Addressing Mexico’s Persistent Inequality by Tackling Entrenched Monopolies

Addressing Mexico’s Persistent Inequality by Tackling Entrenched Monopolies

 

Mexico is plagued with a tarnished image: from the drug war to corruption within government institutions, the foreign press has been less than kind to the country in recent years. Despite the constant stream of unflattering headlines, the government has gradually succeeded in enacting sound macroeconomic policies and strengthening the domestic economy, which have helped Mexico weather the global economic crisis.

Box 1: Key economic indicators
GDP 2011 (nominal) US$ 1,183 bi (14th globally)
GDP growth 2011: 4.0%
Population: 112 mi
Population under 30 years of age: 55%

Though the country survived the global financial meltdown—as well as other crises such as the swine flu outbreak in 2009—it has not thrived. Over the past decade, the country’s income inequality has barely budged, notwithstanding the administration’s poverty reduction efforts and its continued investment in social assistance programs such as “Oportundidades”. The path forward to achieve equitable growth presents vast obstacles—as well as opportunities with the change of administration later this year—to truly make a significant dent in the country’s persistent inequality gap between rich and poor.

The current administration’s economic and social policies have achieved only feeble change

Following 71 years of uninterrupted rule by the Partido Revolucionario Institucional (PRI), the Partido Acción Nacional (PAN) took over the presidency in 2000 under Vicente Fox and won reelection under Felipe Calderón in 2006. As the second PAN administration comes to an end, it is clear that the party’s 12 years in power have not lived up to their original campaign slogan, “a government of change”. If anything, change has been marginal at best.

Indeed, Mexico’s socioeconomic segmentation (a measure of the economic and social wellbeing of households) indicates that the number of households in the upper and working classes has grown by only 2.7% over the past decade, with a similar reduction in the number of households living in poverty and marginal poverty over the same time period (see box 2).

Box 2: Evolution of Mexico’s Socioeconomic Segmentation

Source: AMI based on data supplied by the Asociación Mexicana de Agencias de Investigación

The World Bank’s GINI index places Mexico as the country with the least equal society of any OECD country.1 The socioeconomic reality is still stark: the wealthiest 10% of the population account for over 40% of consumption, whereas the poorest 20% account for less than 5% of consumption. Such entrenched stratification does not bode well for the incumbent party in the upcoming presidential elections, notwithstanding the Calderón administration’s attempts to enact policies to address such longstanding inequalities.

Indeed, while the current administration has kept the economy growing and has tried to emphasize employment creation—a wise policy focus given Mexico’s youth bulge (see box 1)— the global economic crisis severely undermined any possibility of making a significant dent in the country’s unemployment (especially among young working-age adults), let alone reverse the swelling of the country’s sizeable informal sector. Meanwhile, approaches such as promotion of education and technical training are likely to bear fruit only in the medium-to-long term, and only if government policies enable a truly competitive playing field.

Breaking up monopolies offers the potential for dramatic change

Mexico remains a country with strong potential, albeit inhibited by its own market structure. It is still a country where monopolies and oligopolies dominate key sectors of the economy, stifling economic growth, inhibiting the creation and entry of new companies into the market, and limiting the spread of new ideas, technology, and best practices. This is the case in sectors as diverse as telecoms—dominated by Carlos Slim’s Telmex in fixed-line services (with an 80% share of the market) and Telcel in mobile services (71%); Construction materials—dominated by Cemex; Mass media—dominated by the Azcáraga family’s Televisa (which has 70% of the market for radio and television) and Ricardo Salinas Pliego’s TV Azteca empire, which accounts for most of the remaining share (with 27% of the market).

Moreover, the challenges posed by this type of market structure are compounded by ineffective government policies and regulatory enforcement practices. Mexico has established regulatory bodies such as the Consumer Protection Commission (PROFECO), the Competition Commission (COFECO), the Telecoms Commission (COFETEL), yet their track records and effectiveness have been subject to much criticism. A glaring example is the much-talked about $1 billion-dollar fine COFECO slapped on Telcel in April 2011, only to revoke its own decision a year later.2

With such constraints, it is not surprising that over 13 million Mexicans out of a working-age population of approximately 60 million turn to the informal (and illicit) sector for their livelihoods and even to start their own businesses. If legislators are serious about taking Mexico to the next level of growth they must hold the government regulators accountable for enforcing the necessary rules to increase competition in the marketplace and reduce monopolistic practices. Only then will Mexico have the opportunity to reach its full growth potential.

There is an opportunity to change course with the forthcoming presidential and congressional elections in July. The new administration and freshly elected Congress could set the tone by debating and enacting legislation to strengthen existing regulatory bodies responsible for enforcing market competition and ensure their decisions are enforced. And, if necessary, Congress ought to push for the break-up of the remaining monopolies through targeted legislation.

The prospects for reform will depend chiefly on who is elected president. Only one of the three leading presidential contenders' (the PRD's Andrés Manuel López Obrador) has made fighting such entrenched business interests a central focus of his campaign, but he is unlikely to win. The PRI candidate and most likely winner, Enrique Peña Nieto, has made few concrete commitments. While he has indicated that he would like to reduce monopolistic practices, he has strong ties to several business groups, such as Grupo OHL (a multinational Spanish construction consortium) and Televisa, making it unlikely that he would challenge the market structure in these sectors.

Outlook

The prospects for changing the underlying socioeconomic divisions in the short term are slim. As the current administration’s record shows, even sound and pragmatic macroeconomic policies have barely altered the overall distribution of wealth in Mexico in the past decade. Tackling the power of entrenched monopolies in key sectors of the economy would represent a bold move to challenge the status quo, and would allow the economy to reap enormous benefits. The next administration has an opportunity to make a difference, yet it requires decisive action against powerful interest groups. The front-runner’s ties to select monopolies suggest his approach would be limited at best, and heavily skewed toward creating favored "national champions" at worst. Does this mean only more of the same for Mexico or is change finally going to come?




Guillaume Corpart is the Managing Director of Americas Market Intelligence and a veteran of Latin American competitive intelligence and strategy consulting.


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Notes
1 World Bank, Gini Index, 2010 data - http://data.worldbank.org/indicator/SI.POV.GINI
2 The COFECO imposed a record $1 billion-dollar fine on América Móvil’s Telcel unit in April 2011 after ruling the company charged excessive prices to wireless and fixed-line competitors to connect to its network. The company successfully appealed the decision, which left the COFECO in the embarrassing position of having to revoke its own decision and nullify the sanction it had imposed—but never enforced—a year earlier. The revocation of the fine leaves the impression that regulators in Mexico lack the muscle to reign in powerful businessmen such as Carlos Slim. Interestingly, the markets share a similar view: they had already bet that América Móvil would skirt the fine, with the company’s share price reaching its highest level since February 2011 (before the fist mention of the fine and concerns of a regulatory crackdown).

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