Good Intentions, Bad Outcomes: Social Policy, Informality, and Economic Growth in Mexico

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Good Intentions, Bad Outcomes: Social Policy, Informality, and Economic Growth in Mexico

By Santiago Levy
Brookings Institution Press, 2008
357 pp. $27.95

The chief economist at the Inter-American Development Bank -- and a principal architect of Mexico's renown Progresa-Oportunidades program, which transfers cash to poor families contingent on their investing in their own health and education -- makes a powerful case for substituting Mexico's hodgepodge of social welfare programs and burdensome labor taxes with more efficient and equitable universal social coverage financed by national consumption (that is, sales) taxes. The issues at stake are not trivial: under Levy's comprehensive proposal, the national social security system would expand its coverage from 14 million to 41 million workers, net tax collections would jump by 1.6 percent of GDP, and the cost of hiring workers would decline by as much as one-third. Peppered throughout are Levy's broadsides against those who attribute the alleged segmentation of labor markets into formal (larger, law-abiding firms) and informal (less productive, tax-evading firms) to economic underdevelopment; provocatively, Levy blames the formal-informal dichotomy on well-intentioned government social policies gone awry. His own economics may strike some readers as overly orthodox, but Levy is not politically naive; recognizing that vested interests could block his proposed radical overhaul in the short run, he offers as well a solid series of smaller measures that point in the right direction.

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