The role of competition policy to

increase competitiveness in

Mexico

Eduardo Pérez Motta

June 2013

Key messages

Mexico can achieve higher competitiveness by fostering economic policy oriented to competition and market efficiency

There are developments in one of two pillars of competition policy - the deterrence of anticompetitive conduct of economic agents

The next challenge is to achieve improvements in the market structures - the second pillar of competition policy

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2

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Mexican economic growth has lagged compared

with other emerging economies

3Source: World Bank, CFC estimation

China

Russia,

Brazil, India

and S. Africa

Mexico

10%

2%

9%

0%

2%

4%

6%

8%

10%

12%

1961 1971 1981 1991 2001 2011

Share of Global GDP (BRICs & México %)

Mexican economy faces a burden (real and perceived) of

being labeled as an inefficient and crony economy…

4

"There are three 'economic Mexicos'. The first one is under the old control style of government. The second is

the Mexico of vested interests, with power groups and firms that seek to capture rents from domestic

consumers, mainly due to lack of domestic or international competition. The third one is a modern and

progressive Mexico. This Mexico blossomed with NAFTA and still has great potential, but it is forced to pay rents

to the other two 'Mexicos‘."

Sources: Claudio Loser y Harinder Kohli (coords.), Futuro para todos: acciones inmediatas para México, p. 48-49; Foro Económico Mundial, The global competitiveness report 2012-2013, p. 33;

Ruchir Sharma, Breakout Nations, 2012, p. 73-83; Daron Acemoglu y James A. Robinson, Why nations fail: The origins of power, prosperity, and poverty, p. 39, 396;

OCDE, México: Mejores políticas para un desarrollo incluyente, p. 44

"The lack of competition and excessive regulation have represented a burden to the Mexican economy for

several years and has contributed to great income disparities. The product market regulation in Mexico is

among the most restrictive and it obstaculizes competition. This, in consequence, reduces productivity and puts

a brake in economic growth."

“Mexico still faces persistent structural challenges that will need to be addressed in order to continue improving

the competitive edge of the economy. The lack of effective competition, especially in some key strategic sectors,

also hinders the efficient allocation of resources that spills over into most sectors of the economy.”

“Every nation has its big tycoons, but to a rare degree Mexico is owned by them. Cornered markets mean the

oligopolists have little incentive to invest and innovate: domestic productivity growth has been virtually

stagnant since the financial crisis of 1994. If competition increases and undermines the abnormally high profit

margins of the large companies, that could lower consumer prices, raise overall productivity, and boost the

country’s growth potential.”

“If you’re a Mexican entrepreneur, entry barriers will play a crucial role at every stage of your career. These

barriers can be either insurmountable, keeping you out of lucrative areas, or your greatest friend, keeping your

competitors at bay. The difference between the two scenarios is of course whom you know and whom you can

influence – and yes, whom you can bribe.”

… that damages the poor and worsens income

distribution

6.9 6.8 6.76.9

5.85.4

4.8

4.0

3.3

1.9

6.3 6.36.1

5.55.2

4.5

3.9

3.4

2.7

1.4

I II III IV V VI VII VIII IX X

Consumer welfare loss from competition

problems in 7 goods markets*

% of total household expenditure by decile

Rural population

Urban population

* Corn tortilla ; soft drinks, juice and water ; beer; medicines; milk; proccesed meat; chicken and eggs.

Source: CFC analysis based on Carlos M. Urzúa (2008). “Evaluación de los efectos distributivos y espaciales de las empresas con poder de

mercado en México”, ITESM, CCM and INEGI, National Survey of Households’ Income/Spending , 2006.

Potential

income

increase by

promoting

competition in

these markets

5

The impact of CFC’s interventions illustrate the

potential of a pro-competition policy …

3.00

1.711.33

Dic 2007 Dic 2008 Dic 2012

Savings of 688.7 million

pesos of Mexican workers

657

538499

Televisa Dish Yoo

Source: CFC estimation with SCT-DGAC data,

1998 – 2011. 2012 projected with data

from june.

