June 5, 2008
By Israel Ortega and James M. Roberts
Felipe Calderón, who began his single sexenio (six-year
term) as President of Mexico in December 2006, has made significant
progress in the fight against narcotrafficking, but Mexicans are
still waiting to see whether his government will successfully
challenge the private- and public-sector monopolies and
duopolies that dominate huge portions of Mexico's economy.
These combines-in energy, telecommunications, construction,
food production, broadcasting, financial services, and
transportation-have long been a drag on competitiveness and job
creation. Notwithstanding Mexico's membership in the North American
Free Trade Agreement (NAFTA), this "roping off" of large
sectors of the Mexican economy to benefit politically powerful
rent-seekers has the same practical effect that traditional
protectionist trade barriers have.
Calderón should also lead the fight to dismantle a
state-corporatist system of price supports, subsidies, and
special-interest tax exemptions that gives an unfair advantage to
the wealthy and well-connected while restricting competition and
holding down economic growth and job creation.
Evidence of the damage to the Mexican economy from the lack of
competition can be seen in Mexico's ranking in the 2008 Index of
Economic Freedom, published by The Heritage Foundation and The
Wall Street Journal. Mexico's economy scored 66 of a possible
100 (with zero being "least free" and 100 indicating "most
free"), making it the world's 44th freest economy out of the 157
countries ranked in the Index. It also ranked ninth out of 29
Western Hemisphere countries, well behind Canada, the U.S.,
Chile, and El Salvador.
Mexico's overall Index score is only marginally higher than the
regional average in the Americas. In addition, although Mexico's
overall score has improved slightly in the year since
Calderón took office, it has not changed much in recent
years, and this lack of change is due, at least in part, to the
absence of any meaningful reform process.
The health of Mexico's economy has a direct impact on U.S.
immigration patterns. The failure of the Mexican economy to perform
at peak efficiency and to realize its full potential over the past
half-century has resulted in a flood of unemployed semi-skilled and
unskilled Mexican job hunters seeking employment with their
alluringly successful neighbor to the north. Illegal workers
from Mexico are often willing to accept lower wages than legal U.S.
workers will accept. U.S. employers in various labor-intensive
fields operate much more efficiently than their Mexican
counterparts do, and these low-wage workers magnify that
productivity. The artificially low cost of this labor (which
also does not include all of the taxes necessary to offset the
additional costs to the government that are generated by these
new residents) has created a strong demand for illegal workers from
To remedy this situation, the Mexican government should
open its oil, natural gas, and electricity generation and
distribution sectors to private investment and participation. It
should also break up private-sector monopolies and duopolies with
more effective anti-trust legislation. The U.S. government
should offer technical assistance to help Mexico liberalize and
open up its economy. The resulting flood of new private investment
would create hundreds of thousands of new jobs that would encourage
many would-be economic migrants to remain at home in Mexico.
"SUPPLY PUSH" AN "DEMAND PULL"
Immigration has become the most controversial, complex, and
sensitive subject facing the United States today. It directly
affects America's economy, culture, and future as a nation.
Currently, anywhere from 12 million to 20 million illegal aliens
reside in the United States-enough to populate America's three
largest cities: New York, Los Angeles, and Chicago. An
estimated half-million more people enter illegally every year.
As the Milken Institute's Joel Kurtzman has reported, former
President Vicente Fox hoped to see 6 million jobs created during
the six years of his presidency (2000-2006). Of course, neither
presidents nor governments can create good sustainable jobs;
only the private sector can do that. The role of government is to
set policies conducive to that job creation. In any case, Fox
"fell far short" of his goal:
Between 2000 and 2006…Mexico created only 1.4 million
jobs. Though accurate figures are difficult to arrive at, the
[U.S. Government] Accountability Office estimates that during
each year of Mr. Fox's presidency between 400,000 and 700,000
illegal immigrants arrived in the United States from
Mexico. The number of illegal immigrants from Mexico was
roughly equal to the number of jobs Mr. Fox did not
If the Mexican government were to make the many changes needed
to reduce the "supply push," and if the U.S. were simultaneously to
make necessary changes in its immigration laws to weaken the
"demand pull," there would be several positive developments. In
Mexico, the result would be the creation of new, sustainable
private-sector jobs. More Mexicans would want to stay home to start
businesses, and others would stay to work for them. Some Mexican
migrants currently working in the United States would very likely
return home, using their savings to start small businesses.
On the U.S. side of the border, prospective employers of legal
immigrants would be forced to pay the full, true cost of that
labor, including taxes to offset the additional costs to the
government that are generated by these new residents, thereby
weakening the demand magnet. The result would be a lessening
of migration pressures at the U.S.-Mexico border, a reduction in
the U.S. unemployment rate, and improved U.S. national
CREATING AN OPPORTUNITY SOCIETY IN MEXICO
Under Vicente Fox, who governed Mexico and headed the
center-right National Action Party (PAN) from 2000 to 2006, a
divided Mexican Congress adopted some needed reforms after 71
straight years during which the center-left Institutional
Revolutionary Party (PRI) had reigned supreme by
controlling both the presidency and the Congress. The PRI,
backed and financed inter alia by the Pemex and electricity workers
unions, enjoyed such total control that pundits jokingly described
Mexico as "the Soviet Union of the Western Hemisphere."
In December 2006, Fox's fellow PAN-ista, Felipe Calderón,
succeeded him as president after barely defeating Andres Manual
Lopez Obrador of the leftist Revolutionary Democracy Party
(PRD). Lopez Obrador is from the same mold as Venezuelan
dictator-president Hugo Chavez, and his election would have
been a major blow to economic reform in Mexico as well as to the
national security of the United States. Calderón, a lawyer
who also earned a master's degree in public administration from
Harvard University's Kennedy School of Government, had been
President Fox's energy minister.
