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 Approval Support Opposition Key Reforms Pacto Goal

Telecom &

Competition

June PAN, PRD, PRI

PAN and PRD resist

PRI efforts to protect

broadcaster Televisa

Create autonomous regulators

Increase competition by auctioning off

four TV chains

Create two free-to-air channels, along with a government channel

Economic

growth,

employment,

and

competition

Education September PAN, PRD, PRI

CNTE (dissident

teachers’ union) won

some concessions to

protect its members

Evaluation system based on merit

Curb the power of teachers’ unions

End the practice of retirees selling or passing down their positions

Society of

rights

Fiscal October PRD, PRI

PAN walked out of

debate to protest

increased VAT in

northern states.

Establish universal pension system

and unemployment insurance

Increase tax rates for the wealthy and

corporations

Reduce maquiladora reimbursements

Democratic

governance

Banking November PAN, PRD, PRI

PRD sought

changes, but they

were struck down by

PAN and PRI

Facilitate collection of loan guarantees

by creating specialized courts

Allow banks to register losses to

increase loans to SMEs

Government gains more regulatory power over financial firms

Economic

growth,

employment,

and

competition

Political December PAN, PRD

PRI, but PRI had to

offer reform to

entice PAN and PRD

to join Pacto por

México

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

Democratic

governance

Energy December

PAN, PRI

(PRI allowed

foreign contracting

rather than just

profit sharing to

win PAN back after

fiscal reform)

PRD opposed profit-

sharing and private

or foreign

contracting and

pulled out of the

Pacto por México in

protest.

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

Economic

growth,

employment,

and

competition

Sources: Bertelsmann Foundation, The Economist, El Universal, Reuters, Forbes, LA Times

Chart Compiled by Bertelsmann Foundation Research Assistant Brian Wenzler

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