Regulatory Transformation in Mexico 1998 2000

8/14/2019 Regulatory Transformation in Mexico 1998 2000

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REGULATORY TRANSFORMATION

IN MEXICO, 19882000

CASE STUDIES ON REFORMIMPLEMENTATION EXPERIENCE


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Copyright 2008

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The World Bank Groups Investment Climate Department (CIC) is the operational center for the International Finance

Corporations (IFCs) Business Enabling Environment Advisory Services and FIAS, the multi-donor investment climate

advisory service. CIC assists the governments of developing countries and transitional economies in reforming their business

environments, with emphasis on regulatory simplification and investment generation. CIC relies on close collaboration with

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REGULATORY

TRANSFORMATIONIN MEXICO, 19882000

CASE STUDIES ON REFORM

IMPLEMENTATION EXPERIENCE

December 2008


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Acknowledgements

This case study was drafted by Cesar Cordova(Director, Jacobs and Associates Inc.) and AliHaddou-Ruiz based on a template developed by

FIAS, the multi-donor business environmentadvisory service of the World Bank Group.The publication benefited from the valuablecomments and support of Vincent Palmade,Gokhan Akinci, Peter Ladegaard, and DeliaRodrigo Enriquez. Florentina Mulaj, DorianaBasamakova, and Patricia Steele provided keycomments and editorial assistance in finalizingthe draft for publication.

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Contents

Executive Summary .............................................................................1

The Reforms in Mexico 1Lessons of the Reforms 2

1. Introduction .................................................................................... 5

2. Context of the Reforms ................................................................... 6

The Broad Context 6

The Specific Context 7

3. Content of the Reforms ................................................................... 8

The First Pillar: Using Trade Agreements to Anchor and Drive Reform 8

The Second Pillar: Expanding Privatization to Support Structural Reform 10The Third Pillar: Reforming the Regulatory Framework 11

4. Reform Process and Institutional Design ....................................... 15

Government Leadership and Strategy 15

Institutional Arrangements 16

The Role of the Public Service 18

Legal Process 18

Management of Stakeholders 20

Resource Issues 22

5. Impact of the Reforms .................................................................. 24

General Economic Performance 24

Specific Impacts 25

Sustainability 28

6. Lessons of the Reforms ................................................................. 30

Success Factors 30

Shortcomings 32

Lessons for Other Countries 34

Appendices ........................................................................................ 35

Appendix 1: Chronology of Major RegulatoryManagement Initiatives, 19882000 36

Appendix 2: Major Sectoral Regulatory Reforms, 19882000 37

Appendix 3: Persons Interviewed 39

Appendix 4: Statistical Information 40

Bibliography ...................................................................................... 41


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Table1 Mexicos Percentile Rank on Major Governance Indicators,

Selected Years, 19962002 ............................................................................. 27

Figures1 Timeline of Events Included in the Case Study ........................................................ 9

2 Architecture and Management of Regulatory Reform in Mexico ............................. 14

3 Mexican Process of Regulatory Impact Analysis Since 2000 ................................. 19

4 Stock of Inward Foreign Direct Investment, 19902003........................................ 25

5 Reduction in Licenses, Permits, and Other Information Requirementsby Mexican Ministries, 19952000 ................................................................... 26

Boxes1 Negotiating the North American Free Trade Agreement ......................................... 9

2 Developing a New Breed of Market-Based Institutions .......................................... 17


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The situation in Mexico two decades ago wasnot unlike that facing many countries today.The economy was heavily regulated and pro-tected. Industries and services in many areaswere shielded from foreign and national compe-tition, and the federal government operated

thousands of enterprises in a range of sectors.But in the late 1980s the government launcheda major reform effort aimed at changing all that.

The Reforms in Mexico

Indeed, during 19882000 the Mexican govern-ment devoted most of its political energy totransforming the business environment. Itundertook reforms aimed at opening markets,privatizing state enterprises, and redefining the

role of the state through deregulation and thebuilding of new capacities for high-qualityregulation. Early reforms unleashed forces thatdrove the momentum for later reforms. Theopening of markets, for example, led to a needfor greater competitiveness and thus lowerregulatory costs for businesses, which fueledregulatory reform several years later. Failures in

privatization, by contrast, deepened suspicionsabout the beneficiaries of market reforms.

The government-wide regulatory reform programwas intended to reduce regulatory costs andbarriers to entry while increasing the quality and

transparency of the public sector. To achieve theseresults, the government introduced a range of newinstitutions and procedures. These included theEconomic Deregulation Unit, the Federal Com-petition Law, and amendments to the FederalAdministrative Procedures Law to protect citizensagainst bad regulation. They also included thecreation of a registry of the formalities to whichbusinesses are subjectan initiative that led to a45 percent reduction in the procedures required ofbusinessesand the adoption of regulatory

impact analysis to lower regulatory costs.

These successive reforms brought about anenormous change in the conduct and perceptionof the federal public administration in Mexicoand greater certainty for businesses and indi-viduals. The reforms to transform the role of thestate in Mexicos economy are probably directly

EXECUTIVE SUMMARY


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linked to positive economic developments. Theprivate sector share of Gross Domestic Product(GDP) rose from around 60 percent in 1980 tonearly 90 percent by the end of the 1990s.Between 1983 and 2000 non-oil exports jumped

from $12 billion to $150 billion, and trade grewfrom 26 percent of GDP to 64 percent. Foreigndirect investment levels more than doubled from1993 to 1994 and persisted at similar levels evenin the face of the 199495 economic crisis.

Improvements in governance were also recorded.Governance indicators published by the WorldBank point to high marks in regulatory qualityfor Mexico from 1996 to 2000and to substan-tial improvement in government effectiveness,

rule of law, and control of corruption.

Lessons of the Reforms

Mexicos experience offers lessons for other govern-ments that face the difficult challenge of organiz-ing, implementing, and sustaining government-wide, multi-year programs of economic reform.Understanding which factors supported success,and which shortcomings undermined it, can helppinpoint good practices in reform.

Success Factors

The reforms were guided by a comprehensiveplan with mutually supportive elements. Thepillars of reform were mutually supportivemarket openness increased pressures foreconomic liberalization, which led to reformsin public sector capacities for good regula-tion. This logic sustained momentum as alliesof reform were createdand helped to pushthe next phase along.

High-level political support was translated intoaction. Clear and sustained support at thehighest levels of the federal governmentresulted in clear mandates, adequate resourcesfor reform institutions, and the dedication ofhigh-quality personnel in key ministries.

A top-down approachguerillas in thebureaucracywas used to trigger reforms.Tohelp overcome resistance to change in lowerlevels of the public administration, thereforms were orchestrated by a small group of

skilled reformers assembled by the presidentand placed in key government positions.

The government adroitly used crisis as anopportunity to set the agenda for reform.

The reforms were based in an explicit regula-tory policy supported by trained professionals ina central reform body.

The reforms made effective use of internationalexperience and best practices.Mexico reliedon its membership in the North AmericanFree Trade Area and especially that in theOrganization for Economic Cooperationand Development (OECD), which it joinedin 1994, to learn about best practices inregulatory reform.

High-level task forces delivered quick reformsand were able to overcome entrenched resis-tance.To launch the reforms, the govern-ment created focused executive units foreach cross-cutting policy. These units wereneeded to trigger changes, break administra-tive and cultural molds, and provide newcapacities to the public administration.

A mix of different mechanisms were used tocompensate losers. Dealing with interest groupsopposed to reforms required a pragmatic mixof communication and education, institu-tional alliances, compensation to aid adjust-ment in the short and long term, and thecourageous exercise of leadership and power.Mexico relied on all these mechanisms.

Linking reforms to international obligationssuch as the North American Free TradeAgreement (NAFTA) helped drive and anchorreforms, preventing backtracking.NAFTAprovided an institutional framework for


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reforms, establishing terms and obligationsthat could not be broken without incurringsignificant costs.

Shortcomings

The reforms suffered from inadequate sequenc-ing. The reform strategy and monitoringmechanisms suffered from various deficien-cies which hindered their sustainability.

