Mexico’s confidence-killing reforms
The proposed disappearance of independent regulators is a step into the unknown.
In 2020, Oskar Hjertonsson the founder of a Chilean-Mexican startup called Cornershop threw a bucket of cold water on his excited shareholders. A few weeks prior, Uber had offered to acquire the company for $3 billion dollars. One of the biggest investment exits in Latin America’s tech startup history. There was only one thing missing; approval from the government.
Chile’s regulators waved the deal through shortly after the merger was filed with authorities. But Mexico’s independent regulatory bodies, like the lumbering Ents of the Lord of the Rings, took more than half a year to choose which one of them would get to decide whether the deal went forward or not.
Hjertonsson despaired as the exit in Mexico started to look like a death sentence for his company. “As of today, we have only 9 months of cash in the bank. I can’t help but feel frustrated and disappointed. … because of the regulatory uncertainty we find ourselves in,” he tweeted. The deal eventually did go through.
Today that same business community is out vocally defending the regulators that left them feeling rather sore four years ago.
This is because the government is currently seeking to dissolve the majority of what in Mexico are known as Constitutional Autonomous Bodies that oversee industries as diverse as telecoms, hydrocarbons, education, and transparency. Mexican president Andrés Manuel López Obrador argues that these regulators not only do a bad job for the amount of money invested in them, but claims they have been co-opted by the very industries they are meant to keep an eye on.
Critics of the reforms see more sinister motives. The powers of the seven regulators the president seeks to extinguish would be absorbed into existing government departments. It wouldn’t be the first time the administration concentrates power around itself, but this move feels even more worrying. It would defeat the very independence regulators need to make difficult decisions that often affect the very departments set to absorb them. It is not only a conflict of interest, say the critics, it violates Mexico’s international treaties, including the US-Mexico-Canada Agreement (USMCA) on the eve of a sensitive review.
The complexity of the subject matter is far greater than most other controversial reforms discussed throughout this administration. Firstly, these are a very diverse set of institutions. They include:
The telecoms regulator (IFT)
The anti-trust regulator (Cofece)
The hydrocarbons regulator (CNH)
The electric power regulator (CRE)
The transparency institute (INAI)
The education evaluator (Mejoredu)
The social programmes evaluator (Coneval)
Each covers very different issues, with very different and technical skill sets, responding to very different interests, and therefore each needs separate consideration. The criticisms and solutions that might apply to the telecoms body may be disastrous for the transparency body.
Nevertheless, there are common themes across the argument that ultimately boil down to three fundamental issues: Democracy, autonomy, and efficacy. The Mexico Political Economist spoke to experts on both ends of the debate to glean how solid their argumentative footing on each of these points was.
Which side best represents citizens’ interests?
Mexico’s very presidentialist system gives the executive power awesome authority as to who gets to run regulators, even if they are autonomous. Whenever a spot in any of these opens up, the president sends Congress a shortlist of options. If Congress rejects them thrice over, the president gets to choose anyway, ultimately making the legislative branch a rubber stamp.
There are a few checks and balances: Regulators are collegiate bodies in which councillors have equal say. Their terms are set up so one president cannot pick the whole lot. Today’s current political setup—in which the outgoing and incoming presidents, as well as both houses of Congress, are dominated by one party—makes this a bit of a moot point. Over the years, the government could gradually pack these institutes with friendly faces. But for the political movement launched by López Obrador and inherited by president-elect Claudia Sheinbaum, these regulators suffer from the original sin of having been born “neoliberal.”
In the beginning, autonomous bodies were conceived of to give non-partisan and expert citizens an avenue to exert control over the government. However, the current administration believes that, at the turn of the century, new regulators began to emerge to represent private rather than citizens’ interests—extracting institutes from within the government to create bodies divorced from democratically elected officials.
“They really took off in the neoliberal era. Before Cofece (the anti-trust regulator) sat within the Economy Department, IFT (the telecoms regulator) was in the Communications Department,” Romualdo Hernández Naranjo, Chief of Staff for the General Counsel at the Federal Electricity Commission, a government department in the executive, told The Mexico Political Economist. “Today, the IFT’s counsellors are divided along the lines of which phone company they support. … And us citizens literally pay for it with high phone bills.”
