How to Make Mexico More Competitive: More Corporate Ethics & State Efficiency, Less Corruption

Between 2013 and 2014, Mexico approved historically needed reforms to increase competition, strengthen financial markets, reduce energy costs, improve the quality of education, and make labor markets more flexible.

Yet, according to the figures published just last week by the World Economic Forum (WEF), the country’s competitiveness ranking remains the same as it was a decade ago. Despite Congressional approval of the structural reforms that analysts and observers have demanded for years, there has been little evidence that Mexico is significantly more competitive than it was in 2005.

In a decade, Mexico has gone from being in the top 43% of Global Competitiveness Index (CGI) to the top 41%, a barely noticeable improvement. That’s to say, it has gone from being 52nd of 122 countries to be 57th of 140 (being 1st is the most competitive). This marginal increase leaves Mexico in company that is hardly illustrious, just one place above Rwanda (58th), and below other Latin American economies with lower GDP per capita than Mexico such as Costa Rica (52nd) and Panamá (5oth).

If the much-heralded reforms have not improved Mexico’s competitiveness, we must ask why? The answer is surely multi-faceted and complex, but we have to consider that the rule of law is a major part of it.

Analyzing the 98 variables that can be compared from 2006 to 2015 confirms that the three main factors that are inhibiting Mexico from capitalizing on the positive effect of its reforms, and to turn these into improvements in competitiveness, are all related to the weakness of the law in public and private venues.

Indeed, Mexico has seen clear advancements in many areas directly related to its reforms such as strengthening investor protection, promoting a sound banking system, refining auditing and reporting standards for business, and improving bankruptcy laws. In just a decade, for example, Mexico’s legal rights index (measuring quality of bankruptcy laws) has gone from ranking 109th  of 120 countries, to 27th of 140.

Yet, all advances related to Mexico’s reforms have been diluted by major lapses in three areas directly related to rule of law issues: (1) corruption, (2) corporate ethics, and (3) government efficiency.

First, the general perception is that corruption has never been as high as now in Mexico. According to the WEF, executives perceive that Mexico is facing historically high diversion of public funds, payments of irregular fees and bribes, lack of judicial independence, and favoritism in the decisions of government officials. The truth is that misconduct may not be at a historical high but press and civil society attention to them certainly is.

That private and public corruption scandals have captured the attention of executives is far from trivial, and has led to the perception that corruption is out of control. Comparing Mexico with the rest of the countries interviewed by the WEF, in just a decade the United States’ southern neighbor has fallen 43 positions in the variable measuring diversion of public funds, 39 in public trust, 37 in favoritism and 37 in judicial independence. On the issue of diversion in public funds, for example, Mexico has fallen more than Greece, and is situated next to countries like Mozambique, Guatemala, and Trinidad and Tobago. Given these numbers, it is not difficult to imagine why public trust in politicians is also at its lowest since 2006, according to the WEF.

Second, according to the WEF study, there is a perception that the behavior of Mexican business has become increasingly unethical, both in relationships with their peers, and with public officials and politicians. In just a decade, Mexico has fallen 63 positions on the measures of “ethical behavior of firms”, from 48th of 120, to 111st of 140. As of now, Mexico’s private sector is perceived as less ethical than 80% of other countries in the study, with an evaluation similar to those of countries like El Salvador and Ecuador.

Third, the Mexican government is perceived to be wasteful with its resources, unable to keep a budget balance, and heavier in taxes. Executives interviewed by WEF consider taxes take an increasingly higher part of their profits, and position Mexico as the 115 of 140 in such indicator, about 82 positions below of where it was a decade ago. In ten years, Mexico has also lost 44 positions due to perceived wastefulness of government resources, 38 because of poor budget management, and 32 for incurring higher public debt. When comparing the magnitude of the perceived tax burden as a share of profits, Mexico is similar to Japan, Austria and Sweden, yet the quality and quantity of its public services is much worse. In quality of primary education, to name one crucial factor, Mexico is 109 positions below Japan, 104 below Austria, and 82 below Sweden.

Overall, a decade of WEF leaves a sound and direct message for Mexico’s elites: to be competitive by reforming was not enough.

The most important structural change that Mexico needs, and the one that is still pending, is one that allows the law to govern the behavior of both private and public sectors, eliminating corruption, unethical behavior, and undue influence. It is not until such structural changes take place that Mexico will fully benefit from the fruits of its historic economic reforms.

This article was originally published on our Forbes.com blog.