Editorial Board

Mexico’s New President Needs to Bust Its Business Cartels

Whoever is elected Mexico’s next president on Sunday must confront an existential challenge from cartels -- and not just the drug syndicates that have turned swathes of the country into 24/7 shooting galleries.

From bread, beer and milk to telephones, television and electricity, monopolies and duopolies dominate Mexico’s economy. Loosening their grip would give Mexican consumers more choices and more money to spend. It would also spur economic development and invigorate political and economic institutions, thereby helping society combat the effects of the drug war violence that has led to more than 47,000 deaths over the past six years.

In a campaign focused more on personalities than policies, the three leading candidates -- Enrique Pena Nieto of the Institutional Revolutionary Party, Andres Manuel Lopez Obrador of the Democratic Revolution Party and Josefina Vazquez Mota of the incumbent National Action Party -- didn’t necessarily dwell on this concentration in the Mexican economy. Yet two telling examples in energy and telecommunications spell out its negative consequences for ordinary Mexicans and why the next president needs to undertake a wide-ranging reform. For different reasons, both are also of symbolic importance.

No cow is more sacred than Petroleos Mexicanos, or Pemex, the state-owned oil company created in 1938 by the expropriation of foreign companies. Partly as a result of a ban on foreign investment in the oil sector -- a prohibition that Mexico shares with Iran and North Korea -- Pemex’s output has been declining for almost a decade, and it has lagged in finding and exploiting new reserves. Electricity production (which relies heavily on oil) is also controlled by a state monopoly notorious for its high prices (nearly twice as high as in the U.S.) and poor service. This year, the World Bank and International Finance Corp. ranked Mexico 142 out of 183 countries in the ease of getting electricity.

Like Pemex, Carlos Slim, the world’s richest man, may be a source of pride for some Mexicans. But they probably feel less warm toward his company, America Movil SAB, which controls 80 percent and 70 percent, respectively, of the landline and mobile telephone markets. According to the Organization for Economic Cooperation and Development, high prices and poor service in telecommunications cost Mexico about $25 billion a year from 2005 to 2009, equivalent to 2 percent of gross domestic product. (Slim’s company with that assessment.) Mexico also ranks near the bottom of OECD countries in market penetration for fixed, mobile and broadband service, and investment per capita is lower than in any other OECD country.

Television is effectively a duopoly between Grupo Televisa SAB, which controls 70 percent of the free-to-air TV and about half of the cable and satellite pay-TV market, and TV Azteca SAB. Mexico’s Federal Competition Commission estimates that more competition in pay TV could reduce prices and grow the size of the market by more than a third.

The list of outsized companies cited for squelching competition goes on, including Cemex SAB, the largest cement maker in the Americas, and Grupo Bimbo SAB, the world’s largest bread maker. According to Eduardo Perez Motta, the head of the competition commission, poor Mexicans (who made up 51 percent of the population in 2010) pay as much as 40 percent more for basic goods and services because of monopolistic practices.

Their hopes for deliverance would now seem to rest with the Institutional Revolutionary Party, or PRI, the party once dubbed “the perfect dictatorship” by Nobel Prize-winner Mario Vargas Llosa for its seven-decade rule. If are correct, Pena Nieto is poised to carry the PRI back into the presidential residence at Los Pinos after a 12-year absence.

We hope that Pena Nieto will live up to his lofty but vague calls for reform, beginning with his plan to amend the constitution to allow private investment in the oil industry. Much will depend on whether his coalition can build the absolute majority in Congress needed to effect that change. The new governing party would need to hope for a constructive attitude from the incumbent National Action Party, which saw the PRI stymie many of its efforts at reform. As the party that first nationalized the oil industry, the PRI has the “Nixon-went-to-China” credibility to bring along the nation on this momentous change.

On our list of other steps that Pena Nieto could take to spur competition would be dropping his reluctance to lift the 49 percent foreign-ownership cap on fixed telephone lines. Beyond his proposal for dedicated antitrust courts, we hope that he will pursue other judicial reforms to even the playing field between deep-pocketed companies and still-relatively weak regulatory agencies. While Mexicans are neuralgic about foreign economic interventions, the U.S. and the European Union can help by expanding professional exchanges and consultations with Mexico’s competition commission.

Deeper challenges abound, such as increasing Mexico’s tax base, bringing more workers into the formal economy and taking on the powerful teachers’ union that has retarded the country’s educational progress. Political reforms over the past two decades, some set in motion by the PRI, have reduced the likelihood of its reversion to a “perfect dictatorship.” Now, by injecting more competition into the Mexican economy -- and restoring faith in government by more vigorously taking on the “other” cartels -- the PRI can help ensure that the country’s future is brighter than the party’s past.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

    Before it's here, it's on the Bloomberg Terminal.