0

5

10

15

20

25

30

1998

2000

2002

2004

2006

2008

2010

2012

Aeroméxico

Mexicana

Others

Low cost

carriers

In 2012, 9 million more

passengers flew per year than

in 1998

Mx$158 gap between the

highest and lowest price

Elimination of commission

on flows

Pensions

Technological convergence

Telecommunications

Authorization for low cost

airlines

Airlines

Average commission Annual percentage rate on balance

Price of triple play package Pesos/month

Domestic flights passengers Millions

Source: CONSAR, Situation of the pensions

system, April 2009

Source: El Semanario, Audiencia, vienen

buenas noticias, 21/5/2009, p.7

… and CFC’s defeats cases show the impact to

consumers derived from lack of competition

90

100

110

120

130

140

150

160

170

180

190

200

Prices of freight transport

National Producer Price Index (NPPI)

Index Dec. 2003=100

Rail

Motor

NPPI

Maritime

Air

Merger

Ferromex/Ferrosur

Nov. 2005:

Rejected by the CFC,

decision overruled in

courts

7Source: Banxico

Prices have grown

twice as fast as the

national price index

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8

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Key messages

Mexico can achieve higher competitiveness by fostering economic policy oriented to competition and market efficiency

There are developments in one of two pillars of competition policy- the deterrence of anticompetitive conduct of economic agents

The next challenge is to achieve improvements in the market structures - the second pillar of competition policy

The two pillars of competition policy: agents’

conduct and market structure

Conduct of economic agents Market structure

Anticompetitive practices of

agentsUneven playing field

Competition

problem

• Dominance ⇒ displacing

• Collusion ⇒ raising prices

• Underlying factors� E.g. economies of scale, networks

• Anticompetitive regulation� Artificial entry barriers

� Distortions

� Discretionality

Root causes

• Economic agents

• Competition authority

• Government (Exec., Congress)

• Economic agents (rent-seeking)

Stakeholders

Enforcement of competition law • Removal of artificial barriers and

distortions

• Pro-competitive regulation

Policy tools

Competition conditions ⇒⇒⇒⇒ Productivity and growth

9

There was a profound reform to Competition

Law in 2011 …

10

Initiative Congressmen Senators Enactment

April 5, 2010 April 14, 2011 April 28, 2011 May 10, 2011

The Executive

presents the

initiative

327 in favor

9 abstentions

0 against

91 in favor

0 abstentions

0 against

Publication in the

DOF (official

newspaper)

Legal certainty

• Technical criteria

• Specialized courts

…which had the goal of effectively discourage

anticompetitive conducts…

Legal

conduct

Illegal

conduct

Facilitate

compliance

• Early

termination

Increase expected costs of

illegal activity

• Fines

• Criminal sanctions

• Inspection visits

• Precautionary measures

Competition in markets

• Higher growth

• Increased

competitiveness

• Better income

distribution

11

The reform places Mexico at the same

level of international best practices

Increase

costs of

illegal

activity

Facilitate

compliance

Legal

certainty

Topics

Higher fines and criminal sanctions

Surprise inspection visits

Precautionary measures

Substantial power of more than one firm

Early termination of investigations

Oral proceedings

Simpler merger notices

Better transparency and accountability

Creation of specialized courts

Exists in(examples)

(in process)

12

0

23 3

7

2006 2007 2008 2009 2010 2011 2012

20

It would be premature to make evaluation,

although early signs are encouraging

Number of applications to CFC’s

leniency program

Leniency

included in

legislation

Relevant cases• IMSS medicine

procurement

• Fees for fuel

adjustments

Legal certainty Credible threat Real cost

Higher fines+

Criminal

sanctions

26

�

�

14

�

Key messages

Mexico can achieve higher competitiveness by fostering economic policy oriented to competition and market efficiency

There are developments in one of two pillars of competition policy- the deterrence of anticompetitive conduct of economic agents

The next challenge is to achieve improvements in the market structures - the second pillar of competition policy

State control

Barriers to entrepreneurship

Barriers to trade and investment

There are still challenges in the second pillar:

a market structure …

0.789

1.619

2.551

0 1 2 3

UK

USA

Ireland

Netherlands

Canada

Spain

Denmark

Iceland

Finland

Switzerland

Japan

Norway

Hungary

Australia

Sweden

Estonia

Germany

New Zealand

Italy

Portugal

Belgium

Eslovenia

Austria

France

S. Korea

Luxembourg

Eslovak Rep.

Czesch Rep.

Chile

Mexico

Turkey

Poland

Greece

Israel

15

Average

OECD=1.35

Product Market Regulation Index

Source: OECD (2011), Product Market Regulation Database 2008

Better

Worse

Regulatory and admin. opacity

Red Tape for start-ups

Barriers to competition

Explicit barriers

Other barriers

…

Component

Mexico

rank

of 34

33%

33%

33%

33%

33%

33%

50%

50%

Gap Mx-OECD

Score

12

31

28

1

34

34

34

1

-0.39

0.87

0.93

-1.06

2.22

1.45

0.93

-0.28

…that distorts its normal function in an

horizontal way…

10000

7445

6382

5994

4025

2233

1721

1684

1358

363

3043

1059

1858

1297

1147

1445

0 2000 4000 6000 8000 10000

Oil

Electricity

Telecommunications

Media

Road transportation

Travel by Air

Construction

Banking

16

Concentration in selected economic

sectors, 2010

Herfindahl-Hirschmann Index

Source: CIDAC, ¿Qué tan abierta es en realidad la economía mexicana? (data); CFC analysis (restrictions)

