How Policy and Competition Can Boost Mexico’s Economic Growth

Mexico’s Economic Opportunities and Challenges

Despite Mexico’s transformation into a global manufacturing hub through trade liberalization in the 1990s, its yearly real gross domestic product (GDP) growth has stagnated at approximately 2% for decades, leaving millions in informal employment and persistent inequality. This brief argues that while reforms such as the North American Free Trade Agreement (NAFTA) and the 2013 structural reform agenda have driven progress, market concentration, government jurisdiction over key economic sectors, and ineffective institutions continue to hinder the country’s prosperity and economic growth. Targeted reforms pursuing further market liberalization in key economic sectors and stronger safety nets are essential to unlock Mexico’s economic potential.

Stagnant Economic Growth

Mexico has historically experienced low economic growth rates of around 2% on average for the past four decades, high informal employment of approximately 54% in 2025, and persistent income inequality. The economic liberalization process that began during the 1980s yielded gains, but regulatory barriers and government intervention in critical economic sectors have limited further progress. Scholars have noted that global economic trends favor economic liberalism and open markets as a solution to increase competitiveness and prosperity. The Mexican economy could establish itself as an economic leader if it adopted more policies in this vein.

How can Mexico achieve this? The history of its economic policies offers lessons toward this trajectory.

Pre-1980’s Protectionist Policies

Before the 1980s, Mexico adopted protectionist policies that fostered the creation and strengthening of state-owned firms. Import substitution was the key policy behind international trade. Largely, these policies weakened Mexico’s international competitiveness, hindering innovation and efficiency, particularly in the manufacturing sector. The economy relied heavily on the oil sector — largely controlled by the state — as its primary driver of growth.

During this time, foreign direct investment (FDI) was low, with few incentives to invest in the country. More specifically, this period from 1970–76 is widely known the “shared development” period, which is discussed in-depth in Juan Carlos Moreno-Brid and Jaime Ros’ book, “Development and Growth in the Mexican Economy.” The six-year span and its aftermath is characterized by three factors: 1) growth alongside external imbalances, such as the economy’s reliance on oil revenues, 2) internal disequilibrium, particularly urban-rural disparities, and 3) macroeconomic uncertainties that culminated in the 1982 debt crisis due to falling oil prices.

Economic Liberalization of 1980s and 1990s

During the 1980s and 1990s, the Mexican government adopted policies to gradually liberalize its economy. Reforms such as Mexico’s entry into the General Agreement on Tariffs and Trade (GATT) in 1986 and NAFTA’s establishment in 1994 opened the economy, boosting the country’s exports. Since then, the economy benefited from greater development and growth, particularly in net exports, and FDI increased substantially. This was particularly evident in regions that had integrated their manufacturing processes with the U.S.

While trade liberalization boosted manufacturing exports, it also led to significant short-term disruptions. The agricultural sector, for instance, faced a 5% increase in rural poverty from 1989 to 1998, largely due to U.S. corn imports displacing small farmers. Critics argue that liberalization resulted in rising regional inequities, as it disproportionately benefited multinational corporations and northern states and largely left southern regions, such as Chiapas, behind.

2000’s Peak Growth and Continued Complications

Despite the breadth of the evidence supporting the positive relationship between economic growth and openness, Mexico’s high growth rates were short-lived, peaking from 1996 to 2000. Thus, more specific reforms are needed to foster long-term economic growth, such as encouraging competition in nonmanufacturing sectors, including petroleum extraction, electricity, communications, and transportation.

Moreover, an unproductive and noncompetitive financial system, a rigid labor market, and weak agreement enforcements became detriments to Mexico’s economic growth. State monopolies in petroleum (Pemex) and electricity (Federal Electricity Commission, CFE) significantly deterred private investment, thereby also hindering future growth. These complications largely persist today.

Benefits of Economic Liberalization

Free Trade Agreements, GDP Growth, and Consumer Advantages

The benefits of economic liberalization, particularly in trade, are evident in Mexico. NAFTA likely contributed to an increase in GDP per capita driven by export growth following the recovery from the 1995 peso crisis. NAFTA integrated various manufacturing sectors, such as the automotive and aerospace industries, with American and Canadian value chains. 