Mexico has benefited from its more than 10 years of membership
in the North American Free Trade Agreement (NAFTA) with Canada and
the United States. In fact, to some degree, Calderón can
thank the thousands of new middle-class Mexican voters that NAFTA
has created for giving him his razor-close margin of victory. They
did not fall for the false promises of the populist left.
Nevertheless, the Mexican government has failed to implement
fully the many reforms that were envisaged when Mexico joined
NAFTA-reforms that would have created more opportunities for
employment and prosperity in Mexico.
For example, of the 178 countries covered in the World Bank's
Doing Business 2008 report, Mexico ranks 134th with regard to
employment: Hiring employees is problematic, there are rigid
restrictions on shift scheduling, and firing anyone is
extremely difficult. Another economic performance
indicator is Mexico's ranking in the Index of Economic Freedom,
published by The Heritage Foundation and The Wall Street
Journal. Although NAFTA membership has helped Mexico to
improve its overall ranking from 85th of 160 countries in 1998,
when it had just entered NAFTA, to 44th of 157 countries in 2008,
it still places only ninth out of 29 Western Hemisphere countries,
well behind Canada, the U.S., Chile, and El Salvador.
According to the United Nations Development Program'sHuman
Development Index, Mexico ranked 53rd of 177 countries in 2006,
which is relatively low for an emerging-market country and
indicates a substantial poverty problem. Similarly, Mexico's "Gini
coefficient," a measurement of income inequality, has not improved
much over the past 10 years.
According to Inter-American Development Bank (IADB) statistics,
Mexico's economy is heavily dependent not only on its commercial
relations with the U.S., but also on the more than $24 billion in
remittances that Mexican migrant workers in the U.S. send home each
year. These remittances equal about "one third of the total wage
earnings in the formal sector of the Mexican economy and 10 percent
of Mexico's exports." Many observers believe the actual measure of
annual remittances would be even larger if it measured the flows
through other channels, like the unknown quantity of cash that
migrants bring with them when they make visits back home, as well
as money sent via the Internet and cash smuggled in by criminals.
These channels are not reflected accurately in the official
In addition, recent reports indicate that the level of
remittances may be falling, reflecting the economic
uncertainty in the U.S. If so, this will put more pressure on
the Calderón government to act quickly to reform the
TEMPTED TO TAKE THE EASY WAY OUT
Historically, Mexican leaders have taken the easy way
out-encouraging out-migration and receiving large inflows of
hard-currency remittances in return-rather than confronting their
economy's structural problems. In so doing, they took a page from
the late Marshall Tito of Yugoslavia, who did the same thing when
confronted with the failure of the Communist economic system in the
1970s. Tito simply exported his surplus workers to Western
While this artful dodging by the politicians has benefited the
elites who control the monopolies, state-owned firms, and powerful
unions that represent their workers, it has not responded to
the needs and aspirations of the average Mexican citizen.
Mexicans might be able to get higher-paying jobs in the U.S.
as illegal aliens, but they must live in constant fear of
deportation. Many of these illegal workers are young single men,
the demographic most likely to commit crimes and abuse drugs and
The failure of the Mexican government to address these problems
has been widely noted. According to the U.S. Department of State,
Mexico has become less competitive relative to other
emerging economies, particularly China but also India and
countries in Eastern Europe, as it has failed to address serious
crime and safety issues or pass much needed fiscal, labor and
energy sector reforms. Recent reports from AT Kearney, Transparency
International, the World Economic Forum and the Organization
for Economic Cooperation and Development (OECD) have detailed the
perceived decline in Mexico's attractiveness as an investment
Taking on the Drug Kingpins. Although President
Calderón pledged during the 2006 presidential campaign to
continue the modest economic liberalization efforts begun by
Fox, he has spent more of his political capital on another worthy
goal-fighting the dangerous and über-wealthy organized
crime networks that traffic and ship illegal drugs through Mexico
to the USA. This illicit activity is one of the main contributors
to the pervasive atmosphere of corruption that has long plagued
Calderón's efforts have had some success: The cartels are
running scared and trying to shake Calderón's confidence
with a series of brutal assassinations of Mexican law
enforcement officers and military officials (and, in some cases,
their families) who are involved in the fight against the
narcoterrorists. But Calderón has not backed down. As
Time magazine reported recently:
"When you see the killings, the cartels are trying to make a
statement to the authorities not to interfere with their
enterprises. And they are also trying to send a message to the
public saying they are in control," said a U.S. anti-drug
official…. "It's a P.R. campaign. But it's not going to
work. Because, quite frankly, this country has a new
Presidents Bush and Calderón recently announced a
joint U.S.-Mexico program, the Mérida Initiative, to support
the Mexican government in its war against drugs by providing U.S.
technical assistance, training, high-tech surveillance
equipment, and anti-money laundering financial intelligence
software. Funding of $550 million for the second tranche of the
three-year project was included in the Bush Administration's FY
2009 budget request to Congress. When added to the first
appropriation for the Mérida Initiative that was requested
in the FY 2008 War Supplemental, the total funding to date is $950
million for Mexico and $150 million for Central American countries
to fight against drug-related gang violence.
A More Insidious Threat: Economic Stagnation.
Mexicans are still waiting to see whether the Calderón
government will bring the same degree of commitment and resolve it
has demonstrated in the drug war to the many systemic and
structural problems that historically have prevented the
Mexican economy from performing anywhere near its full potential.
