Law and Business Review of the Americas Volume 16 Number 4 Article 7 2010 Are You Being Served - The Consequences of Telemex Monopolistics Privatization Luigi Manzetti Follow this and additional works at: https://scholar.smu.edu/lbra Recommended Citation Luigi Manzetti, Are You Being Served - The Consequences of Telemex Monopolistics Privatization, 16 LAW & BUS. REV. AM. 781 (2010) https://scholar.smu.edu/lbra/vol16/iss4/7 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in Law and Business Review of the Americas by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. ARE You BEING SERVED? THE CONSEQUENCES OF TELMEX MONOPOLISTIC PRIVATIZATION Luigi Manzetti* 1. MAIN ARGUMENT INthe 1990s many countries in the former Soviet bloc, Latin America, Africa, and Asia adopted, in varying degrees, reforms aimed at re- placing failed state intervention with market-driven policies. Theo- retically, they were based upon the theories of neo-liberal economists such as Freidrich von Hayek and Milton Freidman, whose ideas inspired the political agenda of Augusto Pinochet, Margaret Thatcher, and Ronald Reagan in the 1970s and 1980s. By 1989, important international finan- cial institutions (IFIs) such as the International Monetary Fund (IMF), the World Bank, the U.S. Treasury Department, and think tanks came to the conclusion that market reforms, based upon the same neo-liberal ideas, were the only way to revive the ailing economies of less developed countries. John Williamson described this convergence of policy prescrip- tions as the "~Washington Consensus" because many of its proponents were based in the U.S. capital. The Washington Consensus originally de- veloped in the late 1980s as a set of policies to help Latin America to get out of a decade-long stagnation period.' However, as more countries be- gan to ask for the Import Substitution Industrialization (ISI) assistance, its prescription came to be extended to other regions of the world moving away from communism and ISI. Its main features were economic deregu- lation, trade liberalization, and privatization. Among these three, priva- tization was probably the most controversial because it symbolized the reversal of decades of ISI and government control of the commanding heights of the economy. Consistent with the von Hayek and Friedman theories, the Washington Consensus argued that the divestiture of gov- ernment (or state)-owned enterprises (SOEs) would accomplish both ec- onomic and political goals. Economically, it would bring about competition and consequently, better products, lower prices, and greater attention to customers' needs. Politically, it would deprive politicians of the discretionary power to favor powerful lobbies within the business and * Luigi Manzetti; Department of Political Science, Southern Methodist University. 1. John Williamson, What Should The World Bank Think About The Washington Consensus?, 2 (Peterson Inst. for Int'l Econ., Working Paper, 2000), http:// www.iie.com/publications/papers/paper.cfmResearchI D=351. 781 782 LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16 labor sectors and, in the process, prevent them from engaging in corrupt and collusive activities. However, despite its potential for creating growth and competitive markets, the record of privatization worldwide to date is quite mixed. Economists often point to technical difficulties, market failures, and lack of secure property rights. Political scientists instead have stressed how political opportunism was often associated with poor results and crony capitalism. According to this line of thought, the way governments carry out privatization and set up the regulatory policy (particularly in the stra- tegically important sector of public utilities) is crucial. When govern- ments manage a state divestiture process following political criteria in order to retain political support from key socioeconomic vested interests, privatization results in the re-assignment to well-connected groups in the private sector. In turn, the early winners of the privatization process will become the staunchest opponents of market competition and any subse- quent effort to introduce competition in their monopolistic markets will cause major losses to the country in terms of economic efficiency and welfare improvements. In his "winner takes all" thesis, Hellman argued that the beneficiaries of "politically managed" privatization processes will do everything in their power [tlo block specific advances in the reform process that threaten to eliminate the special advantages and market distortions upon which their own early reform gains were based. Instead of forming a con- stituency in support of advancing reforms, the short-term winners [will] seek to stall the economy in a partial reform equilibrium that generates concentrated rents for themselves, while imposing high costs on the rest of society. 