- The Washington Times - Monday, December 29, 2003

MEXICO CITY — Just steps off a street teeming with peddlers hawking bootleg DVDs and fake brand-name shoes, Leonardo Rivas hunches over the intricate circuitry of a motherboard. When he’s not here, he’s off retrieving data for hysterical clients who have lost archives or installing software for an interoffice network.

A 26-year-old, college-educated computer whiz such as Mr. Rivas probably would be a prime candidate for work in the United States, or perhaps for a multinational firm or an ambitious local company in an emerging global market such as Mexico’s.

But Mr. Rivas has more in common with the legions of unlicensed taco and trinket vendors on Mexico City’s streets or the family that openly sells pirated software outside his shop.

They are all part of Mexico’s growing off-the-books economy in which millions of people scramble to earn a living or find alternatives to the meager salaries companies in the country offer. Others have gone underground to avoid the red tape, fees and taxes that choke the entrepreneurial spirit.

“It would be better to be formal. If all of us paid taxes, then water, electricity costs and so much else would probably be lower and more affordable for everyone, and we’d all get better services and better development for our country,” said Mr. Rivas, who dreams of starting a legitimate, tax-paying business offering computer expertise.

“But if the system makes it too difficult for you, then what can you do? You don’t believe in the system.”

In a search for economic sustainability, Mexico opened up its tightly controlled economy in the past two decades, auctioning off state-run industries, wooing foreign investment and experiencing a surge in assembly, or maquiladora, factory jobs serving the U.S. market.

But globalization of the economy without attention to the grass roots hasn’t produced as many jobs as promised.

A key feature of Mexico’s newly liberalized economy, the 1994 North American Free Trade Agreement, hasn’t fulfilled pledges that Mexican-owned businesses would flourish along with exports.

Mexican companies provide only 4 percent of the material that goes into the much-touted clothing, electronics and other products assembled in Mexico.

Successive governments have failed consistently to come up with ways to strengthen homegrown employment and commerce. Nearly two-thirds of working Mexicans, for example, still don’t participate in commercial banking with savings and checking accounts, much less qualify for business loans.

Still, with more than 1 million potential workers coming of age every year, Mexicans need to find ways to earn a living. Because of that, migration to the United States has surged, while Mexico’s informal economy has grown from 11 percent of all those employed in 1990 to more than 27 percent today.

Mexico’s 4.5 million “microbusinesses,” for example, are among the biggest sources of employment in the country. But 70 percent of these ventures, often family-run with only some workers, are informal and not registered with the country’s treasury department.

Teams of street jugglers, gum sellers, tamale peddlers and “car watchers,” people who guide drivers into parking spaces, are abundant in Mexico City.

So are those laboring off the books in activities that are not so obvious to the naked eye. Mr. Rivas is an example of a skilled professional who earns far more in cash on his own than he would in most formal jobs with equivalent demands.

“My cousin works at a bank as a systems manager for their computers. He earns $700 a month,” Mr. Rivas said. “Forget that. If I get a lot of work, I can earn that in a few days.”

If Mexico’s cash economy continues to grow as anticipated, it is expected to absorb close to 30 percent of the country’s work force by 2006. Off-the-books trade in services and goods already accounts for more than 12 percent of Mexico’s gross domestic product.

The cash economy is a safety net that shields millions from hunger. But it’s a time bomb, too.

The phenomenon has dire implications in a country with one of the lowest tax-collection rates in the world for an economy its size. Brazil and Argentina, where evasion is rampant, have a rate of about 20 percent of the value of their GDPs. Mexico’s rate is 11 percent to 12 percent.

Every year, because of the informal economy, millions of people are failing to pay into pension funds and a tax base that is insufficient to support Mexico’s ailing education and health systems, its antiquated infrastructure and other public services in crisis.

The country’s underground economy also breeds crime. Mexico is a major player in pirated, stolen or smuggled imported goods sold cheaply on the black market. The capital’s downtown streets are clogged with trinkets, cosmetics, clothes, videos, CDs and electronics peddled by vendors linked to Mafia-style mobs that battle for turf and thrive on police corruption.

The informal economy “is a loss, loss, loss problem,” said Simeon Djankov, manager of the World Bank’s Doing Business in 2004 project, which studies obstacles to commerce in countries worldwide.

“The government loses because they don’t earn tax money,” Mr. Djankov said. “The employees lose because they aren’t getting social security or pensions. The company loses because they don’t want to get too big. They want to stay invisible so inspectors don’t go after them.”

Research suggests that if even half the informal businesses in Mexico were to be legitimized and start growing, Mexico could add as much as a percentage point to overall growth every year, which would be significant, Mr. Djankov said.

Mr. Djankov’s project found that because of lawyers’ fees, government fees and other expenses, incorporating a company in Mexico costs $1,110. That is 60 times the price of incorporating a business in Canada and 40 times that in the United States.

An entrepreneur also is obliged to deposit more than $5,000 into a bank account that remains frozen for the life of the company, an antiquated creditors’ insurance that doesn’t exist in the United States or Canada and is one of the highest such requirements in the world.

At the same time, Mexico’s bankruptcy laws “are some of the worst in the world,” Mr. Djankov said.

Corruption is deeply rooted, born of a system whose many layers of permits and fees offer civil servants opportunities to demand bribes.

For Gloria Olivares, 52, paying a small bribe to operate her makeshift corn-cake stand is so natural that she doesn’t even get upset. Mrs. Olivares is typical of many of the poorest street vendors. She lives in a small town and makes a long bus trip to Mexico City to set up a charcoal-heated grill on a corner and try her luck.

While her husband watches and washes parked cars for tips, Mrs. Olivares earns about $15 on a good day. But it costs her about $6 in bus fare to make the four-hour round trip that starts at dawn.

“Those from the city have taken my things before because I don’t have a permit. They’ve told me there are no more permits to be given,” Mrs. Olivares said.

“My desperation was such that a lady who let me use her bathroom recommended I talk to a man who works in the Department of Public Transit,” she said.

She begged the man for help, and he gave her a piece of paper that she said seems to protect her.

She wasn’t sure what it said. Every once in a while, a city truck passes by and a man hops out to collect $3 or $4 to guarantee her space.

“I’m never giving up this space, not for anything in the world,” Mrs. Olivares said.

Such a bribery arrangement is genteel compared with the high-stakes extortion in prime shopping territory, where shop owners have demanded that street sellers be ousted and police play a protection game.

“People think the informal economy is free. It’s not. The price of informality is not zero. Those in it are often subject to corruption,” said Carlos Arce, an Economic Ministry official who directs programs to loosen red tape so that more businesses can register and pay taxes.

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