Can Mexico dismantle its monopolies?

MEXICO CITY -- As the government promises to open up markets long dominated by one or two companies, investors are showing optimism for Mexico's economy. But can competition crush the monopolies?

MEXICO CITY -- Mexico has been enjoying a buzz of investor optimism in recent months.

Interest rates on peso bonds have fallen as demand for Mexico debt has risen. Meanwhile, the peso is rallying as the country's growth prospects improve. Mexico's economy grew faster than Brazil's last year and is going head to head with Latin America's largest economy again this year. It didn't hurt the global perspective, either, that Thomas Friedman recently declared Mexico -- not China or India -- would become the dominant economy of the 21st century.

All of this hubbub has helped steer the country's narrative from drug violence to one of economic opportunity.

Yet Mexico has failed to live up to its full potential before -- witness the country's anemic job growth and depressed wages that have helped keep nearly half the population poor. So what's changed?

Competition, say observers. Mexico's leadership has declared its intentions to open up markets historically controlled by one or two companies and dismantle the dominance that has been a key obstacle to growth for businesses and a block to social mobility. A pact between the three major political parties this year promises reforms in telecommunications, education, energy and taxes.

"The primary reason why Mexico isn't growing faster and creating more jobs is the lack of efficiency in markets," said Eduardo Perez Motta, head of Mexico's Federal Competition Commission, or CFC. "The best thing to do is inject competition."

Whether it's cell phones or cement, banks or beer, Mexican consumers and small businesses have long been hamstrung by few choices, poor service and high prices in a wide range of markets key to growth.

Carlos Slim -- owner of a business empire that includes the dominant companies in traditional and cellular telephony and Internet, as well as holdings including banks, department stores and restaurants; builders of homes, highways and dams; and mining -- is a target of a proposed reform of the telecommunications industry. Slim's dominance in that arena helped position him at the top of Forbes' world’s richest list.

The reform, now making its way through Congress, could give Mexican regulatory authorities more power and dull the legal weapons companies like Slim's America Movil have historically used to defend themselves from sanctions.

If lawmakers approve the reform, regulators "will have the teeth to bite," said Eduardo Garcia, editor-in-chief of the business news website SentidoComun.mx. "And that bite will really hurt."

With greater regulatory power, the government could restrain abuses across other industries as well. While the only true monopolies in Mexico are in energy -- Petroleos Mexicanos, the national oil company, and the national Federal Electricity Commission -- dominant companies in Mexico frequently rule their roosts through monopolistic practices.

"In some markets what's needed is to eliminate barriers to entry with a more even regulatory playing field, and in other instances dominant companies need to be regulated," said Perez Motta.

Take the cement industry. Cemex, which was fined last year for anti-competitive practices (although it has appealed the ruling), supplies more than 60 percent of the market. Garcia notes that Mexico has some of the world's highest cement prices.

Or look at television. Televisa claims more than 70 percent of Mexico’s viewing audience, and a second company TV Azteca takes what remains; together they control 90 percent of the TV advertising market -– and charge high prices that only a few companies can afford.

Those two companies -- competitors in television -- each own 50 percent of one of the few alternatives to America Movil’s cell phone service in Mexico, Iusacell.

"It's as if you and I are dominating a market; we're competing but we also have this opportunity to create a very tight connection," said Alexander Elbittar, an economist with the public university CIDE in Mexico City. "The two top operators have the possibility to coordinate actions in television."

The telecommunications reform could bolster a recently proposed reform of education (also making its way through Congress) and last year's labor reform, which updated labor laws that hadn’t been touched since 1970. Energy reform is likely to be on lawmakers’ agendas later this year; a draft banking reform is also in the works.

"With the reforms on the table -- not just telecommunications but education and labor -- the most important ingredient is competition," said Perez Motta.

Optimism for Mexico’s economy can only hinge on good intentions for so long. Earlier this year, the World Bank reduced its forecast for Mexico’s economic growth to 3.3 percent from 4 percent.

In the race for greater economic growth in Mexico, the question remains: How fast will the competition come?

Photo: Flickr/Esparta Palma

This post was originally published on Smartplanet.com

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