Fisher Investments Editorial Staff
Emerging Markets

Losing Monopoly

By, 03/13/2013

Source: Jeff Sullivan, Getty Images.

President Enrique Peña Nieto’s embarking in to relatively new economic territory in Mexico: breaking up monopolies. Since entering office December 1, Peña Nieto’s made surprising—and quick—moves to open up Mexico’s economy, including the unprecedented Pact for Mexico with opposing parties. Now, in the name of economic competition, Peña Nieto’s government’s looking to pass a bill effectively breaking up Mexico’s currently monopoly-dominated Telecom and TV industries.

For decades, current (and some previous) monopolies have been protected by strong political ties, and past government administrations have proven unsuccessful in breaking them up. Peña Nieto’s own Institutional Revolutionary Party (PRI) was especially renowned for its part in propping up monopolies during its 71 years governing Mexico (from 1929-2000). However, Peña Nieto pledged monopoly reform during his campaign, and his word appears good. Just last week, his party dropped from its platform outright opposition to constitutional reform, potentially opening up Mexico’s Energy sector (monopolized and state-owned). And now, we have this latest plan.

The proposal would require Telecom companies owning 50% or more of their given markets to sell assets—or legally be forced to by the new Federal Telecommunications Institute, whose rulings would hold during appeals processes (a detail Italy may want to consider for Berlusconi). Firms will be forced to start selling before they can appeal the decision. Should the firms prevail on appeal (currently looks unlikely) at the very least, in the immediate future, the monopolies would be somewhat smaller.

But the reform doesn’t stop at just breaking up monopolies. The separated businesses must be sold to new/smaller firms (i.e., current market monopolies can’t maintain market share by swapping businesses with other behemoths). Additionally, limits on foreign ownership would be eased under the plan—bringing more foreign direct investment to Mexico—a positive for all involved, directly or indirectly. Such moves would hit on all cylinders. Increased competition should yield better quality Telecom and TV services, with more choices at, most likely, lower prices. Certainly as it pertains to TV programing, new entrants should yield new media perspectives and (one hopes) more freedom of press.

Even though the proposal targets only a few industries, positive reform in one area very likely spills over into others—and potentially breaks up more monopolies. But why are there so many? Monopolies are often seen as a necessary evil if an industry has such massive economies of scale that there can truly be just one (or a few) cost-effective providers. But in the age of wireless, any such advantages for Telecom and TV (and many other industries) are long, long (decades-long) gone. Nieto’s bill is an effort to cut the cords and bring Mexico up to speed.

Not since former president Miguel de la Madrid tried opening up the economy in the 1980s—over 30 years ago—has Mexico seen such apparent political will for free-market reform. Perhaps the PRI is trying to distance itself from its monopoly-entwined past. (Keeping in mind it is a political party, though. Such habits can be hard to break.) Or maybe Peña Nieto and leaders of his opposition are truly trying to liberalize Mexico’s economy. We sincerely hope it’s the latter—markets can always use more liberalization, even ones more developed than Mexico. Not only would breaking up monopolies be a boon for Mexico (and all countries it trades with), it could set an example of positive effects of free markets for other emerging markets. Stay tuned.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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