Mexico’s structural reforms receive mixed marks from think tank

By Graeme Stewart

Reaction to the Mexican Government’s reforms of several industrial sectors has been fairly mixed with some firmly in the Peña Administration camp while others claim it was a lost opportunity.
Here, Manuel Molano, Director General of the highly respected Mexican Institute of Competitiveness (IMCO for its acronym in Spanish), runs through the changes and gives his frank and honest opinions on the reforms to MexicoNow.

The Labor Reform was good but insufficient

First up was Labor Reform and Molano rated it highly although it probably didn’t go far enough.
He said: “You have to take into consideration that the labor market in Mexico is a two tier market. There is a labor market for the formal enterprises and the Government that, basically, hires one third of the workforce – that’s roughly 19 million workers, according to the latest figures.
“Then there is an informal market that hires the rest and in that there are no benefits, no pension, no medical insurance, no retirement plans, no anything.”
“We, as an institution, felt we had to have a serious reform of social security, making more of the labor force formal. The informal market is linked to the fact that our taxes are expensive so few industries can pay the full government amount. Manufacturing, export-led businesses have no problems and a lot of the high value added retail and wholesale companies can also manage – but the rest of the economy can’t, so it lies within the informal market.”
“I think we have still to see the benefits of Labor Reform and I don’t think this reform was as good as some of the others, such as the Energy Reform. But one hint of the possible success of the Labor Reform is that the number of formal workers by GDP growth is a little bit higher than it was in the past.”
“So what has failed us since we enacted the Labor Reform is economic growth as we have lacked an impetus in the economy. You could see an effect in the growth trends of the informal labor force but the thing here is that a lot of the productivity measures that the government has been enacting orbited around labor and labor law and it is possible that you need to go one step back and make better investments in the kinds of business that can pay for good wages and with adequate payments to government in order to actually be productive.”
“We shouldn’t ask ourselves why our workers are not more productive. We need to ask why we haven’t invested in more productive businesses.”
“For instance, many foreign and Mexican multinational companies find the Mexican workforce excellent. That proves that when Mexican workers are employed by businesses that actually can pay capital labor and government, things go smoothly.”

The Energy Reform gets thumbs up!

Energy Reform next and this one scored high on Molano’s approval rating.
He said: “I think the Energy Reform has been one of the better reforms in the history of our country. It’s just a pity that it came at a point when the oil industry is so depressed.”
“Recently, The Financial Times recommended that people holding assets in the energy industry dump their investments in nationally-owned companies and invest instead in private companies because private companies can adapt to the vagaries of the market while national oil companies can’t.”
“I think that now we are going to see a lot of private development in Mexico in deep water rigs. It is very clear that Pemex could do much better in consultation with other oil companies of the world and probably we will see a lot of developments around the electricity sector.”
“But overall, I think that the energy reform is awesome. As was the news that Mexico has signed a billion dollar agreement with the United Kingdom for mutual aid in the energy sector.”
“It has to be said that we have had our ups and downs with our relations with the world and a lot of that has to do with our closeness to the USA and the fact that we are part of the American sphere of influence. I don’t think the Americans are really worried about Mexico investing in conjunction with British and German investors in the country. They are a bit wary of the French and absolutely wary of the Chinese.”
“But I think it is very positive that we are now in such a close relationship with the UK. The signing of the US$1 billion agreement with the UK was wonderful. The two countries had been apart somewhat since the 19th Century, although the British have been in and out of Mexico in mining and many other industries, but I’m convinced that being a lot closer is going to be a boom for both economies.”

The Telecom Reform was satisfactory

Telecom Reform also came in for praise as Molano said: “This is another reform that has been surprisingly good. I think that they were very able to unravel the aftermath and consequences of the poor performance of the telephone network in the 1990s. Nobody in the 1990s foresaw the growth of the mobile network in such a monopolistic business. What has happened is that new competitors, such as Mexico Virgin and UC Televisa, are competing with Telmex and Iusacell. That has worked very well and we all see the evidence in our cellular phone bills which are lower than they were a few years ago.”
“We have also seen more competition coming into the television networks with the authorization for two new broadcasters, which is awesome.”
“We hear a lot about Mexico and most of it is bad but these reforms in Labor, Energy and Telecoms is a success story that everyone must applaud.”

