Calderón's challenge: Confronting monopolies

By , Staff writer of The Christian Science Monitor

Mexicans run into near-monopolies at every turn. When they pick up a phone (to be charged rates above the international average), it's almost certain that the service provider is Telmex, which owns 94 percent of landlines. When they turn on the TV at night, they're probably viewing a channel owned by one of two dominant broadcasters.

Usually, they just sigh.

But this month, the price of corn tortillas, dominated by a company owning 70 percent of the tortilla and cornmeal market, shot up by more than 50 percent in some parts of the country. That sent the war against price gouging, usually reserved to regulatory agency meetings, pouring into the streets – with housewives marching to demand an answer.

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The unrest was enough to spur the nation's antitrust watchdog to launch an investigation, threatening fines of up to $6.4 million on any company engaged in monopolistic practices.

For President Felipe Calderón, though, the "tortilla wars" could ultimately portend something much larger. He campaigned as the "jobs president," but if history is to grant him that title, he faces tough economic reforms ahead. Economists say loosening the tight grip that business elites have on the economy should be near the top of the list for a country that is losing position globally – in no small part because of the economic concentration that keeps competition down and prices high.

"Monopolies are one of the top three reasons that Mexico is not growing faster," says Luis Felipe Lopez-Calva, who is joining the UN as the chief economist for Latin America and the Caribbean. He's one author of a recent World Bank study showing that Mexican oligopolies such as Telmex, public monopolies such as oil company Pemex, and the nation's powerful public-sector unions hurt competitiveness and exacerbate the divide between rich and poor. Under the administration of former president Vicente Fox, it showed, billionaires got richer – their net worth growing steadily in recent years to 6 percent of GDP in 2006 – while nearly half of Mexico's 106 million residents continued to live in poverty.

Average joes feel the pinch

"This is a country of pure extortion," says Victor Manuel Martinez, a locksmith and father of two, who laments the high costs he pays for telephone service and electricity in the simple shop he set up on a Mexico City sidewalk.

In Mexico, electricity is dominated by a state-controlled monopoly, and Mexicans pay some of the highest rates in the world, according to the World Bank study.

To cover his expenses, Mr. Martinez says, he must raise his prices: selling a $2 lock for double that amount, for example. High costs, especially for food and cellphone service, also affect his personal budget. "Monopolies don't let you progress," he says.

Carlos Slim, the world's third-richest man behind Bill Gates and Warren Buffett according to Forbes magazine, owns 94 percent of landlines with his company Telmex, and over 70 percent of the mobile phone industry. "I only use it for emergencies or work," says Martinez, pulling his phone out of his jeans pocket only to tell a passerby the time.

"Mexico is a country of privilege. Instead of competing for consumers to buy their goods or their services [big businesses] are always looking for special privileges," says Eduardo Perez Motta, who heads the Federal Competition Commission, the country's antitrust regulator.

'Jobs president' and monopolies

With his master's degree in economics and a lifetime in politics, few people know which economic reforms Mexico needs better than the man who campaigned as the "jobs president," Calderón's friends say. Tax collection rates are among the lowest in Latin America. Labor laws make it hard to fire inefficient employees. Corruption and bureaucracy dissuade investment.

Mr. Fox had promised to create 6 million jobs to sustain the growing workforce, but just once, this past year, came close to his target. By the end of his term, only an additional 1.5 million formal jobs were registered with the Mexican Institute for Social Security. Growth averaged just over 2 percent annually, and undocumented immigration to the US continued unabated.

Some doubt whether Calderón will fare much better if he doesn't also do something to prevent monopolistic practices.

It was Calderón's rival for the presidential slot, Andrés Manuel López Obrador, who threatened the nation's leviathans, many of whom were Calderón's most loyal supporters. But because the cliffhanger race highlighted the income divide so starkly, says Mr. Perez Motta, Calderón may have no choice but to try to disband the stubborn concentration of wealth if he wants to meet his campaign pledge and prove that he is not beholden to vested interests.

"Mexico is a lot more competitive electorally. I think the PAN [Calderón's party] has to consider going after some of these oligopolies for economic purposes, but they are also going to have to consider it for political reasons," says Armand Peschard-Sverdrup, director of the Mexico Project at the Center for Strategic and International Studies, a Washington research organization. "It's not a matter of whether he goes after certain sectors and how aggressive he is toward breaking up these oligopolies. It's a matter of how and when."

In his first address to the nation as president, Calderón said that employment was a top priority and that it was "indispensable to remove the obstacles that impede businesses and the economy from growing faster."

When pressed on the issue of monopolies at a press conference last Sunday, he said: "I am convinced that competition benefits consumers and makes economies more efficient. It seems to me that public and private monopolies don't respond, necessarily, to a new world context, in which the interaction of consumers and products generate much bigger markets."