Critics believe these arguments are a fig leaf to cover the government’s true desire to impose its own ideology on the parts of the State that think differently.
“The government says ‘I don’t want [regulators] to be politicised; I want them to be politicised by me’. The point of autonomy is that institutions are politicised by everyone,” Leonardo Núñez González, director of the applied research unit at Mexicanos Vs la Corrupción, an anti-corruption watchdog, told The Mexico Political Economist. “It is natural for the government to resist being scrutinised, but that’s just part of a democratic system.”
Often, this is where the debate reaches an impasse, since the diverse bundle of autonomous bodies set to be absorbed by different government institutions may benefit from greater or lesser autonomy from the government. The Bank of Mexico, the oldest of these, has been around since 1925 and will remain autonomous—highlighting a broad understanding that there are some organisations worth keeping away from electoral politics. But that’s where the agreement ends.
Less autonomy might mean more efficacy.
Both Hernández and Núñez agree that some autonomous bodies could benefit from regulating within the government, since they might gain some teeth in the process. Hernández cited an instance in which Cofece decreed that there was not enough competition in the Mexican freight rail industry. It was powerless to do anything since the publicly-awarded concessions lasted until 2035. “Then, what are they doing apart from describing a problem they can’t fix?” he asked. “Why not push for the State to rescind these contracts since ultimately they were awarded to look after the public interest?”
Again, proponents of the reforms smell a “neo-liberal” rat, since they claim that as soon as it comes to regulating State-owned companies, it’s open season.
More autonomy could also empower efficacy.
While greater incorporation into the government might be beneficial for some regulators, it might entirely defeat the point of others. This is the case of the independent transparency institute, said Núñez, which is destined to be subdivided across many different government departments if the bill is approved.
“If the INAI enters the government’s orbit, the government becomes judge and executioner. Then what? Is the government going to punish itself? Unlikely.” Núñez added that there were instances in which the government had actively tried to block investigations carried out by Mexicanos Vs la Corrupción—claiming that the requested documentation didn’t even exist— only for the INAI to force the State to produce the necessary papers. “There are hundreds of cases like this,” he said.
The current and incoming administrations have not given promising signals to dispel these worries. The rejection rate for information requests to the government has increased significantly. The administration has also been accused of deliberately failing to nominate new councillors in order to paralyse regulators.
Uncertainty: The real killer
The debate rages as the clock ticks down to September when a new Congress will come to session—one month before Sheinbaum becomes president, allowing a peculiar slot of time in which López Obrador will get to govern with a newly elected constitution-altering super-majority.
This long leadup and discussion is in itself new, argued Hernández. “If the president had wanted to impose these changes from the top, he would have done so quietly on a holiday as so often happened in past regimes. The debate is part of the democratic process.”
It hasn’t been a particularly enlightening one though. Arguments that muddy the waters have been particularly unhelpful, mainly the debate over whether regulators should be disbanded because they are too expensive. “Cofece makes five times its annual budget in fines, because it’s doing its job,” said Núñez. “These regulators aren’t even 1% of the federal budget” and what they give back to society is worth much more, he added.
Rather than being a period of thoughtful analysis, critics feel they’ve been excluded, and the administration has spent its time turning public opinion against them.
“What should have been a technical debate became a political debate,” said Nuñez. “That isn’t a bad thing, but politics has consumed everything. The end result will be thay the reforms will go through as they are and everyone will have to muddle through understanding what implementing them actually means. Meanwhile, information will be lost and rights will be put in jeopardy. We won’t understand what we have until we’ve lost it.”
As time runs out, crucial questions still need answering. The secondary legislation needed to implement the reforms is still unknown. Worried policymakers and businesses are worried—and not just in Mexico. It is still unknown how proposed changes will affect Mexico’s treaty obligations, including the USMCA that stipulates the need for the sorts of regulators being affected.
Business may come to miss something as minor as the Uber-Cornershop regulatory impasse of 2020. And, as was the case back then, we’re still months away from knowing what will actually happen. But make no mistake, the discussion around something as dull-sounding as the reform of Constitutional Autonomous Bodies, is actually a struggle for the very soul of the Mexican State.
“If these reforms pass, we’ll have to throw out our Mexican Political System textbooks and dust off our Political Theory books,” concluded Núñez.