Economic Change on Mexico's Horizon

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    Mexico's President Enrique Pena Nieto speaks during the presentation of a telecommunications reform bill in Mexico City March 11, 2013 (Edgard Garrido/Courtesy Reuters).

Mexico’s President Enrique Pena Nieto speaks during the presentation of a telecommunications reform bill in Mexico City March 11, 2013 (Edgard Garrido/Courtesy Reuters).

I spoke last week with CFR’s Brianna Lee about Mexico’s telecommunication, education, tax, and energy reforms, and what they could mean for Mexico’s economic outlook. You can read the interview here or below.

Mexico’s president Enrique Peña Nieto, who assumed office in December 2012, is pushing through a major package of reforms targeting some of the country’s most powerful economic interests, including those in the telecommunications and energy sectors. CFR’s Shannon O’Neil says “these are changes that Mexico’s economy desperately needs,” even if only some of the measures take hold. Successful reforms could significantly improve the country’s image, she says, especially in the eyes of international investors asking: “Is Mexico for real this time.” Meanwhile, she notes that while economic ties between Mexico and the United States are already strong, Washington should leverage this moment as an opportunity to expand bilateral trade further.

President Peña Nieto’s economic reforms are targeting the big empires of the country’s telecommunications sector. Can you give some background on the industry? What is his goal in this sector?

For the last twenty plus years, Mexico’s telecommunications industry has been basically in the hands of Carlos Slim. Whether it’s Telmex, which is fixed line, or Telcel, which is mobile, his companies have controlled 70 to 80 percent of the market. By all independent accounts, this has had huge costs for Mexico’s economy, particularly for consumers and businesses, which pay much higher rates for their telephony needs.

The other big cost is underinvestment in the telecoms sector. When you look at Mexico vis-à-vis other OECD countries, as well as its emerging market peers—China or Korea or Brazil—Mexico falls behind in telecom infrastructure investment. This includes new types of connections, such as Internet and broadband. Indeed, by some measures, the country even falls behind places likes Zimbabwe and Serbia. That lack of access to the digital age has real costs for businesses and innovation.

The Televisa broadcaster is another one of the empires being targeted by these reforms.

Broadcast is another sector that Mexicans in general have been worried about. There is a duopoly in broadcast between Televisa, which has about 70 percent of the market, and TV Azteca, which takes the remaining 30 percent. Like many countries, the vast majority of Mexicans get their news from television, not from print media or radio, where you see more competition and plurality.

So what [officials] say they’re going to do is auction off at least two new networks on the spectrum; in those auctions, neither of these existing companies can bid. So this is another opening up. There’s also been talk of creating another public channel, i.e., a government channel.

The head of Mexico’s teachers’ union, Elba Esther Gordillo, was recently arrested on embezzlement charges. What’s the significance of this in light of these other reforms?

Before her arrest, the congress passed a constitutional measure that would reform the education system and do things like subject teachers to performance tests. She had been politically opposed to that and some of these other proposed accountability measures. Additionally, most people believed she was corrupt–she’s been photographed for years wearing very, very nice clothes, and has houses that people have talked about. There was always a question about how she could afford all these Hermes bags on a supposed $80,000-90,000 a year salary. But there’s also a question here about the timing: Why did [Peña Nieto] go after her now?

One answer is that [the government] finally got its act together and collected incriminating evidence. They’ve become much better at financial tracking. But another answer is that she had become a political adversary opposed to the government’s reform project. And [her arrest] is a way to diminish her power, if not remove her altogether from the political scene.

Gordillo’s arrest also sends out a warning to other people that might oppose Peña Nieto’s reform project. It’s a little bit of a shot across the bow—that “not only are we going to push this reform, but if you do not negotiate with us or work with us in some way, we might be willing to use other tactics.”

Energy and tax reform are also on the horizon. What’s in development right now?

In some ways, [energy and tax reform] may need to go together, because revenues from energy are such a big part of the federal budget. If you don’t reform the tax system and increase revenue, it’s hard to change the structure of energy, because you need this money to pay for day-to-day operations.

Officials have been talking about energy reform since the beginning of the campaign. It’s part of the Pact for Mexico, which is an agreement between the three parties [Peña Nieto's Institutional Revolutionary Party, the National Action Party, and the Party of the Democratic Revolution] to push things forward. It sounds like the administration will push for a constitutional reform that will open up the energy sector, mostly for new developments and particularly the type of exploration and production that requires high levels of expertise and technology that Pemex does not necessarily have. This applies to deep-water drilling in the Gulf, to shale oil and shale gas, and to potentially other fields where Mexico doesn’t really have a developed expertise.

When the Pact for Mexico was signed, it was heralded as a historic moment of cooperation. Do you expect that esprit de corps to persist with these reform measures?

Three different political parties with different ideological leanings may agree on the principles of reform, but as more of these negotiations get down to the details, there have been tensions, and there will continue to be tensions. The pact has survived so far through education reform; and it seems to have survived through the telecommunications reform—but I would say that it would be harder to keep this coalition together for energy and tax reform.

It may survive, but it may be that just two parties come out together rather than all three. That’s a distinct possibility. And if that happens, and if only some reforms are passed, which would be too bad, it’s still worth it because these are changes that Mexico’s economy desperately needs.

The drug war is still happening in the background of all this. To what degree is that affecting Mexico’s economy?

Mexico has been doing fairly well over the last few years, but it could be doing so much better. Some impediments are the uncompetitive parts of the economy, but another drag is security. When foreign companies think about investing in Mexico, they all have a discussion about security. It doesn’t mean that they don’t invest, but they may not go in as fast or as big. And many may not go in at all.

It’s a big cost for day-to-day operations, particularly for small- and medium-sized companies where security costs are much higher as a percentage of revenues than, say, a big multinational company. It’s very hard to measure, but people say it might cost anywhere between 1 and 2 percent of GDP per year. So if Mexico’s economy is growing at 3 or 4 percent now, it could be growing at 4 or 5.

Is the United States paying attention to these reforms?

Definitely. There have been meetings about it already between economic liaisons. It was part of the discussion when Peña Nieto met with Obama back in November. It’s also on the agenda of manufacturers and the finance world. Indeed, there are a lot of U.S. businesses watching to see what happens—is there enough economic opportunity for them in these new, more open sectors? But also, particularly in the financial world, people are asking: is Mexico for real this time? Are they really going to make the structural changes that would open the economy and let it grow faster? Successfully pushing through these reforms would have a much larger impact: people will look to Mexico and say, “Mexico’s really open for business and making the kind of changes necessary to be a big player.”

And we’ve already seen a lot of investment, particularly with U.S. manufacturers in Mexico, despite many of the country’s problems. Many factories in the United States depend on those in Mexico—there are pieces and parts that are crossing the border every day that allow a company, in the end, to create a globally competitive product. This is already the reality, but the question going forward is: Can the United States make the most of this and make it even easier for these companies to grow by facilitating trade with Mexico? Rather than thinking about cutting back this trade, we should recognize that Mexico helps support U.S. workers because trade grows the overall pie for these companies. A rising tide on both sides of the border lifts all boats.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.