Towards a more effective poverty reduction in Mexico: a general equilibrium assessment

Abstract

Oportunidades, Mexico?s conditional cash transfer program, has proved to be an insufficient tool for poverty alleviation in a phase of low and uneven economic growth, and it has failed to achieve its intended goal to break the intergenerational transmission of poverty. In this context, what strategy would lead to a more effective poverty reduction without jeopardizing Mexico's economic development? This study carries out a general-equilibrium assessment in a bottom-up approach in the regional setting of Chiapas, the poorest state in Mexico. It finds that a policy set composed of a 20 per cent, 10 per cent, and 5 per cent increase in fixed investment in agriculture, construction, and manufacturing, respectively, as well as distributional changes in Oportunidades and other social transfers, pro-poor direct tax rate changes, a higher value-added tax rate and the elimination of labor and payroll taxes, may notably boost real GDP growth by 6 per cent. This economic strategy may also reduce informal employment, may ensure that formal labor income growth increases more than capital income, and may generate pro-poor growth, enhancing a process of structural transformation and rural change. Moreover, poverty would fall. The growth elasticity of poverty shows that for every one-percentage increase in GDP, poverty would decline by 2.95 per cent on average.