Bill breaks Mexico’s telecom monopoly

Bill breaks Mexico’s telecom monopoly

Mexico’s Carlos Slim is no longer the world’s richest man. For the last four years, the billionaire and telecommunications mogul held claim to the distinction only to lose it in the last few weeks to Bill Gates. The switch from Slim to Gates occurred with a drop by 0.24% in his America Movil and was followed in subsequent trading days by drops in other companies, in which Slim is a majority stake holder.

While it is questionable to think that Slim’s wealth and influence will dissipate substantially, owing in part to their diversity and overwhelming strength, it may be instructive to note an event occurring within the same month: the passage of telecommunications reform in Mexico. Since the looming threat of such reforms at the beginning of the year, America Movil has seen its stocks plummet 14 percent. His considerable wealth and influence are owed in great measure to his acquisition of telecommunications ventures during the period of state sell off and privatization in the heyday of the Washington consensus period, in which figures such as President Carlos Salinas de Gortari pushed for major economic reforms and liberalization. The coinciding fall in Slim’s status and the recently passed legislation, while not completely interrelated, are nonetheless telling.

The extent of Slim’s monopolization is massive: his fixed line telephone company Telmex controls up to 80% of the industry and his mobile phone service Telcel controls up to 70 percent. As many have noted, including most recently Daren Acemoglu and James Robinson in their  book Why Nations Fail: The Origins of Power, Prosperity, and Wealth, the telecommunications monopoly to which Slim owes his financial dominance has acted as a substantial hindrance to innovation and growth in Mexico.

Other instances of monopoly, such as Televisa which is possessed by Azcarraga Jean and captures 70% of the market, will also be dramatically affected. With the passage of a recent reform bill the prospects for a greater opening of key market areas in Mexico and for investors may change dramatically.  The bill itself is illustrative of telling political changes that are seemingly encouraging and which bode well for the overall level of support that will be essential in its implementation.

Mexico’s Telecommunications Reform Bill was passed with overwhelming support, having only three dissenting votes. The bill has the potential to significantly reform telecommunications within Mexico. Having passed the House and Senate, a majority of the Mexico’s 31 states and the federal district will need to approve it; another bill that will spell out specifically the means of implementation will also need to be passed.

In an important reversal from much of the policies pursued by Mexico since the administration of Carlos Salinas de Gortari, a greater role for the government will be incurred as a result of the newly enacted legislation. This role, however, will not remotely approximate the type nor extent of state controls that existed prior to the pursuit of neoliberal economic reforms in Mexico. The law will give a regulatory body, the Federal Institute of Telecommunications, the power to regulate and revoke operatic licenses for monopolistic practices. Comprised of a board of seven regulators, the new body will prevent companies from controlling market shares of more than 50%.

The law was passed with support from all three major Mexican political parties – the PAN, PRI, and PRD – and as such seems to be a politically successful venture on the part of President Enrique Peña Nieto and his ‘Pact for Mexico’. Indeed, some have heralded a recent ‘Age of Agreement’ in which the major political parties have to varying extents worked for key compromises and toward the passage of essential reforms. The successful passage of the bill by such overwhelming numbers may be indicative of this, and certainly seems to speak to the strong desire for telecommunications reform. Importantly for the prospects of implementation of the legislation, support clearly exists from those on the left who are demonstrating much greater resistance to other areas of reform, such as oil, that have a greater historical memory and are potentially much more politically explosive. While the prospects for implementation are in a political sense encouraging, it may be instructive to consider some of its potential ramifications.

“We are touching on something which for a long time was thought to be untouchable – the monopolies.”  This statement by  Senator Alejandra Barrales speaks to the central objective of the reform bill; the elimination of monopolistic companies that have crowded out the sort of innovation and greater degree of consumer choice that many experts deem essential to fostering and strengthening markets. Another objective of the legislation is the growth of foreign investment in these sectors allowing for up 100% ownership of the capital by non-Mexican telephone companies compared to the current cap at 49%. For radio and television the extent of foreign investment companies possessing capital will go from the current rate of 0% to 50%. Such large increases are in many respects revolutionary.

They are in keeping with but albeit expanding Mexico’s continuing trend to seek a greater degree of integration into the global economy and to expand both investor expectation and commitment. For a country that has recently seen a fair share of uptick in foreign investment from a variety of countries including Japan, this legislation will likely only work to increase such investments. For skeptics of foreign investment in Mexico who point to low interest rates as being an unstable key upon which the increase is largely predicated, this could potentially serve as another means of encouraging investment when those interest rates inevitably increase.

Despite these generally optimistic inferences, it is important to note that monopolistic business practices and their legacies do not disappear in a day and that Televisa and America Movil are well placed to maintain their dominance. Yet, in the long term one would be hard pressed to see this move as being anything but positive. Given the greater diversity and consumer choice that the bill will afford, great improvements in broadband amongst other areas have a better chance of occurring, in addition to the likely effect they will have on driving down prices. This could potentially have socially transformative impacts and will likely do much to increase Mexico’s global presence.

Perhaps more importantly for the long term viability of Mexico’s success, this legislation will likely have a positive effect in encouraging democratization in Mexico and will potentially work to erode some of the corrupt aspects long associated with the Mexican telecommunications industry. In a country that has seen rather large pendulum swings of control from the state to monopolistic business interests, the Telecommunications Reform Bill will likely have dramatic and far reaching consequences and should be viewed as an impressive and arguably revolutionary development.

Categories: Economics, Latin America

About Author

Sean Durns

Sean Durns worked as a research assistant to a former high ranking Pentagon official and the Director of National Security Strategies at a DC based think tank. His analysis has been referenced by a variety of media outlets including The Wall Street Journal, Roubini's EconoMonitor, OilPrice, and many more. He holds a M.Sc. in History of International Relations from the London School of Economics where he focused on US foreign policy, security studies, and energy security.