The Fiscal Reform was atrocious

When queued about the Fiscal Reform, we got a firm shake of the head and a look of disapproval as Molano said ruefully: “It’s non-existent. It’s more like fiscal regression.”
“There is a new fiscal formula that basically taxes the formal economy more heavily and that has been very tough on growth. A lot of economists concur that we took away money from companies and families but the Government is not putting it to good use. It looks like the Government has large budgets on infrastructure but that money wasn’t spent in 2014. It is expected to be spent faster in 2015 but that has to do with the political cycle and the fact that we have an election coming up.”
“We needed a Fiscal Reform that taxes more Mexicans more equitably and that spends better the money from the public coffers. We also have to understand that Fiscal Reform was allegedly one of the sops to the Mexican Left so they would allow Energy Reform to go forward. We didn’t see AMLO (the leftish leader) go crazy over the energy reform and I think that had to do with this.”

The Education Reform was a step in the right direction

Education Reform was applauded with the proviso that a lot of work had still to be done.
Molano said: “This reform has worked very well in States where Mexico is closer to the First Developed World and has worked very badly in places like Guerrero, Oaxaca and Michoacan which are violent places with a lot of organized crime. A lot of analysts have found a relationship between phantom schools, phantom teachers and the cultivation of heroin poppies and other illicit activities.”
“I think this was a very positive reform although I think we will see some violence and intimidation around the Education Reform, especially in the poorer places of Mexico. But in the end I think this is an overall good reform.”
“There is still a lot that needs to be done and I think it could be implemented a lot cheaper than is usually thought. English literacy is something that Mexico should work on as is science and mathematics.”
“If we could focus the efforts of the education sector on those three areas of knowledge, I am pretty sure we could build a much better country in record time. We could change the dynamics of the Mexican economy in less than a generation. Of course, that would entail serious modifications to some of the programs by sending talented people abroad and bringing in talented people from abroad to help us. Education reform is a very big step towards accountability and further possibilities.”

The Financial Reform is a good start

Financial Reform was welcomed but with a warning that there was still a long way to go.
He said: “Some good was done there. They created a regulation framework that is much friendlier to bank loans, guarantees and getting credit for productive activities in this economy. However, I think that the impact that can be achieved by that is very limited due to the fact that our Courts and property systems work poorly so a lot of the underserved sectors have no assets or service collateral for loans. Guarantees are not enough to help everyone so we have a conundrum that has more to do with the justice system than the financial sector. That is something we really need to think hard about.”
“Manufacturers shouldn’t worry if they are investing in cities as property rights tend to work well in cities if you have the proper guidance and advisory services. But in rural areas I think that is quite an issue. Even though we have changed our agrarian reform ministry into something more user friendly I think we still have a long way to go.”
“Municipalities are a weak link in government as they are very corrupt but, having said that, if you have the proper guidance for investing in cities you should be fine with your investments.”

Conclusion

Summing up, Molano stated: “Generally, I am quite happy with the Reforms. What has me a bit frustrated is the fiscal part, which is not particularly useful and some other Government moves that have been neglectful of security issues, have ignored corruption issues and other things that concern the rule of law and freedom to trade.”
“Having said all of that, I think the Peña administration has been quite successful and useful in improving the conditions of the economy. But what is missing in Mexico is more Federal involvement and stronger rule of law and that has to do with poor institutional design.”
“I think that should be our next target, to tackle bad institutional structure and corruption with impunity. Other countries of the world have done it. You have seen great violence in places like America during the 20th Century. Now it seems to be working well. For instance I don’t think that you would have considered putting a manufacturing plant in Alabama in the 1950s.”
“ I hope that can happen in Mexico but I don’t think we have to wait 50 or 60 years for that to take place and I hope we can see manufacturing plants in, for instance, Oaxaca, in my lifetime.”