Mexico aims to lure millions out of informal economy

Alfredo Barrueta has worked in the streets of Mexico City since childhood, graduating from ball juggler to car windshield cleaner before scratching a living by selling roses.

Barrueta, 37, is among 30 million Mexicans, or 60 percent of workers, toiling in the informal economy -- a massive workforce that the government is trying to convince to pay taxes in return for wider social security.

"I sell in the street to survive," said Barrueta, who has sold roses at the same roundabout in the capital's ritzy Polanco district for two decades.

"If we get run over, we don't have any insurance," he said before walking between a stream of cars for a job that earns him a bit more than the $140 monthly minimum wage.

In Mexico City, every sidewalk, street corner, metro station and park is bustling with an array of workers: The cook frying pork tacos for office workers; the woman selling balloons next to a playground; the fire breather entertaining motorists at a red light.

Luring them into the formal economy is one of the biggest challenges that President Enrique Pena Nieto has taken on as part of his vast structural reform agenda.

Mexico has one of the highest rates of off-the-books workers in the hemisphere, with the International Labor Organization estimating that 47 percent of Latin America's non-agricultural employment is in the informal sector.

Experts voice doubts

Last week, Congress passed a fiscal reform championed by Pena Nieto to increase the government's meager tax haul through a raft of new levies.

The reform would exempt those entering the new "incorporation regime" from paying taxes in the first year that they join the formal economy. They would then contribute gradually, not paying the full normal rate until the 10th year.

In return, they would get social security from the start, including public health care coverage.

The Senate is now debating a bill, which passed the lower house, to expand coverage by providing unemployment insurance and a nationwide pension of between $43 and $81 per month.

Experts doubt the legislation will make a dent in the vast informal sector, while several workers interviewed by AFP in the streets of Mexico City were not convinced that paying taxes would be to their advantage.

"It would marginally reduce the number of people in the informal economy," said Raymundo Tenorio Aguilar, economic programs director at the Monterrey Institute of Technology and Higher Education.

"The incentives that they are offering are too flexible, very lax. They are not coercive," he told AFP, adding that the government should offer workers financial help to improve their businesses.

Tenorio estimates that between 120,000 and 240,000 people may be convinced to join the formal economy.

David Lozano, economics analyst at the National Autonomous University of Mexico, has a higher but barely better estimate of 400,000 to 600,000 people.

"The (new tax) system is destined for failure," said Senator Mario Delgado of the leftist opposition Democratic Revolution Party.

It takes time

But the government estimates that two million informal and semi-formal workers will join the new tax regime in its first year in 2014.

After that, around 200,000 and 300,000 people will come into the fold every year, Miguel Messmacher, deputy finance minister for revenue, told AFP.

"The phenomenon of informal work is very complex and it will take time to reduce," Messmacher said.

"It's a gradual process," he said, adding that it would take more time to take hold in less developed regions.

But informal workers said they want reassurances before they consider paying taxes, which start at a rate of six percent for the lowest incomes.

They want a guarantee that they can stay at their street corner. They want credit to grow their business. And they want health insurance for their families.

"We would be convinced if they let us work where we are and if they guarantee health insurance," said Esteban Flores, 46, who sells sodas, snacks and cigarettes outside a metro station.

But some say they government cannot be trusted.

"The government will take our money to give it to others," said Joaquin Reyes, 64, who boils corn and sells each ear for less than $1. "How can I pay taxes if I barely make enough to survive?"