Monitoring was neglected, leading to misper-ceptions and false expectations.The lack ofsystematic, ongoing evaluation led to anamnesia in which society and politiciansforgot or minimized the benefits of reforms

while emphasizing the costs, reducingsupport for long-term efforts.

Poorly developed competition and regulatoryframeworks for privatized infrastructureservices undermined support for the entirereform process.

Short-term gains were not properly weighedagainst longer-term sustainability in somecases. Expecting that economic efficiencywill be the only factor taken into accountduring structural reform is politicallyunrealistic. But the Mexican experiencesuggests that success depends on givinghigh priority to competition and economicefficiency.

The design of reforms often overlooked thedifferent needs for their implementation.Thechange orchestrated in Mexico was broad,ambitious, and carried out extremely quickly.But some legislative reforms never reachedfull implementation, and the speed ofreforms inevitably led to great difficulty inconsolidating the gains.

Lack of transparency and inadequate communi-cation about the goals, benefits, and costs ofreforms reduced their acceptance over the longterm.In retrospect, earlier and stronger efforts

were needed to institutionalize many of thereforms and communicate them to society.

Inadequate quality of human resources andadministrative processes, paramount in imple-menting reforms, slowed progress. Difficultiesin modernizing and depoliticizing the publicadministration in Mexico created an impor-tant obstacle to the reforms.

Political and public support was too fragile tosustain the course.Mexicos difficulties inmoving forward with further reform maysuggest that the approach to setting thepurpose and direction of change was too topdown and autocratic, compromising the

continuity and coherence of reform.

Lessons for Other Countries

The depth of the political, social, and institu-tional reforms required to carry out structuralchange is linked to the overall development ofsociety. By the early 1990s the corporatistmodel was changing in Mexico, and reformersdid not appreciate the shift. It took the 1994peso crisis for them to recognize the need fora more open and accountable approach.Beginning to establish the foundation for anew model of reform required many years.

As the reform process advances from launchingto implementing change, involving differentstakeholders along the way, political supportneeds to take different forms. At the outsetpolitical support for reform will mean push-ing, commanding, and expending sheerpolitical capital in overcoming resistance.But as implementation begins, politicalsupport will mean providing guidance andleadership, ensuring more open and partici-pative approaches, and defending thereform institutions that will be under fire.

It is important to design and create institutionsthat will support reforms in the long term. Tocompensate for shifts in political support, it is


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Market-based reforms require strongertransparency and accountability, whichtake time to materialize, but new commu-nication technologies can support institu-tional change. As reforms slowly sink in

and are internalized in the political andadministrative culture, adherence toprinciples of transparency and account-ability becomes vital to supporting themarket and maintaining trust in a modernregulatory state.

vital to contemplate a phase of institutionbuildingcentered on developing andfinancing human resourcesduring thedesign of reforms.

International agreements can anchor and drivereforms. Because an international treaty withimportant partners, such as NAFTA, limitsthe discretion to unilaterally reverse reforms,it can work as a powerful ratchetingmechanism toward comprehensive reform.


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In 1988 Mexico launched reforms that trans-formed the regulatory relationship betweenthe state and the market across the whole ofgovernment. The process that propelled theseefforts enabled Mexico to carry out a coherent,multiyear regulatory reform program with

economywide effects. This case study examinesthe strategies of Mexico in undertaking thisambitious reform program as well as theevents and stakeholders that shaped thereform efforts.

The two presidential administrations in powerbetween 1998 and 2000 devoted much of theirpolitical energy to redefining the role of thestateminimizing its intervention in themarket and transforming its regulatory role.

Although strategic goals were not clearly articu-lated, the ultimate aim was to shift the frontierbetween the public and private sectors. In pace,scope, and depth the regulatory reformsexceeded those of almost all other OECDcountries except the transition economies inCentral and Eastern Europe.

The reform process was rooted in three mutuallysupportive pillars:

Liberalization of trade and investment,anchored in the North American Free TradeAgreement.

A vast privatization program designed toreduce the governments direct participationin the economy, increase private sectorconfidence, and enhance economic efficiency.

A regulatory reform program with severalobjectivesto cement the regulatorychanges required for a modern, market-oriented economy (transforming the publicsector from an owner to a regulator andpromoter of private enterprise), to broadly

promote competitive markets by making iteasier to start and operate businesses (neces-sary to confront growing competition intradable goods), and to craft an improvedregulatory framework for recently privatizedindustries (generally nontradables not subjectto trade-induced competitive pressures).

1. INTRODUCTION


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Two decades ago the Mexican economy washeavily regulated and protected. Industries andservices in many areas were shielded from foreignand domestic competition, and the federalgovernment operated thousands of enterprises insectors ranging from hotels to transport and

mining. Exports were limited, with most indus-tries focused on internal markets. In the 1980s acollapse in oil prices and default on a massiveexternal debt, followed by five years of economicstagnation, triggered a major shift in this economicmodel. Mexico was one of the first Latin Americancountries to adopt market-based principles as acornerstone of economic development.

The Broad Context

The changes began under the administration ofPresident Miguel de la Madrid, which came topower in December 1982. Faced with the task ofcorrecting fiscal imbalances and dealing withexternal pressures created by the debt crisis thathad erupted earlier that year, the governmentdecided to abandon the import substitutionmodel that had been in place for nearly 30 years.

This crucial policy shift was part of a worldwidetrend. Later, the fall of the Berlin Wall in 1989galvanized the administration of President CarlosSalinas at the highest levels. Seeing the boldchanges occurring in Eastern Europe and Russia,many policy makers and analysts urged the

government not to miss the boat of history.

Meanwhile, the social and political environmentwas also shifting, and the Mexican polity wasfinally beginning to show some democratic vigor.The incumbent political party had been in powerfor nearly 60 years, and government decisionswere centralized in the hands of the president.The highest level of the executive branch wieldedmuch influence over the legislative and judicialbranches. In addition, the president nurtured a

consultation model allowing representatives ofthe business community and unions to partici-pate in exclusive, high-profile social pacts.

But new voices and demands were emerging,and discontent took shape in the broadersociety. The presidential elections of 1988 saw astrong populist challenge as suspicion of votingfraud led an array of opposition groups to take

2. CONTEXT OF THE REFORMS


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3 Studies have estimated productivity growth in Mexico inthe range of 12.5 percent a year in the 70s and in the 80s,compared with 34 percent for Hong Kong (China),Taiwan (China), and Korea (Lustig 2002).

1 Between 1982 and 1988 the share of imports subject tospecial licenses was reduced from 100 percent to around20 percent, and the average tariff from 27 percent to 10percent (Blanco 1994, 40).

2 The maquila program, set up in 1966 to alleviate highunemployment in the border region, slowly expanded tobecome a key tool for attracting foreign investment andtechnology. The program allows 100 percent foreignownership of firms and temporary importation, withoutpayment of import taxes, of foreign goods into Mexico,

where they are assembled, manufactured, or repaired andthen exported, either to the country of origin or to a thirdcountry. Between 1986 and 1992 employment growthaveraged more than 10 percent a year in this sector, whileexport growth exceeded 20 percent (Blanco 1994, 4546).

to the streets. In the following years this move-ment grew, demanding more transparency andaccountability from the state and especially theexecutive branch.

The Specifi c Context

Mexico progressively opened up its economythrough such steps as joining the GeneralAgreement on Tariffs and Trade (GATT) in1986.1 The government launched a fiscal auster-ity program to control inflation and reduced thestates direct participation in the economythrough a program of privatization and marketliberalization. At the core of these reforms was anew strategy of market openness. Domestic

reforms were underpinned by internationalcommitments as Mexico joined not only theGATT, but also the Asia-Pacific EconomicCooperation (APEC) and the OECD and signedfree trade agreements.

This move toward market openness did nothappen in isolation. Mexican leaders hadwatched the Asian economic successes of the1970s and 1980s and had seen the positiveeffects of trade liberalization in the rapid growth

of the maquiladora sector (in-bond assemblyplants that export finished products primarily tothe U.S. market).2 Most other Latin Americancountries were also shifting their economiestoward a more pro-market, pro-trade orienta-tion. Competition for international capital and

investment was strengthening, and in theabsence of concrete advances in multilateraltrade negotiations (the Uruguay Round),Mexico sought to engage an array of nations inpreferential trade and investment agreements.

