ONE of the main reasons for the landslide victory of Andrés Manuel López Obrador, a left-winger, in this month’s presidential election in Mexico was the country’s mediocre economy. Between 1995 and 2015 real GDP per person increased by an annual average of 1.2%, less than in any Latin American country except Venezuela (see chart). Take into account the swelling labour force, and Mexico looks even worse: GDP per worker expanded by just 0.4% a year, while total factor productivity (a measure of the economy’s efficiency) barely grew. What makes this puzzling is that Mexico has embraced economic orthodoxy: sound monetary and fiscal policy, open trade, investment in education and, more recently, improved competition policy. So what went wrong? In a groundbreaking book* Santiago Levy, the outgoing policy chief at the Inter-American Development Bank, argues that Mexico’s decision-makers have failed to fix distortions in the economy caused by the tax regime, social policy and legal institutions, and in some cases have compounded them. These distortions lead to a systematic misallocation of resources, says Mr Levy, a former deputy finance minister and head of the social-security institute.

In other words, workers end up in jobs where they are less productive than they might be. Too many individuals who should be workers become entrepreneurs or are self-employed. Efficient businesses are taxed and penalised, while subsidies help sustain unproductive ones. Joseph Schumpeter’s notion of “creative destruction”, in which capitalist competition drives out weaker firms and rewards stronger ones, is paralleled in Mexico by “destructive creation”, quips Mr Levy, in which the environment favours the entry and survival of weak businesses that hinder the growth of stronger ones.

Mr Levy’s powerful argument is based on hard data. He has had access to detailed economic censuses conducted every five years by Mexico’s statistics institute. They show that Mexico has a huge and disproportionate number of small businesses, and unusually wide variation in the productivity of its companies. The census under-counts small firms because it excludes those that lack fixed premises (such as taco stands) and those in villages of fewer than 2,500 people. Even so, more than 90% of the 4.1m firms in the 2013 census had at most five workers. And 90% of the total were “informal”, absorbing almost 33% of the capital stock and 40% of workers.

Rather than “informality”, the key distinction Mr Levy makes is between firms that have salaried employees and those that do not. Four-fifths of the “informal” firms are in the second category: their staff are either self-employed or paid piece-rates or profit shares. These firms’ only legal obligation is to pay corporate tax, of just 2% of revenues if these are under 2m pesos ($105,000) a year. Firms with salaried workers, by contrast, must pay social insurance, deduct income tax and grapple with employment law (which doesn’t allow them to fire people if business drops).

The census shows that firms with salaried workers are much more productive. So it is worrying that from 1998 to 2013 the weight of non-salaried firms in the economy grew. Mr Levy argues that public policies are to blame. In the name of social inclusion, in the period under study, Mexico introduced non-contributory pension and health benefits worth 1.3% of GDP, thereby helping non-salaried workers, while raising income taxes on salaried ones to the tune of 1.9% of GDP. Never strong, the rule of law and enforcement of contracts have become even weaker.

Mr Levy, who designed Mexico’s conditional cash-transfer scheme aimed at reducing poverty, has long argued against erecting further non-contributory benefits in parallel with (rather than to replace) employment-based social insurance, because this discourages hiring salaried workers. His book broadens that argument. He thinks that Mexico also needs to replace restrictions on firing with unemployment insurance and shift the tax burden away from payrolls, abolish tax perks for small firms and take contract enforcement more seriously. The prize would be faster growth, better social provision and better-paid jobs.

This ought to be attractive to a left-winger like Mr López Obrador. The policy changes are politically daunting, but the new president has a strong mandate. Unfortunately, he seems wedded simply to expanding non-contributory pensions and other benefits. It would be ironic if a politician who claims to be a mould-breaker offers more of the same.

(*) Under-Rewarded Efforts: The Elusive Quest for Prosperity in Mexico, IDB.