THE TIMES THEY ARE A CHANGIN'

Mexico 2014 | ECONOMY | FOCUS: GENERAL REFORMS

While President Peña Nieto's reform of PEMEX is the crown jewel of his program, reforms in other sectors promise to shake up industry monopolies, banks, education, and the telecom and broadcasting industry.

In 2013, New York Times columnist Thomas Friedman quipped that, if US Secretary of State John Kerry needed a new agenda, he would do well to focus on closer integration with Mexico, rather than beating his head against the rocks of Israel, Palestine, Afghanistan, or Syria. These remarks appeared in a column by Friedman hailing the signing of the “Pact for Mexico" by Mexico's President Enrique Peña Nieto, and the three main political parties. The reforms promised to end 15 years of political paralysis and implement important change that focused on three central themes: economic reform, political and economic democratization, and citizen participation and social rights. Two years later, the legislative phase of President Nieto's reform process is complete. The next order of business is implementation. If Mexico can make the reforms permanent, and exploit its geostrategic potential, the country can expect years of economic dividends, political stability, and investor confidence. While President Nieto's reform of PEMEX is the crown jewel of his program, reforms in other sectors promise to shake up industry monopolies, banks, education, and the telecom and broadcasting industry.

In July 2014, the Mexican Senate approved hard-fought anti telecom-monopoly legislation that will abolish high service fees that Mexicans must pay due to lack of competition in the sector. Known as secondary legislation, the new rules will force América Móvil and Grupo Televisa to pay penalties if their companies control over 50% of the market share in their respective telephone and TV markets. The new law extends beyond the telecom industry, and also empowers regulators to penalize other companies engaging in monopolistic practices.

The implementation of President Nieto's educational vision is proving to be a daunting task, as unions and local governments attempt to scuttle educational reforms. While the new legislation seeks to professionalize Mexico's teachers by regulating wages, standardized testing, and instituting constant evaluation, teacher's unions contend that the reforms amount to state overreach. Some states are boycotting the new laws, and teacher strikes in 2013 in Oaxaca kept 1.3 million students out of the classroom for two months. However, the Mexican Institute for Competitiveness found 1,906 non-existent 'ghost schools' with 24,230 teachers on their payrolls. The study also found 1,441 teachers aged over 100 years at elementary schools in Mexico, all of whom shared the same birthday in 1912.

In spite of Mexico's developed financial markets, healthy intermediaries, and low rates of delinquency, the banking system has historically failed to adequately fund productive projects and enterprises. Growth driving sectors such as micro, small and medium enterprises as well as agriculture, infrastructure, and housing all were starved for sufficient credit, which stymied growth. Reforms passed in January 2014 gave Mexicans and investors products and services that met their needs at competitive prices. The bank reform was structured around four axes of reform: encouraging greater competition among financial service providers, strengthening the Development Bank, extending financial products and services, and ensuring liability and prudency across the sector. Major changes involved strengthening CONDUSEF, the national commission for protection of consumers of financial services, and bolstering the means of coordination and cooperation among financial authorities. The new legislation also promotes dispersion of credit by making it easier for lenders to collect loan guarantees in cases of nonpayment. According to the General Directorate of Social Communications, by 2018, domestic financing to the private sector will be equal to 40% of GDP. The directorate also predicted that banking reforms would grow consumption and investment in Mexico, and provide additional economic growth of 0.5% between 2015 and 2018.

These reforms are long overdue, and while some Mexican consumers remain wary, the improvement of the business environment is already apparent, as companies such as Kia, BMW, and Nissan break ground on billion dollar investments that will boost demand for skilled labor and services. If reforms are able to lower energy costs and eliminate bureaucratic inefficiencies as President Nieto hopes, Mexico will be an unstoppable economic force. Under the right circumstances, Mexico might well become the global manufacturing challenger to China that Thomas Friedman predicted.