For more than a decade, Mexican political leaders and the key players in its economy and society have turned a blind eye toward discussion of so-called “structural reforms” without which, say experts, the country will not be able to improve its global competitiveness or grow at the levels it needs in order to emerge from underdevelopment.
In the previous administration of President Vicente Fox (2000-2006), discussions of those issues never got beyond initial stages. There were no agreements or structural changes. Nevertheless, the current administration, led by President Felipe Calderón (2006-present), has managed to enact some reforms thanks to negotiations with various political parties. But the general consensus is that they fall short of meeting the country’s needs.
Reforms of the tax and pension systems have already been approved, and energy reforms are currently being debated. In the energy sector, three structural reforms will be required, although experts and politicians from the opposition have denounced them because they say they don’t deal with the fundamentals and will not provide the growth that the economy requires.
Many analysts, both within and outside the Mexican government, are talking about “the other agenda,” which will involve reforms that do not require changes in the Constitution or the approval of the country’s Congress. They will, however, mean applying public policies that are appropriate, decisive and precise so that Mexico has better tools for competing on the global level. These measures could [collectively] add two or three points to the country’s Gross Domestic Product.
According to Alberto Jones Tamayo, Mexican managing director of Moody’s, the global ratings agency, energy and labor reforms are vital for the future but they are not enough. “This is something urgent,” Jones Tamayo says, “but we also need a parallel agenda of public policy steps that increase the competitiveness and economic growth at a national and local level.”
A Point of Departure
Over the last 10 years, Mexico has grown at an average rate of 2.4%, but it really needs to grow by at least 5% a year in order to overcome the cumulative negative impact of the past, and satisfy the growing demands of workers, says Mauricio González, general manager of GEA, a Mexican economic consulting firm.
When it comes to competitiveness, Mexico is ranked number 52 in the “Global Competitiveness Index 2007-8” published by the World Economic Forum. The study ranks 131 economies. From 2005 to 2008, Mexico’s ranking slipped seven positions, so it is now far below Chile, which is in the 26th spot, the highest ranking in Latin America.
In addition, according to a World Bank report, “Doing Business 2008,” Mexico’s economy is significantly behind in several economic indictors: It is in 135th position when it comes to paying taxes; 134th for employing workers; 83rd in enforcing contracts; and 75th for starting a business.
In addition, the World Bank’s “Report on Global Indicators of Good Governance 2008” highlights other shortcomings of the Mexican economy. On a scale of 1 to 100, in which 100 is the highest grade, Mexico ranks as follows: for political stability and the absence of violence, 32.7; for state of law, 40.5; and for controlling corruption, 46.6.
Jones proposes several new priorities for improving the country’s competitiveness and raising its economic growth rate: investing in infrastructure, especially communications; providing high-quality services to companies at reasonable prices; providing legal certainty to companies that invest in the country; improving the administrative efficiency of the government; investing in higher quality education that fits the needs of the labor market; fighting corruption; improving governmental transparency at every level (federal, state and municipal); combating insecurity; and, finally, freeing the country from remaining barriers to international trade.
For his part, Edgar Camargo, director of economic analysis for Mexico at the Bank of America, supports a range of “aggressive public policies that are focused and strategic” in order to achieve progress. In his opinion, the priorities of the government must be to strengthen the state of law and transparency and balance the country’s financial accounts. “These are three areas where you can have a solid foundation from which you move forward.”
The Regulatory Goliath
Even the government is urging the country to take on the “monster” of governmental bureaucracy. A long succession of steps is required to establish a business and apply for any kind of permit, notes Carlos Garcia Fernández, head of Cofemer, the Federal Commission for Regulatory Improvement, a division of the Ministry of Economics. He says, “The Goliath is this huge, bombastic, heavy, smothering, excessive government, which weighs down on the poor citizen, who is David, and smothers his entrepreneurial activity; crushing it, inhibiting it, restraining it, and limiting David’s right to enjoy his right to free enterprise, as outlined in the Constitution.”
It is vital for the economy to simplify these bureaucratic hurdles, adds Camargo. “In Latin America, delays in doing business, bureaucratic hurdles; and administrative inefficiency are the result of the major mistake that governments made during the 1970s in an effort to establish themselves as employers.”
Energy reform is under discussion now. The private sector and the government are working on three parallel agendas involving regulatory regimes and competitiveness. Their main goal, notes Garcia Fernández, is to do away with “the large number of obsolete, harmful and costly regulations” that persists in Mexico.
In the first agenda, which has a regulatory and legislative character, people are trying to reform the Foreign Investment Law, where “there are extremely obvious barriers for new competitors that want to enter strategic sectors,” says Garcia Fernández.