At growth of just 3 percent, Mexico's roughly $900 billion economy
lags behind both Brazil (4.5 percent) and the overheated,
poorly managed Argentine economy (a sizzling 8.5 percent).
Calderón is acutely aware of the huge growth
opportunities that Mexico is missing domestically, as well as
Mexico's increasing vulnerability to competition from Asia,
and has proposed an ambitious package of reforms to the Mexican
Congress.Calderón's reputation as a pragmatist may help him
strike a political deal with the lawmakers. The PRI's nearly
80-year hold on political power in the Congress through deeply
entrenched, well-connected economic monopolies, however, is
proving difficult for Calderón to unravel.
In a hopeful sign, Calderón recently announced the
creation of a $25 billion fund to build highways, bridges, and
other infrastructure. As the Los Angeles Times reported,
Calderón wants to avoid dependence "on the external
motor of the U.S. economy" to keep Mexico growing. He also warned
that Mexico must make "difficult decisions" to reverse the
decline in Pemex's production and to raise funds from a source
other than the government budget to "pay for exploration in the
deeper waters of the Gulf of Mexico." The money, Calderón
said, could come only from two sources: reducing government
spending for public services or looking to the examples of
China, Norway, and Brazil, where the state-owned oil companies
benefit from private investment.
President Calderón faces an uphill fight to win reforms
from the divided Mexican Congress to permit greater private
investment in the energy sector. The opposition, including
entrenched special interests in the PRI and anti-globalization
activists in the PRD, will try to "forestall reaching the
two-thirds majority needed to change Mexico's constitution and
allow for participation of private companies in oil exploration and
A CHOKE-HOLD ON THE MEXICAN ECONOMY
Numerous private- and public-sector monopolies-in energy,
telecommunications, construction, food production, broadcasting,
financial services, and transportation-have long been a drag on
competitiveness and job creation in Mexico. The oil firm
(Pemex) and electric power company (Federal Electricity
Commission) are both state-owned monopolies, and neither one
has been disciplined by competition. Massive privately owned firms
have functioned like monopolies and duopolies in
telecommunications (Telmex); television networks (Televisa);
cement (Cemex); bread and tortilla manufacturing (Bimbo and
Maseca, respectively); and banking (Banamex/Citigroup and
Bancomer/Banco de Bilbao). They enjoy monopoly rents by using their
significant influence with the Mexican government to stifle
As a result, Mexican consumers pay higher prices for a lower
quality of service and reduced availability of goods. In
addition, Mexico's state-corporatist system of price supports,
subsidies, and special-interest tax exemptions gives an unfair
advantage to other wealthy and well-connected businessmen while
restricting competition and obstructing economic growth. Of
course, the most critical result for Mexico's workers is a severe
shortage of jobs.
Mexico's largest unions have had a stranglehold on the Mexican
labor sector since the 1930s. Granted immense leverage in
workplaces, as well as tremendous resources and political power,
they enjoy "closed shop" hiring and firing prerogatives, leadership
elections by acclamation, and mandatory dues without
"Although union membership is gradually declining," reports the
Economist Intelligence Unit, "the percentage of unionized workers
remains above 30 percent," mostly "at industrial plants employing
20 or more workers. Independent unions are rare in Mexico." The
majority of workers belong to one of only nine national labor
unions, which "enjoy strong political ties and are often
organized to rally in support of a politician's campaign.
Likewise, a politician who confronts unions can expect to face
union-led street protests."
The economic stagnation that has resulted in part from the
structural distortions to the economy caused by the rigid labor
market has forced 40 percent of Mexico's workers into the
The immense political power of the National Educational Workers'
Union (a teachers' union with about 650,000 members and the largest
labor union in Latin America), or the oil workers' union (the
richest in Latin America), or the social security employees' union
(which has thwarted any attempt at pension or health reform for
years) remains largely unchecked. Even a weak attempt at
reforming the labor market by "the Fox administration- which
avoided sensitive measures, such as linking wage rises to
productivity increases-was rejected" due to "the lobbying power of
the influential public-sector unions." This locked-down
situation leaves legions of informal and part-time workers out in
The remittances that Mexican workers in the U.S. send home to
their families are spent mostly on goods and services. If a portion
of this money could be drawn into investmentsto start small and
medium-sized businesses in Mexico, and if those investments could
be made in the context of a reformed domestic economic environment,
the resulting economic stimulation and job growth would reduce
out-migration pressures significantly. This could be achieved if
Mexico's federal and state governments adopted pro-growth economic
policies centering on job creation, robust free-market
competition, monopoly-breaking privatization of public-sector
enterprises, and anti-corruption measures.
CASE STUDIES IN THE NEED FOR REFORM
Mexico showcases numerous examples of the negative economic
effects of monopolies and duopolies. It is virtually impossible for
a company to break into certain markets-beer, cement,
textiles, or bread among them. According to the Economist
[The Mexican government owns] oil and other hydrocarbons; basic
petrochemicals; electricity; radioactive materials; and nuclear
energy. Other state-run sectors include the following: airports,
seaports and heliports; postal service; telegraph; radiotelegraphy;
minting and issuing of paper money; and certain mining areas. The
government also manages Mexico's development and trade banks,
including the North American Development Bank, created
alongside the North American Free-Trade Agreement (NAFTA) to
provide financing to environmental-infrastructure projects
along the U.S.-Mexico border.
The Mexican Congress awarded no-cost broadcasting frequency
spectrum to just two politically well-connected companies: Televisa
and its only rival, TV Azteca. The airline industry was opened up,
but only slightly. The two major national air carriers, Mexicana
and Aéromexico, were privatized in the 1980s but
reacquired by the Mexican government in the 1990s after they
experienced financial difficulties. Within the past few years, they
have been sold again to private interests, but they continue to
operate as a duopoly and exert their market power to block the
entry of any significant competition.