Results were slow to appear, however. Reformswere complicated by continued downwardpressure on the price of oil (a major Mexicanexport), a stock market crash, and a run on thepeso in 1987. Mexicos economy continued tosuffer from relatively low productivity growth,investment, and industrial production.3 And asmall number of firms with political clout in eachsector continued to dominate the Mexicanmarket. These disappointing results were linked to

a combination of factors: the timidity of reforms,a political economy vulnerable to special interests,concentrated market structures, and inflexiblelabor laws that prevented economic adjustment.

Moreover, the public sector continued to drawprecious resources from the already meager andoil-dependent budget. Employment in the federalgovernment had ballooned to nearly 2 millionworkers by 1988, up from 1.5 million in 1986.Administrative offices were overstaffed, and state

enterprises, with unionized workers, accounted for40 percent of federal government employment.

But the lack of early results did not stop thereforms. On the contrary, the reforms expandedand deepened. Since 1987 and over the next15 years, Mexico made regulatory reform acentral element of its broader transformationfrom an inward-looking economy to an open,market-based one. Regulatory reform hassteadily proceeded, at first because of and later

despite the external shocks and macroeconomicupheavals that accompanied this transformation.Indeed, regulatory reform may have helpedreduce the severity of economic shocks byincreasing the flexibility of the economy.


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In 1988, the new administration of PresidentCarlos Salinas decided to decisively acceleratereform. Its approach was to deepen the reformstrategy by adding international trade negotia-tions and a more intense program of domesticeconomic deregulation. The first was necessary

to break through domestic opposition to reformand to attract investment; the second to facilitatethe flow of goods and services through theeconomy by eliminating regulatory bottlenecks,and to revive domestic and foreign investment.

The reform process centered on three main pillars:

Consolidation of trade liberalization, mainlythrough the negotiation of a free tradeagreement with Mexicos largest trading

partner, the United States.

Expansion of the privatization program toincrease economic efficiency and restore theprivate sectors trust in government.

Gradual implementation of a government-wide regulatory reform program to speed

adjustment, eliminate bottlenecks in theeconomy, and increase the transparency ofthe public sector.

Underpinning these reforms were a range of newinstitutions and procedures to carry out and

sustain regulatory reform in Mexico (Figure 1).

The First Pillar: Using TradeAgreements to Anchorand Drive Reform

At the core of the new thinking was the use ofexternal mechanisms to anchor and drivereform. The administration persuaded Mexicansocietyand, just as important, the United

Statesto support NAFTA, a trade agreementlargely inspired by the one just finalized betweenthe United States and Canada (Box 1). ForMexico, a major rationale for pursuing NAFTAwas to transform its image, convincing thedomestic and foreign private capital marketsthat it was a trustworthy business partner. Forexample, the states direct intervention in the

3. CONTENT OF THE REFORMS


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BOX 1

Negotiating the North American Free Trade Agreement

Mexico and the United States began formal negotiations of a free trade agreement in August 1991. Canadalater insisted on participating in the new Mexico-U.S. treaty, which became the NAFTA. The negotiation of themain body of the agreement was concluded in December 1992. Once labor and environmental sideagreements were incorporated in 1993mainly at the behest of the new U.S. administration of President BillClintonNAFTA received legislative approval in all three countries in November 1993 and entered intoforce on January 1, 1994.

After agreeing on a basic text in August 1992, the Mexican government, under orders of the president,launched an effor t to disseminate NAFTA throughout the country. Negotiators held 44 forums on NAFTA in 27

of the 31 state capitals and in the Federal District. In addition, they held 14 forums in the Senate to ensurethat legislators were fully informed before the fi nal vote.

economy and its traditional discretion (grantedby the Constitution) in limiting property rightshad been a source of uncertainty and distrust forthe private sector. As a stable external mecha-nism, NAFTA played an important role inlimiting the discretion of the state in definingtrade policy and in expropriating private prop-

erty (see Elizondo 2001).

The signing of a trade agreement with theUnited States also served as a mechanism to lockin earlier reforms and commitments with Mexi-cos main trading partner. It ensured future accessto the North American market and guaranteedthe permanence of Mexicos new policy of

market openness. In addition, the treaty includedimportant measures on protecting investmentand intellectual property and new disciplines inconsultation and trade disputes. These estab-lished credible and irreversible obligations ontransparency and investor protection.

Domestically NAFTA, along with membershipin the OECD in 1994, was sold as a ticket toenter the rich countries club. Just as accessionto the European Union has been an importantcatalyst for difficult reforms in many Europeancountries, NAFTA helped focus attention on thestructural reforms Mexico needed to becomeglobally competitive (see Solchaga 2004).

FIGURE 1

Timeline of Events Included in the Case Study

Market-openingreformsbegin

1988 20001980s Period of case study

Structural reformslaunched (privatization,

NAFTA,

regulatoryreform)Economic

deregulationunit, sectoralregulatory

reform begins

Competition law

Agreement for thederegulation ofbusiness activity

(regulatory impactanalysis)

Federal registry ofbusiness formalities

(45% reduction)

Administrativeprocedures

law(regulatory

quality)Fast track for

business start-ups

Regulatoryimpact analysisstrengthened,

cofemer(strong centralreform engine)


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NAFTA required setting up new institutions andadjusting existing ones that were helpful insustaining regulatory reform. An early andimportant decision was to shift all trade policy,including international negotiations, from the

Foreign Affairs Ministry to the Ministry of Tradeand Industrial Development (Secofi). Trade wasconsidered part of Mexicos national economicpolicy, not its foreign policy, and the idea was toisolate it from potential contamination bypolitically tainted international issues or obliga-tions.4 In practical terms, this meant placing theMexican missions to the GATT, OECD, APEC,and the like under the control of Secofi.

To coordinate public sector responses to

NAFTA, the government established the Inter-ministerial Commission for the Free TradeAgreement, composed of the ministers of tradeand industrial development, foreign affairs, socialdevelopment, finance, and labor and representa-tives of the Office of the Presidency and theBank of Mexico (the central bank). While Secofiretained full responsibility for the negotiations,the commission provided a channel for minis-tries to communicate their interests in thenegotiation agenda.

Because building the confidence of the privatesector was so vital, the government encouraged anew collaborative relationship through theNAFTA Advisory Council, made up of repre-sentatives of labor, agriculture, academia, andbusiness. The councils role was to discusspriorities and interests in the negotiations andkeep its constituencies informed about progress.

The private sector also reorganized itself toparticipate in the reforms. The Business Coordi-nating Council, the most broadly based businessassociation in Mexico, established the Council ofForeign Trade Business Organizations to serve as

the principal link with the public sector during thenegotiations. The new entity presented thepositions of each productive sector to Secofi andactively participated through a side room strategythat allowed it to respond rapidly to changes inproposals and strategies during the negotiations.

NAFTA was not the only new external commit-ment that Mexico entered into. Others included itsmembership in the GATT (1986) and unilateraltariff reductions; membership in APEC (1993)

and the OECD (1994); and free trade agreementswith Chile (1992), Bolivia (1995), Colombia andVenezuela (1995), and Nicaragua (1998).

The Second Pillar: ExpandingPrivatization to Support StructuralReform

Opening the economy to international marketswill produce few benefitsand even amplify thepains of adjustmentif the economy is too rigid

to respond because of either government owner-ship or regulatory constraints. To enable Mexicoto take advantage of the opportunities created bythe trade agreements, the government had tointensify and deepen structural reforms in theeconomy (efforts supported in part by resourcesand advice from the World Bank Group).