Andrés Rozental, who was deputy foreign minister from 1988-94 and knows Calderón well, says that a careful parsing of that statement might signal that fighting monopolies is not a key strategy for now. "He meant 'my own personal feeling' – he was not saying 'our government policy toward monopolies is,' " says Mr. Rozental.

What Calderón is doing for the economy

Calderón last week announced a jobs creation program for young Mexicans, including cash incentives to companies that hire first-time workers. On Thursday, in a meeting with executives of foreign firms, Calderón said Mexico welcomed long-term investment to help create jobs and expand the economy.

"While other governments in the world and Latin America are thinking about expropriating or seizing your investments, in Mexico we are thinking about how to give guarantees to increase investment in our country," he said. He also promised infrastructure projects to attract investments and speed growth.

But the pressure to break up monopolies looms, and regulatory agencies, industry players, and economists have a wish list.

For starters, many would like to see more TV offerings. Currently Televisa and TV Azteca own 94 percent of the broadcast market. The US-based Telemundo is trying to enter the market, and it has accused the other two broadcasters of a smear campaign to diminish support for Telemundo's access to the market.Many economists, who say they worry that the Calderón administration won't grant Telemundo the license, say allowing a third broadcaster would go a long way toward increasing competition and inviting a freer flow of information.

Roots of 'crony capitalism'

The roots of oligopolies in Mexico date back to the 1930s and '40s, when local governments created state-run industries to reduce independence on goods from foreign countries, says Celso Garrido, an economist at Mexico City's Autonomous Metropolitan University. The Institutional Revolutionary Party, which controlled Mexico for 71 years, also controlled key industries.

When the country was forced to open up to privatization after the financial crises of the '80s and '90s, industries were not open to competition, but merely transferred to private ownership. In 1990, for example, a consortium headed by Mr. Slim bought the state-run telephone company.

But it's the public energy monopolies – especially the state-run oil firm Pemex – and oligarchies in the banking sector are among the most worrying to economists. "Mexico is now in a stagnant situation. It is losing positions in Latin America. Argentina is growing very fast, Colombia is growing, Chile is growing, Brazil will recover the growth rate of the economy, and now we are losing position against China and India," Mr. Garrido says. "This is the most risky part of the situation; we are losing long-term positions in the global economy."

Oligopolies play a critical role in slowing growth in Mexico, which, compared to countries with similar development in the region, has one of the most entrenched concentrations, says Lopez-Calva. He attributes that to weaker regulatory institutions and a less independent judiciary.

The World Bank report, for example, studied the outcome of 612 anticompetition resolutions by the competition commission over the past eight years, and found that billionaire-controlled companies in Mexico are more likely to be involved in monopolistic practices and win amparos, or judicial stays, which allow them to delay regulatory rulings against them while they mire the process in appeals.

Much work to be done

In June, under the Fox administration, the Federal Competition Commission was granted greater power to sanction firms and block mergers, a law that Perez Motta says will help change the climate. But much more remains to be done, he says. "If you ask me, 'Are you happy with the results of commission?' – absolutely not," he says. "The challenges in front of us are much stronger than results we have had."

Some, like Mr. Martinez, doubt that Calderón, a free-market advocate and friend of big business, will have the gumption to attack the country's economic elites.

But many pin hopes on Calderón, who is known for taking copious notes and studying them before heading into meetings, and seeking quick results.

Alejandro Puente Córdoba owns a cable business that serves the southern state of Oaxaca. This year he, along with 200 members of his Mexico City-based cable trade group, Canitec, were granted the right to offer phone services through their own lines. But Mr. Puente Córdoba says the government blocked such competition for years by setting up obstacles, including requiring them to team up with existing phone companies, or, in other words, he says, with Slim's Telmex. Canitec estimates its participation in the market will drop prices by 30 percent.

"They have delayed us for five years. I can only hope that Calderón makes the right decisions and respects the law," he says, adding, "and tackles the 'Three Ts' – Televisa, TV Azteca, and Telmex."

Most Mexicans hope he'll add a fourth "T" to that list – for tortillas, the basic Mexican staple and primary source of nutrition for the poor.

They may get their wish.

Last week, Calderón signed an agreement with businesses to limit prices to 78 cents a kilogram and raised duty-free corn imports. The government has been seeking a culprit, blaming the price hike on everything from US demand for corn for its ethanol plants to price-gouging middlemen. But Calderón made sure to get in a plug for the nation's competition crusaders, saying: "We won't tolerate speculators or monopolists."

Ms. Llana is Latin America correspondent for the Monitor and USA Today.

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