The second agenda, which has a regulatory and administrative character, does not require any approvals by the Mexican Congress. Instead, it involves making advances in such areas as customs, energy, regulatory norms, foreign trade, telecommunications, and both labor relations and social security.
The third parallel agenda, explains Garcia Fernández, is at the level of state and municipal governments, who already plan, over the six years of the Calderon administration, to open a total of 220 “little windows” [offices?] through an initiative known as SARE, a system for rapidly setting up companies.
Saying No to Monopolies and Yes to Competition
In addition, economic growth in Mexico could get a boost “in the very short term” from the battle against monopolies and oligopolies, and the creation of stronger competition in every productive sector of the country, explains Pérez Motta.
A lot of sectors in Mexico are highly concentrated, with little or no competition, such as telecommunications, where Teléfonos de México (Telmex) dominates the market. There are also oligopolistic practices in the financial sector, where four banks control 76% of the consumer credit market. One of the reasons monopolies and oligopolies persist is that there are no laws that enable people to fight them. In addition, the penalties for these illegal practices are low, and the budget for fighting such practices is very low.
As Pérez Motta explains, competition involves the transfer of wealth from dominant companies to consumers, and to other companies that are medium-sized and small. This generates additional purchasing capacity and, ultimately, leads to additional growth. “If you want to grow in the short term, you need competition because competition means efficiency and a transfer of wealth to the population,” he says.
For Camargo, “Promoting competition is something that can be done without constitutional measures. When you promote competition, you wind up generating other positive changes. Competition provides an incentive for you to become more productive. It forces companies to carry out improvements; to look for efficiencies in their production processes. Competition is an extremely powerful weapon for moving the economy forward.”
A Boat that Is Sinking
According to Manuel Paz, professor of public policy and the director of the Public Opinion Research Institute in Tabasco, “Fighting corruption is the number-one issue; the most important of them all” for Mexico. The country has lagged behind other countries because of corruption, which impedes the competitiveness of companies and local governments.
According to Paz, corruption affects both the private and public sector. “Corruption means that things move backward,” he says, noting that there are two reasons people give for explaining why this problem has not been addressed. First, they say it is a systemic problem that persists because the country’s norms and laws permit it, and don’t punish it. But this kind of reasoning is specious because the practice of corruption has to do with people, their educations, and their ethical values.
On every level, governments have failed to take decisive action combating this very serious problem. In fact, Paz admits, many of today’s governmental leaders have attained their current positions by means of corruption. “Not enough progress has been made,” he says, despite such efforts on the federal level as the Law of Transparency and Access to Information (which permits any citizen, through a formal petition process, to obtain information about any government office or public official.)
According to Paz, so long as the country does not fight corruption, there is little likelihood that it can compete globally. “In a boat like Mexico, where the system is corrupt, the boat will sink,” he warns.
Two other areas that are indispensable for improving the competitiveness of Mexico and improving its economic growth are improving access to credit and increasing investment in technology.
In Mexico, credit is expensive. Rates and commissions are very high, which limits access. “So long as we don’t enable more people to have access to financing, there is no way we can compete,” Paz affirms. The level of private sector credit in Mexico represents 20% of the country’s GDP, far below the level of other countries such as Brazil (40%), and Chile (60%). Paz believes that the government can – and must – regulate the differences between active interest rates (the money banks earn) and passive interest rates (the money banks pay out), because not doing so permits banks to practice “usury.” If rates are regulated, he says, a larger number of productive organizations will be able to have access to credit, and compete as a result.
When it comes to investment in technology, Mexico invests less than one percent of GDP, because of “negligence” and “ignorance,” says Paz. He is certain that if the country makes progress in these three areas, it will experience explosive growth.
‘We Cannot Be Stopped’
Most of these changes have not been enacted over the decades because “every level of government is indecisive,” says Paz. These kinds of decisions require political will and the sort of leadership that knows which direction it wants to go in.
For his part, Garcia Fernández warns that if these kinds of measures are going to be more than just scraps of paper — and wind up building a better climate for business — then “you need enormous determination and support from the President to carry this agenda forward.” Without that, “this [approach] won’t do any good.”
Jones says that no one knows how many percentage points Mexico’s GDP would grow “if they dealt with these concerns. However, it is clear that growth would not be insignificant. These changes would clearly increase the country’s economic growth rate, and economic growth is a key factor when it comes to the government’s sovereign debt rating.”
These kinds of changes are urgently needed, notes Garcia Fernández. “Even if we don’t make them, other countries are making such changes and, as a result, they are moving ahead of us in the indices of competitiveness.”
“You level the playing field in order to build confidence,” adds Camargo, “and to increase the potential of the economy so that you can attract a meaningful flow of investment.” If these sorts of improvements are carried out on a regular basis, “we cannot be stopped.”