The government began a fresh round of privatiza-tions, this time focusing on the reprivatization ofbanks that had been nationalized in 1982 and the

liberalization and sale of public sector infrastruc-ture such as rail, ports, highways, and telecommu-nications. It complemented this policy with amajor agenda of economic deregulation, inspiredin part by the Thatcher and Reagan initiatives inthe United Kingdom and the United States andthe Chilean process. But unlike privatizations oftradable goods and services companies, the sale of

4 Mexican relations with the United States cover a large arrayof complex issues, including immigration, drug trafficking,

urban development, and environmental concerns along theborder. To deal with trade in isolation from all other issuesand on its own merits, it was deemed best to maintain theauthority within Secofi, reducing the probability that tradeopening would be linked to concessions in other areas.Major trading economies commonly use such an institu-tional structuresuch as Japan (Ministry of InternationalTrade and Industry), the United States (Office of the UnitedStates Trade Representative), and Europe (Directorate-General for Trade)precisely to limit contamination oftrade policy by foreign affairs and politics.


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ministry (Secofi) and was directly accountable tothe trade minister. (For a chronology of regula-tory management initiatives and details onmajor sectoral regulatory reforms undertaken in19882000, see Appendixes 1 and 2.)

The UDE directed much of its efforts towardfostering efficiency in the provision of non-traded goods and services that are shieldedfrom international market competition. It usedan opportunistic strategy, selecting economicsectors where deregulation could yield largegains at little political cost, such as natural gas,or where inaction would result in excessivelyhigh costs, such as road freight.

Early achievements helped facilitate privateparticipation in such areas as:

Trucking and bus transportation (198990),by eliminating price and route restrictions,

Electricity (199293), by providing the legalbasis for cogeneration and self-supply byindependent producers,

Ports (199193), by creating privately run,integrated port administrations,

Land tenure (1992), by allowing the sale ofsmall plots and promotion of agribusinessventures.

Consistent with experience in many countries,however, the UDE soon found that it could notaddress the regulatory problems facing the econ-omy unless it moved from a strategy of deregula-tion to a broader and more sustainable strategy ofregulatory improvement (OECD 2002). TheMexican economy was not only overregulated; itwas also underregulated in some areas and poorlyregulated in others. More important, ministriesstill had a regulatory style that was top down,interventionist, and nontransparent.

The new strategy was aimed at improving theregulatory environment for private sector activity

public service companies requires heavy doses ofreregulation. These efforts were therefore linked tomajor constitutional, legal, and regulatory reforms.

Through liquidations, mergers, transfers, and sales,

the government reduced the number of state-owned companies from 1,155 in 1982 to fewerthan 200 in 1996. That dramatically changed thecomposition of public sector employment andallowed the government to pay down a significantshare of its debt. (In the late 1990s, however, thestate still owned major infrastructure sectors).

The Third Pillar: Reforming theRegulatory Framework

Regulatory reform was an important new featureof the 19882000 reform process. The initialgoal was pure deregulation: to eliminate regula-tory barriers and burdens, liberalize protectedsectors, remove economic bottlenecks that werelimiting the gains from greater market openness,and through these steps support the tradenegotiations that were picking up steam. Thegains from unilateral market opening in the1980s were inadequate, and the governmentneeded to show more results.

Awkwardly, until 1995 the regulatory reformswere promoted separate from the privatizationprocess. This poor practice showed that design-ing regulation for privatized sectors was notamong the main concerns of officials carryingout the privatization efforts.

Early Strategies for Regulatory Reform

To implement the radically new policy process

of regulatory reform, the government assembleda small, high-level group of professionalsalmost like a special forces teamoutside thetraditional structures of the bureaucracy. Theseprofessionals, around 15 economists and law-yers, formed the Economic Deregulation Unit(UDE), created in 1989. The UDE operatedunder the general purview of the powerful trade


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private firms. And NAFTA had locked in tariffeliminations and limited the ability to protectdomestic industry through nontariff barriers. Sothe government focused instead on reducing thecost of doing business through intensified regula-

tory reform, a strategy aimed at helping Mexicanfirms expand their exports and transform them-selves into engines of economic growth.

Toward More Systematic

Regulatory Reform

In a move designed to make the regulatoryreform program more systematic and transpar-ent, President Zedillo issued a decree, theAgreement for the Deregulation of Business

Activity, in December 1995. Now with a broadermandate, the UDE established a clear reviewprocess for proposed and existing regulations.This process required the sponsoring agencies tojustify proposed regulatory measures on the basisof efficiency.

In addition, the UDE continued to proposereforms in specific sectors, even without theapproval of the responsible line ministry. It alsosigned cooperation agreements with most Mexican

states to promote regulatory reform at the statelevel, to provide technical assistance on request,and, through coordinated federal-state efforts, tomake it easier for new businesses to start up.

One of the UDEs major achievements wasto create a complete inventory of businessformalitiesrules and forms required to startand operate a business, such as licenses, permits,and other authorizations. The process of compil-ing this inventory, the Federal Registry of Business

Formalities, involved reviewing all businessformalities (except those relating to taxes). Inaddition, the UDE required ministries andagencies to submit a justification for each onearequirement that shamed officials into cullingunneeded, duplicative, and forgotten formalities.

The process led to the elimination of 45 percentof business formalities by 1999, reducing red

by creating appropriate market rules and institu-tions and building more effective and efficientgovernance. The UDE began to devote greatefforts to horizontal regulatory reforms thatbenefited virtually all economic sectorsfor

example, designing regulatory frameworks forconsumer protection, technical standards, andcompetition policy.

As the UDE gained experience, it starteddeveloping tools of regulatory governance.Changing rules without changing the wayministries regulated could not sustain theadvances made: ministries would graduallyre-regulate and once again expand their powers.The reform had to be more systematic to

prevent regulatory backtrackingthat is, it hadto control the flow of new rules as well as thestock of old ones. And it had to imposeminimum quality standards on new regulations.

This policy shift toward more comprehensiveregulatory reform was supported by the businesscommunity. After nearly a decade of tradeliberalization and the entry into force of NAFTAin 1994, businesses faced growing market compe-tition and had become increasingly worried about

the anticompetitive effects of new and existingregulations. A new sense of urgency emergedwhen Mexicos financial system collapsed inDecember 1994, only a few days into the newadministration of President Ernesto Zedillo. Inthat month the currency was devalued by morethan 50 percent, and in 1995 the economycontracted by 6.2 percent.

As often happens in times of economic crisis, thebusiness sector clamored for protection and

subsidies and for an industrial policy involvinggenerous state aid. But it also demanded concretemeasures to reduce red tape and petty corruption,which were particularly burdensome for start-upfirms and small and medium-size enterprises.

Meeting the demands for protection and subsi-dies was beyond the governments power. Scarcepublic funds allowed little room for subsidies to


19/4913

tape and the discretion of front-desk publicservants and inspectors. By reducing and stream-lining the federal formalities required to start anew business, the changes not only madebusiness start-up far easier; they also virtually

eliminated a significant source of corruption.

Other initiatives included transforminglicenses into notifications, exempting orsimplifying compliance by small firms, andsimplifying and streamlining inspectionprocedures. The UDE also began to work withlocal governments to establish state andmunicipal registries of formalities.

The new regulatory management system re-quired a cultural shift in Mexicos rigid andlegalistic public administration. The bureaucracywas unaccustomed to the delays associatedwith controls to ensure the quality and transpar-ency of regulation. But with some exceptions,the new processes were able to overcome opposi-tion thanks to support from the presidentsoffice and, crucially, from the presidents legalcounsel (which considered the UDE a vital filterin ensuring the legal quality of regulatoryproposals submitted for the presidents signa-

ture). To further support the UDE in deliveringits new mandate, the government created theEconomic Deregulation Council, with represen-tatives from the government, business, labor,and academia.

Conflicts were resolved through the governmenthierarchy, with the UDE acting as the monitor.Laggard ministries were identified, called toaccount, and encouraged to accept the newregime by the Economic Deregulation Council

and in Cabinet meetings. Also playing a key rolewere a series of specialized ad hoc workinggroups, with members designated by the Busi-ness Coordinating Council and the EconomicDeregulation Council. This national forum fordiscussion of regulatory proposals helped toconsolidate the power and prestige of the UDEand was instrumental in exposing andovercoming ministerial reluctance and delays.