Further evidence of the need for extensive reform is provided by
three major industries-oil, telecommunications, and
electricity-that are sorely in need of competition.
Pemex: Mexico's Tarnished Crown Jewel. In analyzing
where reforms are needed most, a natural starting point is Mexico's
oil sector, which accounts for a substantial portion-9 percent in
2006-of the country's gross domestic product. State-owned Petroleos
Mexicanos (Pemex) has a monopoly on all upstream and downstream
exploitation of Mexico's rich oil and natural gas resources,
although the Mexican constitution specifically reserves only
"ownership of…petroleum and other hydrocarbons" for the
state. According to several business scholars, it does not
mandate the state monopoly of oil production and retail.
The oil and gas sector has been extremely sensitive
politically at least since the 1930s and the sexenio of the
revered Lazaro Cárdenas. Control of the oil industry strikes
at the very heart of the average Mexican's sense of
sovereignty, national self-image, and independence from the U.S.
(which invaded Mexico several times in the 19th and early 20th
In 1938, President Cárdenas created Pemex by
nationalizing the holdings of U.S. and Anglo-Dutch companies that
had largely developed Mexico's oil industry.In his seminal book on
the world petroleum industry, The Prize, Daniel Yergin writes
that "petroleum nationalization [was the] great symbolic and
passionate act of resistance to foreign control, which would become
central to the spirit of nationalism that tied [Mexico]
Rather than working for the Mexican people, however, Pemex seems
to exist primarily to generate revenue for the government treasury
and for its own union. With almost 140,000 workers, Pemex is wildly
overmanned. Its pre-tax earnings in 2007 were around $50 billion,
but it invested only $13 billion in development of new oil fields.
As a result, oil production is already falling and will continue to
decline rapidly unless new deep-water discoveries of proven oil
reserves are made in the Gulf of Mexico or Mexico's Pacific
waters. Pemex replaces only a fifth of the reserves it depletes,
and Mexico already imports 30 percent of the petroleum and 23
percent of the natural gas that it consumes. According to
Mexico's largest potential reserves are believed to be
located in the deep waters of the Gulf of Mexico, as much as 10,000
feet below the surface. Pemex does not have the technology or the
expertise to go after that deepwater oil. Over the past five years,
it has drilled six test wells in waters about 3,000 feet deep,
finding some gas, but it needs the help of international oil
companies, such as Brazil's Petrobras (PBR) or Norway's
StatoilHydro (STO), to mount a concerted deepwater
Although the Pemex monopoly ensured national sovereignty, it
came at a high price, feeding an unfortunate pattern of
widespread and heavy-handed government involvement in the economy,
as well as generating substantial graft and corruption. Former
Federal Reserve Chairman Alan Greenspan characterizes
Cárdenas's behavior as defiantly anti-American and observes
that "[h] is action had dire long-term consequences for
The Mexican Congress has taken some timid steps to increase
private investment in the energy sector, but not nearly enough
market incentives have been put into place to spur necessary
competition in such a vital sector of the economy. This has
led to a Pemex that is "inefficient, undercapitalized and
utilized as a golden goose by the government," whose
"existence exacerbates corruption." In the 2000 election, according
to some observers, Pemex funds wound up in the coffers of many PRI
candidates. By 2000, the PRI had exercised a political monopoly in
Mexico for 70 straight years, since the time of President
Cárdenas. The PRI power base rested (and continues to rest)
heavily on Pemex and the Pemex workers' union. An almost identical
and equally negative phenomenon can be observed today in the
Venezuela of Hugo Chavez.
"Pemex resembles a poorly run government ministry,"
according to The Economist. "Its past three chief
executives have all been accused of corruption," and the
company "must comply with onerous procurement rules meant to
prevent graft, which in practice are merely a drag on getting
things done" (and clearly have not achieved their objective of
eliminating corruption within Pemex). According to Joel Kurtzman,
Pemex is also "the world's most heavily indebted oil company," "one
of the [world's] least efficient producers," and "so bogged down by
bureaucracy, conflicting interests, political meddling and
sweetheart union deals, that it has failed to find any new oil
reserves in years."
Professor Rafael Pampillón of the Instituto de Empresa
graduate business school in Spain has noted that:
[A]ll the gas stations [in Mexico] are PEMEX. It is a good
idea to provide PEMEX with higher tax revenues but it is much more
important to improve competitiveness in the [energy] sector by
permitting the arrival of companies from other countries-and even
by privatizing PEMEX, although the current practice [of state
control of PEMEX] is deeply rooted in Mexican tradition.
Pampillón argues that more competition in the Mexican
energy sector would benefit the entire country.
The PRI members of the Mexican Congress are fiercely resisting
even the minor Pemex reforms that President Calderón is
proposing. The reason, as noted by The Wall Street Journal's Mary
[T]he guardians of the status quo-politicians,
suppliers and labor-would suffer if competition hit the market.
Private Mexican contractors who "supply" Pemex are
[accustomed] …to business transactions tied to political
connections. If there were multiple buyers in competition with one
another, those political profit margins would evaporate.
That benefit will be realized if President Calderón
overcomes PRI resistance and speeds up efforts at reform of
Mexico's energy sector to help it catch up with the majority of
other producer countries. Although some "important changes
have been introduced to attract private investment in natural gas
transportation and distribution":
[The most important] issue in the immediate term will be the
evolution of competition in the market. Hence, one of the first
issues to be tackled to enhance the role of market forces in the
sector is Pemex' discretionary discounts on domestic gas and access
to transport services made possible by its monopoly in domestic
production and its overwhelming dominance in [pipeline]
Telmex: Toothless Regulation That Fleeces Mexican and U.S.