Perfect

competition

Mono-

poly

Mexico

USA

Constitutional restraint

Constitutional restraint

Weak regulator

Underuse of spectrum

Closed to FDI, local barriers

Slots, closed skies

Local regulatory restraints

Inequal access to switches, ratings

Regulatory restrictions EXAMPLES

… and affects the perception of international

competitiveness of Mexico

52 5260 60

6658

53

64

96

7968

116

100

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012

17Source: World Economic Forum, The global competitiveness report, 2006-2007, 2007-2008, 2009-2010, 2010-2011, 2011-2012, 2012-2013.

Mexico in the World Economic Forum competitiveness ranking

Rank of MexicoBetter

Worse

6. Efficience of goods

markets

6A. Competition

General

Reforms to

Competition Law

The reforms needed to improve market

structures are complex …

18

Reform

strategy

• Macroeconomic adjustments

• Smaller government

• End of statism and protectionism

• Institutionalization

• Impelling competitiveness

• Reforms in education, health, etc.

Number of

actors

• President and ministers

• Central bank

• Investors and private sector

• President and ministers

• Congress

• Bureaucracy

• Judiciary branch

• Unions

• ...

Political

impact

• “Temporary adjustments”

• Atomization of effects

• Permanent elimination of

privileges for specific groups

First generation reforms

Source: Naím, Moisés, “Latin America: The second stages of reform”, Journal of Democracy 5, no. 4, 1994

Second generation reforms

… and vested interests have vetoed actions

that affect them

19Sources: Grupo Huatusco, Hacia una Política de Estado: Crecimiento con equidad, 2005

Levy, Santiago y Michael Walton (eds.), No Growth without Equity, Palgrave Macmillan/The World Bank, 2009.

How can we overcome the resistance of vested interests

in context with multiple actors?

Huatusco

Group

The Mexican State has been captured by rent-seeking power groups

and has lost its hability to lead the economy through a path of growth

with equality

6. Conclusions6. Conclusions6. Conclusions6. Conclusions

The “Pact for Mexico” shows politicians’

commitment with competition

20Source: Pact for Mexico

Economic competition will intensifyin all sectors of the economy, with

special emphasis in strategic sectors such as telecommunications,

transport, financial services and energy

(…) competition allows the generation of products and services with better quality at lower prices, incentivizing economic growth, helping alleviate

poverty and inequality, and jumpstarting the innovation processes

that foster economic, social and cultural dynamism of nations.

The “Pact for Mexico” intends to deepen the procompetitive effort …

… through a State Policy that would lead to higher productivity and growth

State Policy

To deepen the economic competition in Mexico, a State Policy shall be instrumented

Institutional framework

The institutional framework must give force and permanence to the competition policy

“Pact for Mexico” reforms:

Telecom

Achievements

Shortcomings

• More autonomy to the regulator• Removal of regulatory barriers to technological

convergence• New broadcast TV networks• Must offer & must carry• Accelerated transition to digital TV• Less limits to foreign investment in sector

�

The path ahead

• Undefined extent of public firms’ participation in broadband markets

• Law implementing constitutional reform still pending• New regulator must be created (IFETEL)

“Pact for Mexico” reforms:

Competition

22

�

Achievements

Shortcomings

• More autonomy to the competition authority• Additional tools to ensure access to essential facilities• Faster judiciary by creation of specialized courts• Total renovation of commissioners, ensuring new ones will

be elected using technical criteria

The path ahead

• Competition matters will be resolved by telecom regulator, not the competition authority

• Law implementing constitutional reform still pending• New competition authority must be created

“Pact for Mexico” reforms:

Financial system

23

�

Achievements

• Enhancements to consumer protection and mobility• Less limits to foreign investment• More credit options targeted to sectors lacking access to

financial services• Increased role of development banking• Enhanced regulatory framework for provision of

financial services to low income population• Additional tools for the CFC to foster competition in the

sector

The path ahead

• Still has to be approved by congress, currently under study

The Australian experience is a showcase of

how a sustained pro-competition effort pays

in the short run

=

2003: $58,000

2009: $73,590*

annual pesos

per household

Source: OCDE,Economic Survey of Australia, OECD Policy Brief, march 2003, p. 5. Available at http://www.oecd.org/dataoecd/4/6/2497195.pdf

* Inflation update (INPC)

www.cfc.gob.mx

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