After several years experience in implementingthe regulatory reform program, and promptedby recommendations from the OECD and anapproaching presidential election in 2000,President Zedillo moved to institutionalize the

policy and speed its implementation throughreform of the Federal Administrative ProceduresLaw.5 With this reform, the UDE was trans-formed into the Federal Regulatory Improve-ment Commission (Cofemer), with an expandedmandate, legislative backing for many of theUDEs powers, and new enforcement powers.

Unlike other independent commissions, Cofe-mer was created not to regulate private sectoractivity but to impose quality and transparency

disciplines on the public sector. It was set upwith a clear legal mandate to ensure the transpar-ency of the regulatory processfor example, byensuring public access to information on existingregulations and to key regulatory proposalsbefore their entry into forceand to promoteregulations offering the greatest net benefit tosociety (Figure 2). Cofemer quickly became adriving force for regulatory reform in Mexico.

Changes in the Federal Administrative Proce-

dures Law were designed to ensure a minimumstandard of regulatory reform within thegovernment even in the event of a change inadministration. The reformed law specified thecomponents of the regulatory reformprogramderegulation of formalities, transpar-ent review and development of regulatoryproposals, and assistance to state and municipalgovernments. And it required that each federalministry and decentralized agency (such asPemex and the Mexican Social Security Insti-

tute) designate vice ministers in charge ofregulatory reform and biennial regulatoryreform programs.

5 The proposal was presented to Congress, where it wasapproved without a single opposing vote, proving thatregulatory reform was an ideologically neutral policy andone of the few matters on which the Congress elected in1997 (the first in which no party had an absolute majority)could unanimously agree.


20/4914

and individuals in the registryand permitsonly those listed to be officially required. Thisgives businesses and individuals greater certaintyabout their rights and obligations.6

In addition, the law expanded and consolidatedthe Federal Registry of Business Formalitiesnow the Federal Registry of Formalities andServices. Today the law requires federal minis-tries to include all their formalities for businesses

6. The registry has since been enhanced with search tools, downloadable forms, and online assistance and other e-government tools.

Note: RIA is regulatory impact assessment.

Public

Ministries

Regulatoryagencies

Official gazette

Presidents office

Councils, task forces(government, academia, business,

unions, consumers)

Cofemer

Support andconsultation

Oversight

Congress

Notice andcomment

Proposal and RIAdevelopment specificliaison officers(vice ministers)

Publicationrestrictions and

sanctions

Proposals andoversight

F IGURE 2

Architecture and Management of Regulatory Reform in Mexico


21/4915

4. REFORM PROCESS AND

INSTITUTIONAL DESIGN

The process and institutional structure forMexicos reform program in 19882000 reflecteda top-down approach aimed at expeditiouslypushing through reforms. Over time, the govern-ment increasingly institutionalized the processesof reform. In response to changes in the political

environment, it also broadened consultation.

Government Leadership and Strategy

The reform in Mexico was undertaken underthe direct guidance and supervision of thepresident along with a tight group of reformersat lower levels. During the Salinas administra-tion (198894), a cohesive and determinedcircle of technocrats pushed for the retrench-ment of the public sector through highly visible

privatizations and the negotiation of NAFTA.

The strategy Mexicos reformers followed was aloose approach of linking initiatives to improve-ments in market conditions internally andexternally. The reformers acted opportunisti-cally, looking for political openings and usingcommitments under NAFTA and the WorldTrade Organization as a central justification.

They often adapted international practices, andthey made good use of international advice,including from the World Bank and the OECD.

Accustomed to a centralized power structure,Mexican society broadly accepted the top-down

approach based on traditional command-and-control mechanisms. Although key privatiza-tions had detractors, the new economic strategywas well received, particularly by the privatesector. Market openness measures were per-ceived as a sign of the administrations commit-ment to reducing the governments direct role inthe economy. And in the end, the president waspowerful enough to silence influential politicaland intellectual circles suspicious of bilateralrelationships with the United States.

The top-down strategy, aimed at achieving fastand visible results, was successful in reaching itsshort-term goals. But medium-term, broad-basedresults were slower to materialize because of themacroeconomic crisis of 1994.What would havehappened without the crisis is hard to imagine,because more of the privatized firms might havesurvived. But some initiatives, particularly key


22/4916

privatizations, clearly had basic shortcomings indesign. As a result, there was a huge backlashagainst neoliberal reforms.

Consequently, the Zedillo administration

(19942000) was forced to follow a morecautious and measured approach, focusing onregulatory institutions and laws to promote amore open regulatory environment. In the springof 1995, for example, the government organizeda series of events across the country to fosterbroad consultation in preparing the 19942000National Development Plan. Having learnedfrom past mistakes, the presidential team ad-opted a more participative approach in pushingfor further bilateral and multilateral market

openness initiatives and structural reformsespecially in the sale of the few remaining statefirms, which were more politically sensitiveprivatizations.7

The new administration also began to focus onbuilding a long-lasting constituency for reform,particularly among small and medium-sizeenterprises, which had been neglected in theearlier reforms. Its emphasis on reducing theformalities to open a business, and drastically

reducing the excessive discretion that wasfostering corruption at front desks and duringinspections, was part of this.

In addition, the new administration acceleratedthe institutionalization of reform bodies, transfer-ring many regulatory functions of sectoral minis-tries to autonomous and semiautonomousagencies in hopes of dealing more efficiently withthe regulatory problems that had surfaced follow-ing imperfect privatizations, particularly in

infrastructure (Box 2). Another purpose, achievedwith less success, was to try to isolate important

regulatory functions from the political process.

The political landscape changed significantly as aresult of the 1997 midterm elections, when noneof the three main political parties won a majorityof seats in Congress. And as Mexico became moredemocratic, the top-down model was reaching itslimits. Congress and the judiciary were starting toblock many reform initiatives, and a generalbacklash against reforms started to brew. Partisanpolitics, exacerbated by the unilateral presidentialstrategy for the reforms of the preceding decade,severely limited the reform agenda from 1997 to2000.8 While most of the earlier reforms hadbeen designed without involving the otherbranches of government, the new politicalenvironment forced the executive branch tobetter communicate and build stronger consensusfor reforms. The new checks and balances alsohelped in imposing higher-quality regulatorydisciplines and transparency on the executivebranch, as evidenced by the approval of reformsin administrative procedures.

Institutional Arrangements

Part of the justification for following a top-

down approach was the Mexican governmentshuge bureaucracy; undertrained, politicized,and demoralized, it could not be changedquickly. To respond to the quickly evolvinginternational situation and the expectations ofsociety, the government made a pragmaticdecision to spearhead reforms without involvingthe public administration. The lack of a civilservice in Mexico helped by making it easy tocarry out a radical, focused replacement of notonly ministers and vice ministers but also

directors general and other mid-level publicservants in key areas.9

7 Importantly, the market openness pillar was not down-played. The close relationship with the United Statescultivated through NAFTA turned out to be an importantfactor in the rapid recovery from the crisis: access to its keyexport market was secure (indeed, enhanced because of thedevaluation of the peso), and the United States played acentral role in the International Monetary Fund plan tosecure Mexicos short-term liquidity during 1995.

8 For example, the National Action Party (PAN) voted againstthe Zedillo electricity reform for partisan political reasons. Asimilar reform presented by President Fox (PAN) early in hisadministration would also fail to pass in Congress.

9 Until 2002, Mexico had no civil service except in theForeign Affairs Ministry and the Bank of Mexico. Thiscreated instability among technocrats and a short-termismin the design of reforms.


23/4917

Thus, personnel in offices close to the nucleusof reform were almost completely replaced. Anew layer of reformers was imposed on top ofthe traditional bureaucracy, which was largelyunaffected by and uninvolved in the reforms.That permitted a rapid start to legal reformsthat later bogged down as implementation gotunder way.

In the first phase, the government created special

units in charge of the three main pillars ofstructural reformtrade liberalization (Officefor the Negotiation of NAFTA),privatization Unit for the Divestiture of Parastate Entities(UDEP), and regulatory reform EconomicDeregulation Unit (UDE). The institutionalarchitecture in these new areas basically followedthe same plan: a flat structure staffed by a coupleof dozen technocrats recruited from top academic

circles.10 Fundamental processes of governmentwere not altered, nor was there any effort toinstitutionalize change through a coherenthuman resource policy.

