ABUNDANT cheap labor has helped Mexico lure billions of dollars in foreign investment in recent years and spur a manufacturing sector so dynamic it has been likened to China.

    But the same low wages that help make manufacturers competitive are a long-term drag on the economy. Millions of people working off the books for paltry sums holds back private consumption, crucial for sustained growth.

    The government has slashed its growth forecast for 2014 after the economy expanded by just 0.3 percent in the first quarter, well short of expectations.

    It is a setback for President Enrique Pena Nieto, who has pledged to reinvigorate the economy and lift productivity by pushing through a series of structural reforms that have encouraged investors and helped fuel talk of a “Mexican moment.”

    While Mexico has recaptured manufacturing business it had lost to China, especially in the U.S. market, its economy is hamstrung by chronically low pay, weak public spending and poor productivity.

    Between 1992 and 2012, exports grew at 8.6 percent a year while the economy as a whole only expanded at an annual average of 2.8 percent.

    Salaries are a large part of the problem. Between 2005 and 2012, real labor income per capita in Mexico fell 6 percent, the government’s social development agency Coneval says.

    Lower incomes mean less private consumption, which accounts for over two-thirds of gross domestic product (GDP).

    Spending by wealthier Mexicans helps compensate, but falling real wages for many of those living below the poverty line — almost half the population — is dragging down retail sales, which grew just 0.1 percent in 2013.

    Raul Feliz, an economist at the CIDE think tank in Mexico City, says the country fails to create enough higher quality jobs and has relied too heavily on a glut of cheap labor.

    “If Mexico didn’t have population growth, economic growth would be zero,” Feliz said.

    Mexico’s proximity to the United States and a multitude of free trade deals make it an attractive investment target, in spite of security concerns about violent drug gangs.

    PepsiCo, Nestle and Cisco this year unveiled investments of more than US$7 billion combined in Mexico. Foreign direct investment, much of which flows into manufacturing exports, hit a record US$35 billion in 2013.

    Low wages are a huge incentive for both Mexican and foreign firms. One in seven Mexican workers earn the average minimum wage of 65.58 pesos (US$5.10) a day or less, national statistics office INEGI said. (SD-Agencies)