Navigating Mexico: The High Cost of Doing Business in Mexico

Photo: The World Economic Forum


Most people would agree that the most essential function of a government is to provide safety and security to its citizens.

In Mexico, you would be hard pressed to find anyone who says the government is doing well when it comes to offering safety.

Recent polls conducted by Mexico’s National Institute of Statistics and Geography (Inegi) show that in some cities 98 percent of the population, when asked, say “I personally do not feel safe where I live.” The overall average for the country is 68 percent.

What does that look like in a small tourist city such as Playa del Carmen, Quintana Roo, an hour south of the mid-sized resort city of Cancun?

Most people would expect certain levels of insecurity in larger cities where there could be accidental fallout from rival cartels.  But if tourists do not associate with drug dealers or police, where is the insecurity coming from in a smaller community?

Mexico is made up thousands of small towns where grandmothers can still expedite justice by raising an eyebrow and the local parish priest rules the roost. So how can a small city or town be unsafe?

The answer is easy: organized crime, the cartels.

Playa de Carmen, once a small fishing village, has grown to about 300,000 local residents who have pretty good jobs because of the high-end international tourist industry.

Sales of good and services are high even if taxes go back to the federal level. Local Playa residents are neither in the crossfires of rival cartels nor do they have the income level to even purchase drugs.

The real impact in smaller towns is on the middle class entrepreneur and the cost that are passed on to all consumers.

The fact is that the Mexican government, under the current regime of the leftist National Regeneration Movement (Morena) party and its various municipal governments, has basically abandoned its duty of providing fundamental public safety in most smaller cities. And the current Morena president, Andrés Manuel López Obrador (AMLO) coddles cartels by refusing to prosecute them and instead telling their members that they “need to behave themselves.”

In referring to organized crime, AMLO states that Mexico believes in “hugs, not bullets,” which rhymes nicely in Spanish, but ensues chaos nationally, as warring cartels get a free pass to basically operate in public.

So in Playa de Carmen, if I want to move a step above being a service worker in the tourist industry and start a small corner store, a nail salon, a restaurant or a bar, beyond whatever regulatory requirements I need to fulfill with the city government, I need to arrange things with the local cartel.

Urban legend has it that once I finish my paperwork with the city to open my business, I am actually visited by the cartel to set up my payment schedule.

For protection, I am required to pay, by the agreed upon monthly date, 20 percent of my monthly profits to the cartel rep who will visit me to collect cash payments.

So how would the cartel know what my monthly sales would be?

As it turns out, the cartel is actually more in touch with local sales and profits than consultants like Price, Waterhouse and Coopers or even Mexico’s Tax Administration Service (SAT).

What happens if I do not pay? Well, that is really just not an option in a city like Playa del Carmen, whose small size makes it easy to manage and quickly detect new businesses.

Practically every member of the local population has been put on notice with vandalism or fires to businesses.

Without getting overly graphic, not paying my quota or even worse, reporting extortion to the police, would result in someone in my family being hurt or, for repeated noncompliance, killed.

So while typical cartel activities like drug sales, money laundering, prostitution and gasoline theft might only directly impact a few, nearly everyone is impacted as small business owners have to add-in this extra cost.

And those who cannot come up with the extra cash are forced to close up shop, because adding 20 percent makes paying legitimate rent nearly impossible.


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