As the new strategy of regulatory governanceemerged, however, it became clear that greatereffort in implementation would be needed tosustain the deep changes in economic and regula-tory orientation. By 1995, the UDE was playing a

pivotal role in managing the regulatory systemand advocating further reforms. This key role

BOX 2

Developing a New Breed of Market-Based Institutions

Independent of the emergence of the regulatory policy, as Mexico embraced market-based policies the

government decided to develop insti tutions that could manage and regulate more effi ciently than thetraditional bureaucracy. These new entities have three characteristics in common: they have a high degree oftechnical specialization; they concentrate on regulatory or enforcement issues, leaving policy matters to theministries; and they have greater autonomy, particularly in human resource policies.

But the new institutions also differ from one another. On the basis of their legal autonomy relative to theexecutive branch, for example, these entities can be divided into four broad categories (the dates are those ofthe most recent reforms):

Independent from the executive branchthe Bank of Mexico (since 1994) and the Electoral Institution(since 1996).

Independent within the executive branchthe National Commission for Human Rights (since 1992), theFederal Competition Commission (since 1994), and the Federal Institute for Access to Information (since2002).

Policy setting, partially autonomous, and technically independentthe Energy Regulatory Commission(since 1995) and the Federal Regulatory Improvement Commission (Cofemer, established in 2000).

Technically autonomous from the sectoral ministrythe Federal Telecommunications Commission (Cofetel,established in 1996), the National Banking and Securities Commission (CNBV, established in 1995),the International Trade Practices Unit (established in 1991 as the General Bureau of International TradePractices and renamed in 1993), the National Institute of Ecology (established in 1996), the NationalWater Commission (Conagua, established in 1989), and the Revenue Administration Service (estab-lished in 1997).

Source: Lpez Aylln 1997.

10 Interestingly, this pool of technocrats existed thanks to keyreforms in the scholarship system in the early 1980s. Sincethese reforms the federal scholarship agency (the NationalScience and Technology Council, or CONACyT) automati-cally awards generous scholarships to any students acceptedfor postgraduate study by any university on an official list ofthe most prestigious in their field. Strangely, fewer studentsin law than in economics have taken this opportunity.


24/4918

received confirmation from Congress when itapproved the proposal to transform the UDE intothe stronger and more independent Cofemer.

Another central player was the Federal Competi-

tion Commission (CFC), established in 1993. Asthe new competition authority gained confi-dence, it created a powerful alliance with theUDE and then Cofemer in advocating market-based reforms. The authority played an impor-tant part in liberalizing a market traditionallydominated by a narrow set of economic interestsby investigating and preventing anticompetitivemergers and monopolistic practices. But despiteits enhanced autonomy, it lacked the politicalpower to contest major ministerial decisions and

to coordinate with sectoral regulators. Its effec-tiveness was also constrained by the courts,which did not always support its decisions.

Another set of players was the new breed ofregulatory institutions that began to emerge inthe mid-1990s following the privatization drive.The performance of these institutions hasunfortunately been mixed.

The Role of the Public Service

For most of the reform period the bureaucracywas treated as either irrelevant or hostile. This waspossible in Mexico because the bureaucracy isquite weak at the policy levelsindeed, the entirepolicy layer of the public administration serves atthe pleasure of the president and is usuallyreplaced when a new one takes office. So it is easyto put into place policy officials who enthusiasti-cally support the presidents policies, but last onlya short time. Lower levels of the administration

have few policy functions and were not involvedin the policy reforms. Though heavily unionized,public employees outside the state-owned enter-prises traditionally have been politically weak.

Still, significant efforts were made to build asustained, reform-minded public service withinthe administrationas represented by the creationof the Vice Ministry for International Trade

Negotiations and the Federal CompetitionCommission in 1993 and the expansion of theUDE (both in size and in responsibilities) in 1995and its transformation into Cofemer in 2000. Butthese efforts touched only the highest levels of the

administration while the rest continued its glacialcourse, unimpeded by the furor at the top.

In retrospect, the failure to undertake a morethorough reform of the public administrationearlier, and to sustain efforts to reform the admin-istrative machinery and bureaucracy, created a bigobstacle to implementing many reforms. Thelower levels of the public service never had a senseof ownershippossibly one factor in the publicsentiment against reforms after 2000.

Legal Process

The restructuring of the Mexican economy fromthe mid-1980s to the mid-1990s was based onan almost complete overhaul of the legal system.While the sequencing of reforms did notnecessarily conform to a well-coordinated plan,two major legal pillars anchored the fundamen-tal transformation in market structure andregulatory policy: NAFTA and the Federal

Administrative Procedures Law.

NAFTA as an Anchor for Reform

The NAFTA framework was instrumental inMexicos transition to a more stable regulatoryframework, based on the rule of law, in whichadministrative discretion (such as over privateproperty rights) was curtailed unless absolutelynecessary. Moreover, as an international treatythat takes precedence over federal laws inMexico, NAFTA reduced the discretion of lawmakers and rule makers to reverse the reforms.This was crucial to safeguard against thecapture of Congress by special interests, thebiggest threat to the reforms in Mexico.11

11 This capture is made easier by electoral laws that prohibitreelection and are based on a strong proportionality system,

which reduces the political accountability of members ofCongress. Moreover, dominated by a single party until1997, Congress could easily amend the Constitution.


25/4919

NAFTA also provided an important boost forregulatory reform through its effects on competi-tionas it became increasingly apparent that thecosts of doing business would have to be sharplyreduced for Mexican firms to compete in the North

American market. The argument that Mexiconeeded to change so as to adapt successfully to thenew economic conditions created by NAFTA, andthe irreversibility of the process, helped drivederegulation and the reforms to sectoral regulatoryframeworks (such as those for mines, railroads,telecommunications, and gas distribution).

Even in the wake of the deep economic crisis in19941995when calls for renegotiatingNAFTA were widespreadthe balance was tilted

in favor of accelerated reform. One reason was thelegal stability of the treaty. Another was that it hadcreated an important constituency for reform:exporters whose contribution to economic growthand job creation would be one of the main reasonsthat the crisis was relatively short-lived.

NAFTAs requirements for transparency andpublic comment were also precursors to signifi-cant changes in the federal regulatory process. In1992, the Federal Metrology and Standards Law

was enacted to guarantee transparency andopportunity for public comment in the develop-

ment of technical standards. This was done inpart to show that changes in nontariff barrierswould be made in a predictable and transparentwaya central concern for Mexicos negotiatingpartners for NAFTA. In 1995 the Agreement for

the Deregulation of Business Activity created thefirst government-wide regulatory review pro-gram (see the following section). NAFTA alsofostered a major reform of customs and inspec-tions systems (see FIAS 2004).

Administrative Procedures Law

as a Second Anchor

A parallel pillarand vehiclefor reform inMexico was the Federal Administrative Proce-

dures Law (enacted in 1994 and amended in1996 and 2000). This law created a firm basisfor all interactions between the government andprivate citizens by setting out rules for request-ing information, issuing resolutions,undertak-ing inspections, and respecting due process. The1996 amendment of the law first established theobligation for carrying out regulatory impactanalysis. This reinforced the UDEs authority torequire clear justification for Regulatory propos-als and led to the government-wide program of

regulatory impact analysis based on a commonmethodology and independent review (Figure 3).

Source: www.cofemer.gob.mx

Note: RIA is regulatory impact assessment.

RIAsatisfactory?

Proposal and RIAsent to Cofemer

Clarifications andcorrections

PreliminaryCofemer opinion

Regulatorresponse

Final Cofemeropinion

10 days

30 days(publicconsultation)

5 days

Yes

No

FIGURE 3

Mexican Process of Regulatory Impact Analysis Since 2000


26/4920

This 1996 amendment, combined with theAgreement for the Deregulation of BusinessActivity, represented a major shift in the regula-tory process. For the first time regulations acrossa range of issuesfrom infrastructure to health

and the environmentwere challenged bycriteria of regulatory quality. The burden ofproof on the desirability of any regulation wasshifted to the sectoral ministries.

