Are Petróleos Mexicanos & Teléfonos de México Holding Mexico Back?

MEXICO CITY (By Elisabeth Malkin, NYTimes) June 3, 2009 ― When Nafta took effect on Jan. 1, 1994, there was optimism in Mexico the free trade accord, along with a raft of other market-based measures, would usher in growth and chip away at the country’s social inequalities. That never happened. Average annual growth in the 15 years of the North American Free Trade Agreement has been about 3 percent.

What went wrong with those forecasts? For several years now, economists and policy-makers inside and outside the country have been trying to puzzle that out.

Now the World Bank has published a book, “No Growth without Equity?,” that summarizes the theories explaining Mexico’s mediocre performance. The book argues special interest groups, particularly in business and labor, have managed to block changes that would make the economy more efficient and productive in an attempt to preserve privileges built up over decades under Mexico’s closed economy and one-party state. Most important, those groups have frustrated attempts to introduce competition.

Surprisingly, Mexico’s transition from a one-party state to a fractious democracy has done little to change this. Powerful interests have been successful at controlling weak government institutions and co-opting political parties.

Among the book’s cases studies are two areas where Mexico is falling behind by just about any measure: its state-owned oil monopoly, Pemex; and telecommunications, where one player, Teléfonos de México, is so dominant that it exercises a de facto monopoly. Telmex is controlled by Mexican billionaire Carlos Slim, a creditor and shareholder of The New York Times Company.

Reserves and production at the oil company, also known as Petróleos Mexicanos, are declining. But even though the evidence of Pemex’s problems is undeniable, efforts to change the company have stalled because several powerful groups benefit – in the short-term at least – from keeping things the way they are.

Adrián Lajous, a former director-general of the company, writes in the book that to develop and modernize its oil industry, Mexico needs to create a strong regulator free of political influence and to introduce competition. But three groups – the federal government, the company’s strong union and industrial companies that use large amounts of energy — would stand to lose from changes to the oil industry.

“None of these groups is satisfied with the status quo, but what brings them together is the perception that basic change could eliminate the benefits and privileges they have enjoyed for many years,” Mr. Lajous writes.

The union does not want to lose generous benefits and tens of thousands of jobs that would be shed in a competitive company.

At the same time, the government benefits from direct control over Pemex — which contributes about 40 percent of the federal budget. If Pemex were to keep more of its profits to reinvest, the government would have to collect more taxes to make up for the shortfall.

In addition, large industrial companies have been able to use their considerable lobbying power to pressure the government for subsidized fuel prices, particularly of natural gas.

The book’s discussion of Mexico’s telecommunications industry chronicles a series of regulatory decisions since Telmex was privatized in 1990 that have barely curbed its quasi-monopoly power.

Rafael del Villar, a former official in the communications and transport ministry who recently was named to Mexico’s Federal Telecommunications Commission, or Cofetel, writes Telmex has successfully fought antitrust regulators in court. At the same time, Cofetel has effectively allowed Telmex to keep prices high and throw up obstacles that keep potential competitors at bay.

“Telmex has exercised its substantial market power unchecked,” he concludes.

Roger G. Noll, an economics professor at Stanford, argues the end result is Mexico’s telecommunications industry has not developed fast enough. The proof is fewer Mexicans have access to fixed lines or Internet than residents in countries with a similar level of income.

Although the figures date back to 2005, more recent statistics show Mexico’s comparative position has not improved much. For example, in broadband Internet access, Mexico is squarely at the bottom of the rankings of member countries of the Organization for Economic Cooperation and Development.

“Competition is hampered by slow and ineffective regulation, created by limitations to the authority of the primary regulator, Cofetel; by an opaque, secretive, and cumbersome regulatory process; and by an inadequate oversight system in the courts and the political branches of the government,” he writes.