Consumers. The telecommunications sector presents what is
probably the best case study of the distorting impact of monopolies
on the Mexican economy, in this case the de facto monopoly
controlled by Grupo Carso, the privately held firm owned by Mexican
billionaire Carlos Slim and his family. Through his ownership of
the former state-owned monopoly Teléfonos de
México (Telmex), which had been Mexico's "Ma Bell,"
Slim owns more than 90 percent of Mexico's fixed telephone
landlines, and "[h] is America Movil's Telcel unit has 77 percent
of wireless subscribers in the country."
Compare that to the United States, where four well-regulated
national cell phone carriers compete ferociously and drive down
prices paid by consumers. Telmex and Telcel dominate the
telecom industry and wield "significant influence over key
regulatory and government decision makers." Telmex has often been
accused of finding innovative ways to block the entry of
competitors. As Mary Anastasia O'Grady has noted in The Wall Street
Journal, "Mr. Slim's company has been masterful in
protecting its turf. One example is its success in using
endless litigation to fend off regulatory orders that it provide
interconnections to other carriers at fair rates, as required by
"Mexico lacks a competition culture," according to the
Paris-based Organisation for Economic Co-operation and Development
(OECD). "The Federal Competition Commission is fairly
toothless," says The Economist, "though a new law is supposed to
give it more bite. Some analysts are hoping that technological
innovation will undermine Telmex's monopoly. But it is seeking to
expand into new businesses, such as cable television."
In 1999, the U.S. Federal Communications Commission accused
Telmex (and then-partner Sprint) of "anticompetitive practices in
the long-distance market" by overcharging Mexicans in the U.S.
when they called home to Mexico. "U.S. consumers have to pay much
more than they should to reach friends and relatives in Mexico,"
said then-FCC Chairman William E. Kennard. "The carriers have not
moved quickly enough to bring these rates down and ensure
meaningful competition." The U.S. government complained about the
Telmex practices to the World Trade Organization, which ruled
against Telmex in 2002.
Critics complain that Slim's competitors have been "victimized"
by his cynical "manipulation of Mexico's weak regulatory agencies
and arcane laws," especially his notorious abuse of the amparo, or
injunction, which allows any citizen who feels that a government
decision violates his constitutional rights to ask a judge to delay
its implementation-often for years.
Since 1998, Slim has made use of more than 60 amparos to
thwart decisions by Mexico's antitrust agency, the Comisión
Federal de Competencia, ordering Telmex to reduce its
interconnection rates-the fees rivals must pay to use Telmex trunk
lines. "Telmex's very aggressive use of the amparo has ended any
hope of an open telecommunications market in Mexico," says Karina
Duyich, [former head of] AT&T Mexico's legal
Carlos Slim: Mexico's Fattest Cat. Perhaps the
wealthiest person on the planet, Mexican
telecommunications mogul Carlos Slim has been chastised for
his lack of charity. Slim, whose father immigrated to Mexico from
Lebanon, controls companies that account for one-third of the
investment value of the $400 billion Mexican Bolsa (stock
Slim, 68, amassed his nearly $60 billion fortune in a
nation where per capita income is less than $6,800 a year and half
the population lives in poverty. His wealth amounts to 6.3 percent
of Mexico's annual economic output: If Bill Gates owned a
similar chunk of the U.S., he would be worth $784 billion.
According to one account:
[I]t takes about nine of the captains of industry and
finance of the 19th century and early 20th centuries-Rockefeller,
Cornelius Vanderbilt, John J. Astor, Andrew Carnegie,
Alexander Stewart, Frederick Weyerhaeuser, Jay Gould and Marshall
Field-to replicate the footprint that Mr. Slim has left on
As another observer has written, that's "enough to give any
The cash from Telmex has financed relentless diversification.
Slim's America Movil is the largest mobile-phone operator in Latin
America. His family also holds a string of industrial and retailing
businesses, including the Mexican operations of Sears. He is
the biggest tenant in the country's shopping centers. His latest
venture is Ideal, an infrastructure company working mainly in the
oil industry. He is also the second-largest shareholder in
Televisa, Mexico's television giant. In addition to landlines
and cellular, Telmex also enjoys an important share of the
broadband Internet market and is trying to become a dominant force
in Mexico's pay-TV market. Telmex also has huge business
holdings in the U.S. as well as in other South American
Professor George W. Grayson, an expert on Mexico at the
College of William and Mary, coined the term "Slimlandia" to
describe how entrenched the Slim family's companies are in the
daily lives of Mexicans. It is not a reverential term. Many
Mexicans hoped that privatization, which began in the early
1990s, would create competition and drive prices down drastically,
but that has not happened. "Slim is one of a dozen fat cats in
Mexico who impede that country's growth because they run monopolies
or oligopolies," says Grayson. "The Mexican economy is highly
inefficient, and it is losing its competitive standing
vis-à-vis other countries because of people like
Telmex Privatization: A Sweetheart Deal. As a recent
report by the OECD Economics Department notes, "Mexico remains one
of the OECD countries with the highest charges, especially for
business use. In the mobile telephone market, in particular, the
dominant firm [Telmex] is using its market power to squeeze out
other players." Clearly, the many customers who are being held
hostage to both Telmex and Telcel are not getting their money's
worth for the high prices they pay. The government of
then-President Carlos Salinas de Gortari did very little to reform
or modernize Telmex when it was privatized in 1990 during the
Mexican government's preparations for entry into NAFTA. The
Salinas administration simply issued regulations that
protected the Telmex long-distance service monopoly until
In participation with minority partners France Telecom and
Southwestern Bell (now AT&T), Slim acquired a 51 percent voting
interest in Telmex, representing over 20 percent of the equity
in the company. Although he denies accusations that Salinas
gave him special treatment, Slim was able to buy Telmex from the
government for just $1.7 billion.