The requirements for transparency and regulatoryimpact analysis introduced a new mechanism ofchecks and balances and a filter for potentialerrors and abuses. Among the most importantinnovations of this process were the following:

Assigning responsibility for regulatory impactassessments to a vice minister in charge ofregulatory reform in each ministry or decen-tralized agency,

Requiring such officials to present two-yearregulatory improvement programs toCofemer and for public comment,

Requiring that all regulatory impact assess-ments, proposals, and opinions by Cofemer

be made public,

Requiring that regulatory proposals be sentto Cofemer at least 30 working days beforetheir enactment or before being sent to theexecutives chief legal counsel for signatureby the president.

The transparency and public comment procedureswere enhanced by Cofemers use of the Internet.Cofemers Web page contains the entire Federal

Registry of Formalities and Services and allregulatory proposals under review, including fulldraft texts and regulatory impact assessments.Anyone may send comments to Cofemer, which islegally obligated to consider all public commentsbefore issuing its opinion.

All this represented an enormous change in theconduct and perception of the federal public

administration in Mexico. Regulatory changescould no longer be secretively drafted andsuddenly published in the official gazette (DiarioOficial de la Federacin). The result has beenmuch greater legal certainty for businesses and

individuals and a strong incentive to participatein the review process. Many newspapers, aca-demics, and business associations now regularlyreview Cofemers Web page to see what regula-tory projects the government is working on.

The transparency of the process provides astrong incentive to prepare sound regulatoryimpact assessments, assuring Cofemer and thepublic of high-quality information for theirreview of the proposals. Further support for

quality comes from a training program and anonline system to facilitate the preparation ofregulatory impact assessments.

The new process has proved to be leaky, withpressures, political motives, and perceptions ofurgency for particular regulations in some casesleading to circumvention of the controls. Butthe mechanism of regulatory impact analysisand consultation has raised the cost of pushinglow-quality regulation, and acceptance of the

new procedure is growing.

Cofemer has continued to push for furtherdisciplines in transparency and consultation. In2002, it designed a groundbreaking access toinformation law that created the Federal Institutefor Access to Information, with substantialautonomy. This has been a major step in aligninggovernment processes with the growing calls fortransparency and accountability in a nation thatis consolidating its democratic values.

Management of Stakeholders

During most of the reform period the executivewas able to drive reforms with little participa-tion by stakeholders except for those at thehighest levels. Yet the program and policies werewell received by business and other socialgroupsand even by Congress, still dominated


27/4921

a wider pro-reform group in the government andadvance the process of regulatory reform. Theadvisory council turned into a dispute resolutionforum for discussing contentious issues, ensuringthe accountability of the UDE and Cofemer, and

pressuring laggard ministries to implement thegovernment-wide reform strategy.

After the 1997 midterm elections, when Con-gress became an independent interlocutor,negotiating with a broader set of constituenciesand stakeholders became vital and more compli-cated. Even then, however, important reformswere enacted, particularly administrative andregulatory improvements. One example is thehistoric reforms to the Federal Administrative

Procedures Law in 2000, unanimously approvedby Congress. This success might suggest thatreforms to procedures, where there are no clearwinners and losers, are easier to pursue thanreforms to substantive economic policies.

Compensation for Losers

In trade liberalization and privatization, by con-trast, a clear pattern of winners and losers appeared.NAFTA required big adjustments by the business

community to survive in the more competitiveenvironment, creating resistance to market open-ing. But Mexicos reliance on export growth andforeign investment to emerge from the 1982 and1987 crises had created a business constituency forcontinued market opening. The fact that exportsgenerated the biggest share of GDP growth afterthe 1994 crisis also helped cement the policy ofmarket openness. In short, many interests hadalready emerged around market opening, and theseinterests were sufficient to give the president the

support needed to maintain reform.

Compensating the losers was a clear concern fromthe beginning. Adjustment programs were set upto manage the transition costs in urban and ruralareas and to compensate some of the losers fromtrade liberalization. These programs included theNational Committee for Productivity andTechnological Innovation (Compite) for small

by one party. Through an ad hoc approach, thegovernment was able to manage reform andfind compromises to move forward.

Consultation with Stakeholders

There were rumblings below the surface,however. The business communitys alienationand distrust resulting from the nationalizationof the banking system in 1982 took about eightyears to overcome. It was not until the privatiza-tion of banks and the negotiation of NAFTAthat true collaboration began to reemergebetween the private sector and the government.President Salinass strategy for regaining andmaintaining the trust of the private sector was to

closely involve it in the policy choices made.This was done through a solidarity pact that alsoincluded government-endorsed union leaders.

A corporatist-style framework of consultationand policy discussion involving business andunion leaders was created for each of the threepillars of structural reform. The most developedexample was the Economic DeregulationCouncil, bringing together representatives ofgovernment, business, labor, and academia. The

weakest related to the privatization program.Beyond the Bank Divestment Committee, thegovernment preferred to negotiate the privatiza-tion strategy directly with the unions.

With some exceptions, these consultation bodieswere narrow and had difficulty in reaching outto broader society. The absence of consumerinterest groups, insufficiently developed inMexico, was conspicuous.

After 1994 the government started to changetactics, sharpening its focus on building trust andconstituencies. The advisory bodies were re-formed. A typical example relates to the creationof Cofemer in 2000. Its advisory council wasexpanded to include key public sector institutions(the Federal Competition Commission, thepresidents legal counsel, and the ConsumerProtection Agency, or Profeco). That helped build


28/4922

and medium-size enterprises, Pronasol (Solidar-ity) for the poor, and Procampo for rural areas.12

Many of the most interesting cases of managinginterest groups during the reform process relate

to privatizations. According to some observers,the fact that only Mexican nationals wereallowed to participate in the privatization ofbanks was an implicit bargain struck in ex-change for the general business sectors supportof NAFTA. This agreement made businessleaders partners in the economic policy process.

Reforming public serviceswith or withoutprivatizationoften requires compensatingexisting workers and paying the costs of transi-tion to the new system. In practice, the generalbenefits of reform far exceed these costs and thusjustify buying the support of well-organized,vocal, and powerful interests, most of themeither part of the bureaucracy or heavily union-ized. In Mexico, the government resolved tosecure union backing in some cases by offeringgenerous financial help through funds providedby Nafin, a government development bank.

In telecommunications, an explicit guarantee ofcontinued employment was a major part of the

negotiation package. The deal also includedsubsidized loans to employees for the purchaseof slightly more than 4 percent of Telmexsstock and limits on foreign ownership. Acreative reorganization of the voting rightsassociated with Telmexs shares allowed theparticipation of foreign capital while making itpossible for a domestic group to exert controlwith just over 20 percent of total shares.

In the railroad sector no such guarantees could

be made, because all evidence pointed toexcessive employment. Here the governmentsstrategy was to relieve private firms of labor

burdens by privatizing only after a labor restruc-turing that involved paying workers more thanthey were entitled to by law. This approach wascostlier. But by liberating private companiesfrom social burdens, it also made it much

easier to impose pro-competitive market regula-tionsbecause enterprises no longer had astrong bargaining chip for use in lobbying.

The cost of restructuring before the privatizationof state enterprises turned out to be greater thanthe government proceeds from the sale. But thelong-run efficiency gainsderived from a morecompetitive market structure and regulationprobably outweigh the short-term burden ofcompensating losers. Even so, this strategyinevitably had an adverse short-term impact onpublic finances. That made marketing thereforms more difficult, because there were noshort-term gains for the public from privatiza-tion (unlike in the privatizations of the early1990s, which balanced public finances).

The reemergence of strong opposition to reformat the end of the 1990s and a virulent backlashagainst market-based approaches since 2000suggest that the efforts to broaden communica-tion and consultation were not able to reachdeeply enough into society. Members of a morecombative and multiparty Congress, for exam-ple, increasingly questioned the reforms.

