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DECEMBER 13, 2013

MEXICO'S REFORMS: A CRUCIAL STEP FORWARD by Samuel George On the evening of December 12, following lengthy and heated debates, the Mexican Congress approved an energy-reform bill that will open the country’s oil and gas sector to international investors. The legislation, which proved more investor-friendly than initially expected, represents a major breakthrough in President Enrique Peña Nieto’s year-long quest for reform. In his first year at the helm, the president from the centrist PRI party has attempted to make up for decades of action deferred. His push for reform is an intensely political process in which the future of the Mexican economy hangs in the balance. Simply stated, Mexico cannot unleash its tremendous economic potential until the country addresses the bottlenecks that protect vested interests but preclude market sophistication. With an underperforming energy sector, inefficient taxation and stifling private-sector monopolies, Mexico needs a reform package with punch. The Key to Unlocking Mexican Growth Between offshore oil and shale gas, Mexico has the resources for an energy revolution, but PEMEX, the state-owned energy giant, lacks the capacity to exploit either fully. The current status quo threatens Mexico’s hard-fought foothold in global manufacturing. Despite massive shale gas reserves (the world’s sixth largest, according to Duncan Wood of the Wilson Center), PEMEX has been unable to meet spiking domestic gas demand. With pipelines from the US operating at capacity, Mexican gas prices have increased as those across the border have dropped precipitously. For industry, Mexican oil-based electricity runs at roughly twice the price of US gas-based electricity. Bloated energy costs eat away at the price advantages Mexico


hopes would entice US outfits to relocate south. A successful energy reform could attract the investment needed to unleash the energy revolution in Mexico’s manufacturing sector. The energy reform is not a done deal. The constitutional adjustments require ratification from at least 17 of Mexico’s 31 state legislatures, though most analysts expect little obstruction from a sufficient number of PRI-friendly states. The legal implications may be more nettlesome. Advocates for more liberal reforms celebrate the bill’s licenses, which function similarly to investor-desired concessions. Yet these concessions remain expressly prohibited, creating a gray area that could well end up in court. A Sign of Political Maturity Long resistant to reform, Mexico finally broached economic modernization and global integration in the early 1990s. Reduced tariffs, deregulation and pursuit of a North American Free Trade Agreement (NAFTA) all positioned Mexico to become a global manufacturing hub. But the reforms proved incomplete. In particular, the service sector—largely unaffected by opened borders—survived the reforms with inefficiencies intact. In some cases, the reforms worsened these inefficiencies, creating, for example, private monopolistic conditions in telecommunications. Through his Pacto por México agreement of December 2012, Peña Nieto brought the country’s three predominant political parties, PRI, PAN and PRD, together to confront the market deficiencies and outline a broad and ambitious agenda for energy, fiscal, banking, education, telecom and political reforms (see chart below). Progress has not always been smooth. Conservative PAN factions and business leaders remain bitter about fiscal reform, spearheaded by the leftist PRD. The conservatives believe that the reform extends the depth of duties paid by the existing tax base without increasing the breadth of the base. Meanwhile, the PRD withdrew from the Pacto por México in November 2013, objecting to PAN leadership of energy reform. The Pacto’s initiatives are, therefore, no faits accomplis. They are, rather, multi-step legal and political processes that can be ambushed by protests that bring Mexico City to a grinding halt or by the vested interests willing to fight tooth and nail to protect their privileged positions. President Peña Nieto may be the reform movement’s figurehead, but the policy proposals are not populist in nature. Rather, they are based on lengthy deliberations among the major parties. The international press might call this process “horse trading”, but for Mexico—a one-horse country for much of the last century—it is evidence of a burgeoning democracy. The estimated growth stimulus stemming from the reforms may not be tremendous, but this is not a get-rich-quick scheme. The president’s legislative agenda is, rather, a concerted effort to create the institutional foundation required to support the weighty potential of the Mexican economy.

Samuel George is a project manager at the Washington, DC-based Bertelsmann Foundation. samuel.george@bfna.org


Mexican Reforms in 2013 Sector

Telecom & Competition

Education

Fiscal

Approval Support

June

September

October

Opposition

Key Reforms Pacto Goal  Create autonomous regulators  Increase competition by auctioning off Economic PAN and PRD resist growth, four TV chains PAN, PRD, PRI PRI efforts to protect employment,  Create two free-to-air channels, along and broadcaster Televisa with a government channel competition

CNTE (dissident teachers’ union) won PAN, PRD, PRI some concessions to protect its members

PRD, PRI

PAN walked out of debate to protest increased VAT in northern states.

  

Evaluation system based on merit Curb the power of teachers’ unions Society of End the practice of retirees selling or rights passing down their positions

Establish universal pension system and unemployment insurance Increase tax rates for the wealthy and Democratic corporations governance Reduce maquiladora reimbursements

  

Banking

November

PRD sought changes, but they PAN, PRD, PRI were struck down by PAN and PRI

December

PRI, but PRI had to offer reform to entice PAN and PRD to join Pacto por México

 

Political

PAN, PRD

PAN, PRI

Energy

PRD opposed profitsharing and private (PRI allowed or foreign foreign contracting December contracting and rather than just pulled out of the profit sharing to Pacto por México in win PAN back after protest. fiscal reform)

 

Facilitate collection of loan guarantees by creating specialized courts Economic Allow banks to register losses to growth, increase loans to SMEs employment, and Government gains more regulatory competition power over financial firms End ban on reelection for legislators and mayors Allow independent candidates to run for public office Replace state elections-monitoring institutions with a federal one Open oil and gas industry to private and foreign investment through cash, profit-sharing, and production licensing Strips STPRM (Pemex union) of its five board member positions

Sources: Bertelsmann Foundation, The Economist, El Universal, Reuters, Forbes, LA Times Chart Compiled by Bertelsmann Foundation Research Assistant Brian Wenzler

Democratic governance

Economic growth, employment, and competition


ABOUT THE BERTELSMANN FOUNDATION The Bertelsmann Foundation is a private, non-partisan operating foundation, working to promote and strengthen transAtlantic cooperation. Serving as a platform for open dialogue among key stakeholders, the foundation develops practical policy recommendations on issues central to successful development on both sides of the ocean. ©Copyright 2013, Bertelsmann Foundation. All rights reserved. 1101 New York Avenue, NW, Suite 901 • Washington, DC 20005 USA • Tel: +1.202.384.1980 www.bfna.org


B|Brief - Mexico's Reforms: A Crucial Step Forward (13 Dec 2013)