Rumors about the details of the Telmex purchase have
swirled ever since then. Slim was a member of Salinas's inner
circle and attended a legendary 1993 dinner at which Salinas
purportedly asked each guest to contribute $25 million to his
PRI party's war chest in return for favorable treatment during the
coming wave of privatizations. "Although no evidence has
emerged, many Mexicans suspect that Mr. Salinas secretly profited
from the sale of Telmex."
Telmex service was terrible in 1995 when Slim took over.Although
service improved after he "plowed more than $16 billion into the
carrier to upgrade infrastructure and improve customer
service," Carlos Slim continues to abuse his monopoly
position, overcharging both Mexicans at home and those in the U.S.
trying to call home.
Poor Telmex service is one of the leading complaints
received by Profeco, Mexico's Federal Consumer Protection
Agency. Under pressure in part from increased competition from
such long-distance Internet phone service providers as Skype
and Vonage,Telmex has publicized the fact that it has not raised
rates for basic landline service for eight years, which has hurt
profit margins but blunts political efforts to break up the
company. Meanwhile, Skype and Vonage have alleged that Telmex
has attempted to block their service to Mexico.
Teledensity (the number oflandlines per capita, close to 100
percent in the U.S.) in Mexico, at 19 percent, is among the lowest
in Latin America because of the artificially high prices that
Telmex charges and the lack of competition. This low level of
interconnectedness is another major factor holding back
Telmex owns and operates international businesses including
fixed-line and wireless operators, television cable companies, and
Internet service providers in Brazil, Argentina, Chile, Colombia,
Ecuador, and Peru. These businesses account for about 30 percent of
Telmex's total revenue. In 1995, government regulators allowed
Telmex to buy a 49 percent stake in Cablevision, the
cable-television division of Mexico's media powerhouse,
Televisa. Telmex has been criticized by competitors and
legislators for using its influence to head off stronger
regulation. Analysts say the problem is Mexico's weak regulatory
Reforms to curtail Telmex's monopoly power during the Ernesto
Zedillo and Vicente Fox administrations (1994 to 2006) yielded
modest reforms at best. As recently as October 2007, an OECD report
concluded that Mexico must do more to increase competition in its
energy and telecommunications industries. Additionally, "OECD noted
that telephone costs in Mexico are among the highest among OECD
member countries in terms of purchasing power parity." Clearly,
Mexicans would be well served by increased consumer choice and
a more robust and transparent telecommunications sector.
In October 2007, Mexico's Federal Competition Commission (CFC)
began an investigation of Carlos Slim for alleged monopoly
practices, trying "to determine whether the two companies,
owned by Slim, America Movil and Telmex have a monopoly on the
Splitting up Telmex Would Create Jobs. BreakingTelmex's
vise-like grip on Mexico's telecommunications sector would
create new, sustainable, well-paying jobs for Mexicans in
Mexico. A recent paper by two prominent World Bank scholars,
Isabel Guerrero and Luis Felipe Lopez-Calva, underscores this
Many studies confirm that lack of competition is a
crucial problem holding back the possibility of strong growth in
Mexico. The Mexican Competitiveness Institute (IMCO) developed a
model to assess the main factors behind the low and failing
competitiveness [in] Mexico. Drawing on cross-country information,
they estimated point elasticities for the impact of investment per
worker of a ten percent [sic] in different dependent
variables. The top four interventions which would bring about
an improvement in competitiveness in Mexico are: (i)
improvements in the competition environment; (ii) changes in taxes
and tax regulations; (iii) improvements in administrative
regulations and the investment climate; and (iv)
An Inefficient, State-Owned Electricity Monopoly.
Mexico's national sovereignty sensitivities historically have
extended beyond the oil patch to embrace the entire energy sector,
which Mexicans have considered strategic. During the nationalistic
"import substitution" craze that swept through Latin America in the
1960s, the Mexican government chose to nationalize the country's
electricity production and distribution companies, imposing
limitations on private participation and foreign companies' ability
to operate. They are permitted to do so only through specific
service contracts with the Federal Electricity Commission (CFE) and
Luz y Fuerza del Centro (LFC).
The electricity sector is federally owned, with the CFE having
exclusive rights to provide electric services throughout
Mexico. The CFE is one of Mexico's largest companies.
According to the Economist Intelligence Unit:
[Its monopoly status is] embedded in the Mexican
constitution and is defined by its Electricity Law. CFE is
vertically integrated and provides generation, transmission and
distribution services for all of Mexico with the exception of
electric distribution in the Mexico City metropolitan area. Luz y
Fuerza del Centro (LFC), another wholly owned decentralized agency
of the Mexican government, is responsible for the distribution
of electricity in Mexico City and purchases some of its power from
Past attempts at reform have been met with strong political and
social resistance in Mexico, where electricity subsidies for
residential consumers absorb substantial fiscal resources.
Meanwhile, Mexico's power generation sector is failing to install
sufficient additional power generation to meet future needs.
Historically, political constraints have meant that any funding to
increase generating ability had to come from the already
overextended federal budget. Nevertheless, a recent report by
the Mexican energy ministry shows that between 2009 and 2014, a
substantial amount of new generating capacity will have to come
from private investment in order to meet demand.
