Mexico Talks Monopoly Reform

The Wall Street Journal

Monday, November 28, 2011 As of 12:00 AM

Access at: http://online.wsj.com/article/SB10001424052970204452104577060772222754302.html

Mexico Talks Monopoly Reform

PRI presidential candidate Enrique Peña Nieto proposes a constitutional amendment to allow private investment in Pemex, the national oil monopoly.

Mexico celebrated third-quarter economic growth of 1.34% last week, putting its annual growth pace at 5.5%. But on a visit to The Wall Street Journal earlier this month, Mexican presidential candidate Enrique Peña Nieto stressed that the country’s annual average growth rate over the past 10 years has been an anemic 1.7%. It has been, the Institutional Revolutionary Party (PRI) candidate said, the slowest 10-year period of growth in the past 70 years.

For steady long-term growth, Mr. Peña Nieto argued, Mexico needs to return his party (out of power since 2000) to the presidential palace of Los Pinos so that he can administer the pro-growth policies the country needs. One of his proposals is startling coming from a PRI candidate: a constitutional reform that would allow private investment in the sacrosanct national oil monopoly, Pemex.

Speaking of private investment in Pemex would have been PRI heresy only a decade ago. But the qualifiers that Mr. Peña Nieto assigns to his “reform” demonstrate that the battle to create true energy competition still lies ahead. It is also worth noting that a PRI-led constitutional amendment will require help from the rival National Action Party (PAN). It is not clear that the PAN will cooperate.

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Associated PressPRI presidential candidate Enrique Peña Nieto proposes a constitutional amendment to allow private investment in the national oil monopoly.

Still, the idea reflects how much Mexico is changing. In contrast to the U.S., PAN President Felipe Calderón rebuffed Keynesian proposals that Mexico increase deficit spending to counter the slump that followed the 2008 financial crisis. Mr. Peña Nieto concurs. With annual inflation running around 3.4%, he calls the macroeconomic stability a necessary “condition for economic growth.”

The growth rate Mr. Peña Nieto cites was of course pulled down by the U.S. recession. Nevertheless the slump—exacerbated by the lack of competitiveness in key industries—left the electorate unsatisfied. That’s why, seven months ahead of the vote, the election is Mr. Peña Nieto’s to lose.

To achieve faster growth, he says Mexico has to increase the competitiveness of state-owned companies, starting with Pemex. There is “a window of opportunity if we open Pemex to the private sector,” he says, hastening to add that “this doesn’t mean that the state needs to give up the property of Pemex or its hydrocarbons.” The monopoly will be protected, he says, while the company is being “strengthened” by way of private investment in exploration, exploitation and refining. He believes that will be a game changer. “It is amazing that we are one of the most important oil producers [in the world] and we import gasoline.”

Mr. Peña Nieto’s proposal seems bizarre coming from the party that has nearly deified the state monopoly since President Lazaro Cardenas nationalized the oil industry in 1938. But he says that the PRI’s longstanding ties to Pemex are precisely why it is the only party that can modernize the company. He says that his proposal hasn’t created much of a backlash. “I think that the PRI has moved to a very pragmatic [stance]” and that “because of the basis of support of the PRI, its links with different sectors, I would put it—with no arrogance—in the best [position] to make these structural reforms in Mexico.” Think “Nixon goes to China,” Mr. Peña Nieto says.

For Mexico’s rising middle class it is no doubt good news that the PRI is acknowledging the cost that an investment-starved national oil monopoly has imposed on growth. Yet declaring victory would be premature.

One problem is that energy remains a political football. Mr. Calderón and the PAN also sought to liberalize regulation around Pemex. But they didn’t have enough seats in the legislature to pass their reform without PRI help. The PRI forced them to water it down, and Mr. Peña Nieto is widely rumored to have led that effort behind the scenes. The PAN had to settle for timid legislation limited to new private incentive contracts in deep-water drilling.

The PRI stunt made political sense: Why let the PAN get credit for a historic victory while it would have been stuck with the blame from key special-interest constituents who live off the monopoly? And the PAN couldn’t complain too much. After all, when PRI President Ernesto Zedillo (1994-2000) tried to introduce private investment in electricity, the PAN, led by Mr. Calderón, killed the bill.

The PAN has yet to choose its presidential candidate, though former education secretary Josefina Vásquez seems to be the favorite to win the primary. She’s an economic liberal, and with Mr. Peña Nieto on record as an advocate for reform, the race could provide Mexicans their first chance to hear a serious debate about the depth and breadth of what is required. The PAN ought to take advantage of this reality by pushing Mr. Peña Nieto to detail his plan. Meanwhile, Mr. Peña Nieto should bear in mind that when Nixon went to China, he didn’t need an assist from Democrats.

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