2 The aim of this paper is to bring support to this argument by showing how political considerations have played a crucial role in shaping Mex- ico's regulatory framework in the telecommunications sector. Consistent with the Hellman thesis, I will bring evidence of how, under monopolistic conditions, the Mexican private telecommunications company has thus far provided a service to consumers that is far below that of other Latin American countries and has imposed unreasonable costs to domestic businesses. In other words, the argument of this paper is that political exigencies have conspired against the establishment of market competi- tion in the telecommunications sector thus creating a significant obstacle to the country's economic development. 11. ON THE ROLE OF REGULATION IN PUBLIC UTILITIES By the 1950s Mexico, like the rest of Latin America, had acquired firm control over the public utility sector under state ownership. This meant that state-owned enterprises (SOEs) in such areas as telecommunications, 2. Joel S. Hellman, Winners Take All: The Politics of Partial Reform in Postcom- munist Transition, 50:2 WORLDn PoL. 203, 204-05 (1998). 2010] ARE YOU BEING SERVED? 783 telephones, and water and sanitation were left to regulate themselves under the supervision of a variety of government departments or minis- tries. By the late 1980s, hard-pressed by severe budget constraints, Mex- ico came under intense pressure from the United States, the IMF, and the World Bank to privatize many of its public utilities, which were plagued by severe financial losses and were no longer capable of meeting basic investment requirements in service coverage and technology upgrading. In fact, since Mexico was the first large Latin American market to em- bark upon utility privatization, it became an important test case for what was at the time a spirited debate about the role of regulation in a market economy with or without privatization. 3 While most argued that priva- tization was unavoidable since SOE management had failed, others con- tended that it was not the type of ownership that mattered but rather the way a public utility was actually run. As Noll noted in this regard, "The key point is that operating efficiency is substantially improved if the en- terprise faces a hard budget constraint and is relatively free of political interference in its day-to-day business decisions."4 Eventually, the view that privatization was always the best option became the dominant line of thinking at the IMF and the World Bank, thus leading critics like Joseph Stiglitz to contend that the two IFIs took too much of an ideological- political stance that downplayed economic efficiency considerations.5 In the early 1990s, the IMF and World Bank made financial assistance con- ditional upon the adoption of the divestiture of SOEs in public utilities, often relegating the establishment of a regulatory framework after com- panies had been transferred to the new private owner. This quick and dirty approach clashed with much of the literature on utility regulation, which postulated the creation of regulatory institutions enforcing legal and technical standards first, particularly in those markets characterized by natural monopolies or where competition was difficult to achieve.6 In fact, most experts underscored how the design of regulatory institutions, 3. Chile had privatized its public utilities in the late 1980s, but they were smaller in size and the government was a military dictatorship, which left many skeptical about the feasibility of such a radical policy under a democratic regime. 4. Roger G. Noll, On Privatizing InfrastructureIndustries, World Bank Development Report Planning Conference (July 2001), http://www.accc.gov.au/content/item. phtml?itemld=853305&nodeld=fcb2ef79e754b7bd71 c99dcf04896b84&fn=Roger% 20Noll%20%28paper%29%20-%200n%20Privatizing%201nfrastucture%20 Industries%20.pdf. 5. See INTERNATIONAL BANK FOR REcoNsTRucrION ANiD DEVELOPMENT AND TIE, WORID BANK, GLOBAL MONIlORING RiPowr 74, 131 (2005); JosEPHii E. S'ico- rz, GL.OBALIZATION AND Irs DISCONTENTS 54 (2002); NGAIRE WoODs, TiH GiOBALIZERS: THIE IMF, TIE WoLi) BANK, ANiD THIR BORROWERS 136 (2006). 6. See Roni-RT Birir Honwrrz, TiHE- IRONY OF REGutATRIORY REFORM: TIjn DuR- EaULATION OF AMERICAN TELECOMMUNICATIONs 32 (1989); Ronald R. Braeu- tigam, Optimal Policiesfor Natural Monopolies, in 11 HANDBOOK OF INDusTRIAL ORGANIZAION 1289, 1290, 1298-99, 1342 (Richard Schmalensee & R.D. Willig eds., 1989); William Glade, Privatization in Rent-Seeking Societies,