A good illustration of Mexico's highly politicized energy
regulatory environment occurred in 2004 when leftists in Congress,
who oppose even the slightest degree of energy privatization, filed
a complaint with the Auditoría Superior de la
Federaçion (ASF), asking it to review the legality of those
few generation permits that had been granted by the Comisión
Reguladora de Energá (CRE) to private parties. The ASF found
that the generation permits granted by the CRE were illegal and
contrary to the constitution. The energy ministry filed a
constitutional challenge before the supreme court alleging
that the ASF does not have authority to decide on the legality of
the generation permits granted to private parties by the CRE,
and the supreme court agreed to hear the case, thereby tying up the
permits for lengthy periods of litigation.
President Zedillo, a Yale-trained economist, proposed a
complex set of reforms in 1999 that would have led to the sale of
the CFE and LFC, but the Congress killed the reforms. "An
electricityreform package that would have strengthened the legal
framework and facilitate growth in privateinvestment was
proposed by the Fox administration," according to the Economist
Intelligence Unit, "but was blocked. The Calderón
administration hopes to push a similar project through [in 2008]
Increasing private participation in the electricity sector would
also help Mexico to do a better job of controlling air pollution,
for which Mexico City is justly infamous. According to a study by
the International Energy Agency, Mexico is one of the 10 worst
polluters among developing countries. Generally, only countries
with a high degree of economic freedom and market-based
democracy have the means to spend the large sums required to clean
OTHER OBSTACLES TO REFORM
Mexico's Plutocracy. For any of its reform
measures to succeed, the Mexican government must dismantle the
country's corporatist system of price supports, subsidies, and
special-interest tax exemptions. This system has evolved over
many years in an incestuous atmosphere of collusion among senior
government, labor, and business elites.
Among the primary systemic failures of Mexico's current
political arrangement is the control that key economic actors in
the private sector exercise over the country's legislative and
executive bodies. In effect, Mexico is governed by a permanent and
unelected plutocracy. The wealth of the country is concentrated in
the hands of too few individuals.
Failure to Protect Intellectual Property Rights. If the
monopolies can be reined in, not only will domestic competitors
benefit, but so will foreign competitors. There is another
problem, however, that is impeding foreign investors.
In order for Mexico to attract additional foreign direct
investment (most notably in telecommunications and energy), it
must strengthen enforcement mechanisms to protect intellectual
property rights. By placing Mexico on its Special 301 Watch List in
2007 for the third year in a row, the Office of the United States
Trade Representative (USTR) rebuked the Mexican government for its
weak enforcement of intellectual property rights.
Inadequate Highways and Other Infrastructure
Problems. As noted by the OECD, the competitiveness of
Mexican firms is being hampered by the poor quality and high cost
of transportation, which are also disincentives to foreign
investment and to Mexico's productivity growth:
The road network and trucking are plagued by inefficiencies
and there are border issues that need to be addressed. The
government is committed to further developing road infrastructure
through public-private partnerships and concessions for toll
roads. Clarifying long term government plans would help
private sector involvement.
Additional detail is provided by the Economist Intelligence
Mexico's road network stood at 355,796 km in 2005, including
122,677 km of paved roads and 14,874 km of major road systems. Poor
coordination at the state and federal level has resulted in poor
planning of the road network [in the 1990s] and in maintenance
problems. Mexico's roads and highways are still inadequate in
the more remote parts of the country…. It continues to prove
difficult to attract private capital to road building, maintenance
and operation; in addition, government auctions for road
concessions are complicated.
Subsidies. Although President Calderón is
trying to reform the energy sector, these reforms are doomed
to fail unless he is able first to address the excessive government
subsidies for that sector. According to a 2007 study by the
International Association for Energy Economics, electricity prices
in Mexico are "heavily and unevenly subsidized"- the average
electricity subsidy is 30 percent of non-discounted retail rates,
and residential subsidies are more than 50 percent. To offset the
cost of the subsidies, excessively high energy prices are
charged to those businesses and consumers that do not receive
subsidies, and those high rates are "hurting the competitive
position of Mexican industries."
These subsidies are also hurting the government's budget,
frittering away resources that could be used more productively to
improve infrastructure. "In 2007," reports the Financial
Times, "the Mexican federal government…earmarked 105.6
billion pesos to subsidize power consumption, which is equal to 1.1
percent of Mexico's gross domestic product (GDP)."
Mexico's Political Oligopoly. For 70 years, just one
party-the PRI-had a complete lock on Mexican politics. Now
three parties share the power, but no fourth party can enter the
political arena or have access to the taxpayer subsidies handed out
to these three (to the tune of more than half a billion dollars in
2007) without their consent.
Independent candidates are not allowed to run. The absence of
consecutive re-election at any level reinforces the party machines'
power: They pick candidates to run for all local and state offices
who are then merely ratified by the voters at the polls. The only
primaries or conventions that are held are to determine candidates
at the national level.
Political Reforms Blocked. Last year, President
Calderón won approval from Congress for a package of fiscal
reform measures intended to increase non-oil tax revenue by 2
percent of Mexico's GDP. Its approval gives the president political
momentum as he seeks the energy reform that is next on his agenda
in 2008. But this victory came at a price: The president was
forced "to acquiesce in an opposition-inspired constitutional
amendment on electoral reform" that is "the legacy of last year's
bitter presidential election, in which Mr. Calderón
narrowly defeated Andrés Manuel López Obrador of the
center-left Party of the Democratic Revolution (PRD)."
A TEDDY ROOSEVELT?
