequality in Mexico is extremely high. In 2015, its Gini coefficient—a ratio of income distribution within a country where 0 represents perfect equality and 1 perfect inequality—was 0.46, the second-highest among OECD countries and well above the OECD average of 0.32. With only minor fluctuations, and perhaps a slight reduction, in the period from 1992 to 2014, this situation has not significantly changed in the past 25 years.

Two factors driving income inequality in Mexico are wage-restriction policies and the limited redistributive role of the state through tax policies. Even before the North American Free Trade Agreement, the economic recession of the 1980s caused an abrupt decline in real wages. This decline was followed by a strict policy restricting the minimum wage. After NAFTA, this policy became necessary for economic integration, because it secured a low-cost labor force for national and foreign manufacturing firms coming to Mexico. Today, the minimum wage in Mexico is the lowest among the OECD countries and one of the lowest in Latin America. Because of these wage restrictions, the growth generated by economic integration with the United States and Canada has not contributed much to the reduction of income inequality.

The second factor is the absence of a progressive tax policy. One of the most significant factors differentiating Mexico from other OECD countries is the very limited role of taxes in the reduction of income inequality. In 2010, taxes only reduced inequality by 2 percent, compared to an average of 27 percent among OECD countries.

WPR: What are the political and socio-economic implications of income inequality in Mexico?

Solís: One of the most harmful socio-economic consequences of extreme economic inequality is social segmentation. The uneven distribution of income reinforces social polarization between a small economic elite and the majority of the population that lives in deprived social and economic conditions. In Mexico, social segmentation is present in virtually every sphere of daily life. Access to quality education, health services and even elementary civil rights and criminal justice is not based on citizenship, but on income and wealth. Income inequality erodes social cohesion, creating a fertile breeding ground for violence and criminal behavior. But it also represents an obstacle for the quality of Mexican democracy, because it reinforces the de facto power of economic elites over democratic institutions and favors clientelist political relationships.

From a strictly economic point of view, the mix of income inequality and high poverty is also an obstacle for economic growth. The absence of a strong middle class with the purchasing power to boost internal markets makes Mexico very vulnerable in the wake of a new era of U.S.-Mexico relations in which protectionism, obstacles to bilateral trade and open hostility from the U.S. government seem to be the new normal.

WPR: What policy measures are in place to address inequality and poverty, how have they evolved recently, and how important of an issue is income inequality to politicians and the general public?

Solís: The most important anti-poverty policy in Mexico is “Prospera,” which began under the name “Progresa” in 1997. A conditional cash transfer program targeted at poor families, Progresa has contributed to short-term, moderate reductions in the incidence of poverty and alleviated extreme poverty. However, its long-term impact on the intergenerational reduction of poverty is questionable. The limitations of conditional cash transfer programs such as Prospera to reduce structural poverty became evident during the 2008-2009 financial crisis. Between 2000 and 2006, Mexico’s poverty rate decreased from 53 percent to 43 percent; after the financial crisis, in 2010, poverty increased to 52 percent.

One of the most effective policy mechanisms to fight income inequality and poverty is a progressive fiscal regime. However, as in many other countries, taxes are extremely unpopular in Mexico, to the extent that even politicians on the left refuse to support progressive tax reform, in large part because of corruption. Even when many Mexicans would favor redistributive economic policies and an increase in social spending, they are not willing even to discuss the necessary tax reforms, because they believe that any increase in government resources will end up in the pockets of corrupt politicians.

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