These developments in manufacturing through FDI generated millions of jobs, widely increased wages, and improved labor conditions. Positive externalities, such as innovation and competition, emerged, further strengthening these economic sectors. In specific cases, technological hubs were established in the 1990s and, in turn, boosted value-added sectors and salaries.

In the aftermath of 1980’s and 1990’s trade liberalization policies, the Mexican economy became one of the largest across the globe. In 2000, Mexico’s GDP was the ninth largest in the world, benefiting from exports, particularly to the U.S. Mexico also signed other free trade agreements with many countries over the next several decades, consolidating its status as a free trade promoter. This included the country’s entry into the United States-Mexico-Canada Agreement (USMCA) — previously NAFTA — in 2020.

As a result of these agreements, consumers had access to a greater variety of goods and lower prices. The government also pursued policies to privatize state-owned firms that were largely unprofitable and inefficient. These actions freed public resources for social programs and infrastructure projects. However, despite these benefits, many other domestic sectors remained closed with high entry barriers, since NAFTA’s establishment and up until the latest structural reforms in 2013. Additionally, economic sectors characterized by regulatory or policy favoritism remain. 

2013 Structural Reforms

A decade later, specifically in 2013, Mexico’s structural reform agenda aimed to address economic sectors with high entry barriers and highly concentrated. The government passed laws through Congress that opened the telecom, energy — at least, partially — and financial sectors. These policies, in most cases, reduced consumer prices, especially in the telecom industry. Mobile and broadband prices dropped by 69% to 81% between 2013 and 2018, which set Mexico’s mobile costs among the lowest in the Organisation for Economic Co-operation and Development (OECD), and the number of households with fixed internet greatly expanded in size as well. However, América Móvil’s market share of mobile services held at around 70% throughout 2013 and 2015, while their share of the fixed telephony market was approximately 69% in 2012 and slightly declined to just over 62% in 2016. Thus, the concern of limiting competition persisted.

Overall, market competition increased product quality and affordability in some sectors, and the reforms also led to improvements in well-being, low fiscal debt, and peaceful elections. However, even after these reforms, challenges continued: economic growth remained stagnant; the labor market weakened; inequality persisted; and the population grew concerned about the perceived rise in corruption and security lapses. These results eventually led to the emergence of more pro-protectionist political parties, as the López Obrador administration won the presidential election in 2018.

Learning From Liberalization’s Past Lessons

Despite the long-term benefits of economic liberalization, certain firms and workers face short-term challenges, particularly when the economy opens to trade. For example, global market volatility became a permanent risk, as Mexico’s economy was integrated with other global sectors. Additionally, sectors with reduced competition underwent job losses, which can exacerbate wealth inequalities when adequate safety nets are not in place. Wage inequalities also increased in Mexico between unskilled and skilled workers as goods from cheaper, low-skilled foreign industries flooded the market. As previously noted, the post-NAFTA agricultural sector experienced job losses due to U.S. imports, resulting in a 5% increase in poverty in rural areas.

Governments can mitigate these risks by employing strategies to retrain displaced workers to more competitive economic sectors and strengthen social safety nets to address income inequality. To some extent, discontent with liberalization policies in Mexico was due to the lack of mitigation strategies to address the short-term negative externalities. Critics have also noted that Mexico entered the globalized world without implementing the necessary conditions to ensure economic prosperity across the country and its workforces.

For East Asian economies, a competitive real exchange rate, the accumulation of physical and human capital, and an active industrial policy helped ensure a successful entry into international markets. These are practices that Mexico could follow to prepare for the short-term challenges of economic liberalization.

To dampen liberalization’s risks, more of Mexico’s efforts should concentrate on addressing an ineffective rule of law, low-quality education, misallocation of resources, and inadequate institutional frameworks. Regarding free trade policies, the government's main objective should focus on diversifying trade and reducing its dependence on the U.S., even in a more protectionist world. The benefits of free trade, especially when coupled with international accountability and peace, largely outweigh any protectionist policies. Furthermore, strengthening antitrust policies that foster fair competition and labor protection laws would likely further the pursuit of economic liberalization in Mexico.

Policy Recommendations

Proposed International Reforms

In terms of Mexico’s international position, the nation should deepen its trade liberalization policies, such as reducing non-trade tariffs and pursuing free trade agreements with other high-growth economies, including those in the Asia-Pacific region. For example, if Mexico concluded free trade agreements with Singapore and South Korea, these countries’ tech expertise could help Mexico further develop in this sector.