In the late 19th and early 20th centuries, the United States
faced similar challenges. President Theodore Roosevelt pressured
Congress to implement existing anti-trust legislation (e.g.,
the Sherman Anti-Trust Act of 1890) and to pass additional
measures, such as the law that created the Interstate Commerce
Commission. By doing so, Roosevelt led the U.S. government to stand
courageously against powerful banking, oil, and steel magnates of
the day and enforce regulations and laws to curb the power of
monopolies to choke off competition and hamper free-market
Although President Roosevelt's name is most often associated
with trust-busting in the U.S., his successor, William Howard Taft,
broke up twice as many trusts during his tenure. Rather than
encouraging unnecessary and burdensome regulations, Roosevelt
and Taft used governmental powers in the manner envisioned by the
Founders to create a space where competition could provide American
consumers with the best goods and services at the lowest price.
The head of Mexico's Federal Competition Commission,
Eduardo Perez Motta, recently announced that his agency (the
equivalent of the Anti-Trust Division in the U.S. Department of
Justice) will re-open an investigation of Carlos Slim's telephone
companies, Telefonos de Mexico and America Movil. Slim's empire
today is far greater than even John D. Rockefeller's at the time of
his death in 1937. If President Calderón can be
Mexico's Teddy Roosevelt, perhaps Mr. Perez Motta can become
Mexico's President Taft.
Calderón himself is on record as supporting the changes
that he knows are needed: "As the head of Mexico's energy sector
[2003-2006] , he promoted the modernization of state-owned
companies as president of the Board of Directors of PEMEX, the
Federal Commission of Electricity (CFE) and the electricity company
Luz y Fuerza del Centro (LyFC)."
The prosperity and national security of the United States have
already been enhanced by the progress made by Mexico since it
joined NAFTA in 1994. For further progress, however, the barriers
to entry into the marketplace of political ideas also have to come
What is required is a careful examination of the vast areas of
Mexico's economy that are state-owned or where private monopolies
and duopolies are permitted by the state to operate without
competition. Attention must also be given to labor laws that
hobble the indigenous workforce and force millions into the
informal economy, as well as to the political straightjacket that
has bound Mexico's leadership. These reforms will require a level
of political will by all Mexican politicians that is strong enough
to break these shackles and create an atmosphere that fosters
greater economic opportunity.
This would, of course, be a daunting task at every level,
perhaps even a dangerous one. But it is not impossible. The result
would be a transformed Mexico-a Mexico that has never before
existed, that attracts workers with its economic opportunities
rather than repelling them. The pressure on the U.S. border would
ease considerably and might even disappear.
With strong personal leadership that inspires the Mexican
population, a coalition with the political will to persist just
might be forged. President Calderón, were he to succeed,
would be hailed as the Teddy Roosevelt of Mexico, and Mexico and
the United States would both be the better for it.
WHAT NEEDS TO BE DONE
The Mexican government should open its nationalized oil, natural
gas, and electricity sectors to private investment and
participation. Pemex, for instance, should consider leasing
deep-water areas under its control in the Gulf of Mexico to private
oil companies to develop the fields, sell the oil produced, and pay
royalties from their profits to the Mexican government.
Private electricity-generating companies in Mexico and the
U.S. should be encouraged to sell power to the two state-owned
companies, the Federal Electricity Commission and Central Power and
Light, and to invest in building additional power-generating
ability in Mexico.
The Mexican government should break up private-sector
monopolies and duopolies by passage, implementation, and
enforcement of more effective anti-trust legislation.
The Mexican government should enforce its laws more aggressively
to protect all intellectual property rights, for Mexican as well as
for foreign rights holders, by increasing funding and staffing of
the three relevant government agencies (the Office of the Attorney
General, the Mexican Institute of Industrial Property; and the
National Institute of Author Rights). The government should also
increase training for Mexican police and the Mexican Customs
Service to spot IPR violations and take enforcement actions.
The Mexican government should eliminate the distortionary price
controls and subsidies that have tilted the competitive playing
field toward monopolies and duopolies in numerous sectors of
the economy, especially in telecommunications, airlines,
banking, broadcasting, and food production. These changes would
encourage foreign direct investment in all sectors, especially
energy, banking, and telecommunications, and the lower prices
from increased competition would benefit Mexican consumers.
The Mexican government should implement a substantial,
multi-year infrastructure improvement programwith dramatically
increased public and private funding of infrastructure development
projects (e.g., privately owned toll roads),beginning with
passage by the Mexican Congress of the ambitious infrastructure
program recently proposed by President Calderón.
The Bush Administration, through the U.S. Department of Justice,
should investigate the operations of Mexican monopolies in the
United States, especially in the telecommunications,
transportation, and energy sectors. The Justice Department
should produce a report for the President that identifies
those monopolies and lays out any actions that the U.S. government
can take to encourage these companies to support the creation of
viable domestic and foreign competitors within their economic
sectors in Mexico.
The Bush Administration, through the U.S. Department of the
Treasury, should commission a study by an independent private
consultant to determine the level of remittances in all forms that
are sent to Mexico from migrants in the U.S.
The Bush Administration should negotiate with the government of
Mexico to design new co-funded assistance programs focused on
intensive infrastructural, developmental, and technical
assistance in those areas within Mexico that are the major sources
of immigration to the United States.
The Bush Administration should negotiate with the Mexican
government to design new assistance programs in conjunction with
leading U.S information technology and adult-education
companies with the goal of improving educational opportunities
in Mexico through greater access to technology and information
resources. Private U.S. companies should provide the bulk of
funding for the projects in return for access to the Mexican
market, to be negotiated with the Mexican government.
Israel Ortega is a Senior Media Services Associate at
the Heritage Foundation and has more than half a decade working in
Congress and Washington, D.C.
First appeared in the Latin Business Chronicle
Mexico should open its nationalized oil, natural gas, and electricity sectors to private investment and participation.
Strategic Initiatives Manager
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