Mexico should also fortify the USMCA to position itself as a leader in nearshoring, especially considering the U.S.’ more protectionist stance in world trade at present. Its geographical position, historical value chain manufacturing integration, and competitive wages all make Mexico a valuable trade partner. Furthermore, if the USMCA is negotiated effectively, the North American region could gain more economic power, as both China’s industrial threat grows and the U.S. becomes increasingly concerned about China’s manufacturing dominance.

Proposed Domestic Reforms

Domestically, Mexico should aim to liberalize closely allied economic sectors to boost competition. More competitive economic sectors enhance innovation and increase supply, which results in lower consumer prices. Special attention should be given to opening the energy sector — including oil and electricity generation — banking, and technology-based industries, such as telecom, television, and digital products.

Particularly, deregulating Pemex and CFE could lower energy costs with positive externalities for the economy. Mexico’s energy sector has become more state-owned and controlled, which has raised concerns about meeting future energy demand. The state-owned Pemex and CFE dominate the oil and electricity markets, as Pemex produces 95% of the country’s domestic gas supply and CFE is required to generate, at least, 54% of Mexico’s electricity annually per the 2025 Electricity Sector Law. Implementing phased deregulation by allowing private firms to participate in the energy sector could lower business and consumer costs, improve competitiveness, and attract billions in FDI annually, as seen in the years following the telecom reforms.

Mexico should also work toward simplifying its business licensing process to boost entrepreneurship. According to the World Banks’ “Doing Business 2020” report, Mexico’s increased building permit fees have made starting a business more difficult and costly. Additionally, the banking system remains highly concentrated, with seven large banks representing approximately 80% of the market share, leading to high interest rates and credit scarcity. Loosening the regulatory framework to attract new banks to the financial sector would likely increase the amount of available credit to businesses and lower loan interest rates.

Moreover, many micro-, small-, and medium-sized enterprises (SMEs) rely on their suppliers for financing instead of financial intermediaries, which may be a result of low market competition. Given that SMEs represent nearly 70% of all jobs in Mexico’s economy, policies should develop fiscal incentives, expand access to affordable loans, and encourage public-private partnerships to support the sustainable development of SMEs.

Regarding the rule of law, policies should be aimed at strengthening the judiciary system’s independence and efficiency to build investor confidence. Currently, due to Mexico’s recent constitutional reforms that are significantly reshaping the judiciary branch, the courts’ independence is of high concern. In a similar vein, Mexico should pursue policies aimed at reducing corruption through transparent governance. In terms of education, policies should expand labor training for high-demand industries, especially for science, technology, engineering, and mathematics (STEM) fields, to prepare workers for a more skilled market and boost entrepreneurship and innovation.

Conclusion

For decades, Mexico has experienced modest economic growth rates of around 2%, which has exposed the limits of its partial economic liberalization. Closely allied sectors that lack competitiveness continue to hinder further growth and development. To surpass the country’s historically stagnant economic growth, policymakers should not only focus on isolated trade agreements but also implement integrated domestic strategies that dismantle uncompetitive sectors, empower regulators and courts, and unleash market forces across all economic sectors.

Mexico should look beyond the U.S. by diversifying trade and forging new trade partnerships in Asia-Pacific, Europe, and Latin America. Harnessing nearshoring trends and upgrading infrastructure and digital platforms to attract long-term FDI will be key to securing and fostering economic growth. Above all, Mexico should strengthen its domestic institutions — ensuring an independent judiciary system, transparent governance, and merit-based regulation — to underpin its credible commitments to fair competition and investor confidence.

Finally, Mexico should learn from previous periods of economic liberalization that resulted in short-term challenges for certain industries and communities. Policies can mitigate these risks by establishing social safety nets and adapting the workforce to more competitive economic sectors. Supporting STEM education and investing in highly skilled labor can also yield significant benefits for future growth and greater added value to the economy.

The future is challenging, especially as areas across the world is gradually adopting more protectionist policies. However, liberalizing the economy further can strengthen Mexico’s economic position as a global competitor. The country’s journey toward economic liberalization remains unfinished, but the path forward is clear. Opening markets with inclusive policies and robust institutions can unlock high-quality economic growth for all Mexicans.

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