Resource Issues

The Mexican reforms were achieved through acombination of strong political will and a smallbut powerful team of reform-minded techno-crats. As a result, the reforms involved relatively

limited administrative and fiscal resources exceptin the case of some privatizations. Indeed,Mexico seems to have invested too little inbuilding the new skills and attitudes needed inthe public administration to sustain the reforms.

The new offices in charge of trade negotiations,privatization, and economic deregulation werefinanced mainly by redirecting existing public

12 Compite provided funds for consulting and trainingactivities, up to 70 percent of the cost or a maximum ofaround $5,000 per firm (according to the most recent data,for 2003). Spending by Pronasol represented 1.2 percent ofGDP between 1989 and 1994. And Procampo accountedfor 6.5 percent of the government budget in 1995.


29/4923

fuel discussions. Some observers have speculated,for example, that merging Cofemer and theFederal Competition Commission and consoli-dating financial and sectoral regulators may bemore efficient, as it would make the best use of

scarce regulatory talent and public sector finan-cial resources.

The long-run viability of a wide-ranging reformprogram seems to justify significantly greaterinvestments in reengineering the public adminis-tration, training personnel, and raising the generalsalary level of the public servants in charge of the

machinery and management of reform.13

funds and administrative structures. The Officefor the Negotiation of NAFTA and the Unit forthe Divestiture of Parastate Entities (UDEP)were staffed by about 4060 people. The UDEinitially had an annual budget of $1 million and

a staff of about 15, expanding to $5 million andabout 60 professionals by the time Cofemer wascreated. This structure is still relatively small inthe light of Cofemers important government-wide tasks, however.

While the budgetary cost of creating and main-taining the new regulatory reform agencies is low,their existence and operation have continued to

13 The administration of President Vicente Fox tried to solve this problem in part by considerably increasing the salaries of seniorpublic servants. But this may have widened the salary gap between senior and mid-level public servants (the salary ratiobetween directors general and directors is up to 3 to 1).


30/4924

The reforms to transform the role of the state inMexicos economy appear to have led to positiveeconomic developments. A thriving privatesector has emerged in Mexico, and exports haveseen tremendous growth. The reforms have alsotransformed the regulatory environment,

instilling a market-oriented culture of transpar-ency and accountability. Recent developmentsin the political environment, however, havemade sustaining the reforms more difficult.

General Economic Performance

The regulatory reform in Mexico is generallyagreed to be directly linked to positive develop-ments for the Mexican economy. But a few

words of caution are in order. First, the 1994currency crisis, which led to a contraction inGDP of more than 6 percentwiped out manyearly benefits of reforms. It also drove manynewly privatized (and therefore inexperienced)firms into bankruptcy, particularly in thefinancial, construction, highway, and airlinesectors (though corporate fraud and scandalsalso played a part).

Second, evaluation of policy and reforms wasrare in Mexico during the 1990s. Part of thereason was that this task would have requireddiverting resources from policy design andimplementation; in the context of cost reduc-tions, devoting specific resources to such tasks

was indeed difficult to justify. Moreover, execu-tive agencies became worried about how theresults of evaluation would be accepted: If theywere too negative, there was a risk of fueling theopposition to reforms. And if they were toopositive, a skeptical public might view them asself-promoting propaganda.

For these reasons, care should be taken in interpret-ing the results of the reforms. Moreover, drawingdirect links between microeconomic reforms and

macroeconomic outcomes is always difficult.

Emergence of a Thriving Private Sector

Although the regulatory reforms were only partof a larger picture, the response of the privatesector to the changing environment was rapidand robust. The private sector share of GDPreached nearly 90 percent by the end of the

5. IMPACT OF THE REFORMS


31/4925

lent to 3.3 percent of GDP on average (rising to4.3 percent after 1989). Capital inflows rosedramatically in the years following the bankingprivatization and in expectation of the conclu-sion of the NAFTA negotiations. Mexico became

a key player in many sectors, and some of itsmajor firms started to expand abroad.

The increased flexibility of the economy, linkedto the extraordinary growth of exports anddriven by NAFTA, was clearly evidenced by theprompt recovery from the 199495 economiccrisis. After the 1982 crisis, it took Mexico morethan eight years to return to international capitalmarkets; after the 1994 crisis, it took only oneyear. As the OECD has emphasized, regulatory

reform can play an important part in increasingeconomic flexibility and reducing the length anddepth of economic downturns.

Specifi c Impacts

Thanks to the reform efforts of the period underreview (19882000), Mexico developed a moremodern, market-based regulatory infrastructure

1990s, up from around 60 percent in 1980.Prices in fully deregulated sectors such as portservices, trucking, and intercity transport fellsubstantially. And productivity rose in regulatedsectors such as gas and mining (OECD 1999).

Huge Gains in Exports

Between 1983 and 2000, as Mexico trans-formed itself from a very closed economy toone of the most open in the world, its exportsrose dramatically. Nonoil exports jumpedfrom $12 billion to $150 billion, and tradegrew from 26 percent of GDP to 64 percent.Indeed, Mexico became the eighth biggestexporter in the world.14

Along with the growth in trade came a bigincrease in private capital inflows and foreigndirect investment, though per capita gains wereless impressive (Figure 4). Between 1980 and1999, net capital inflows to Mexico were equiva-

FIGURE 4

Stock of Inward Foreign Direct Investment, 19902003

Source: UNCTAD 2004.

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

20

40

60

80

100

120

140

160

180

BillionsofU.

S.

dollars

Argentina Brazil

Chile Mexico

14 This ranking counts the European Union as one entity(Germany, France, the United Kingdom, the Netherlands,Italy, and Belgium all have higher total exports than Mexico).


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85 percent of draft regulations sent to the UDEthat did not require regulatory impact analysis(because they involved no compliance costs forcitizens) were eventually published in the officialgazette, only 60 percent of proposals requiring

such analysis were published.

This does not necessarily mean that the regula-tions were abandoned, but it does suggest asubstantial reworking of the proposals. Thesedata coincide with numbers in Cofemers yearlyreports showing that about 2030 percent ofproposals received are subject to detailed scrutiny(which involves requesting corrections to theregulatory impact assessment or detailed sugges-tions or comments on regulatory content).

Reforms reached beyond the federal level. TheUDE helped state and municipal governments indrafting important regulatory laws relating towater and the securitization of mortgages. It alsoassisted in creating online registries of formalitiesand implementing programs to make businessstart-up easier.

These efforts would eventually lead to thecreation of the Rapid Business Start-Up (SARE)

system, which by June 2008 was operating in134 municipalities with high levels of economic

activity. This system allows low-risk businesses toopen in 2 working days, compared with thenational average in 2001 of 57 days.15 Resultshave been uneven, however. This is particularlyso in Mexico City, where a new administration

campaigned on an antibusiness platform, prom-ising to reverse earlier reforms and federalinitiatives.

Governance indicators published by the WorldBank point to high marks in regulatory qualityfor Mexico from 1996 to 2000and to sub-stantial improvement in government effective-ness, rule of law, and control of corruption(Table 1). Ultimately, the most significantreform may have been the creation of the

regulatory review process, based in law andaimed at avoiding unnecessary costs for busi-nesses and individuals. This process has entaileda profound change in the way the governmentoperates, favoring predictability, transparency,analysis, and public consultation.

TABLE 1

Mexicos Percentile Rank on Major Governance Indicators,Selected Years, 19962002

Indicator 1996 1998 2000 2002

Voice and accountability 42.9 45.0 55.0 59.6

Political stability 34.8 24.8 45.5 50.8Government effectiveness 52.0 69.4 69.6 61.9

Regulatory quality 74.0 75.5 76.2 68.0

Rule of law 55.4 40.5 45.9 52.1

Control of corruption 39.3 41.0 44.0 52.1

Source: Kaufmann, Kraay, and Mastruzzi 2003.

Note: Percentile rank indicates the percentage of countries worldwide that rate below Mexico.

15 Much of the improvement has not been clearly reported bythe World Bank Groups Doing Business exercise in itsnational ranking for Mexico, which reflects a large numberof days required to open a business. The ranking may beskewed by the fact that it is based on practice in Mexico

City, which has not yet adopted the innovative RapidBusiness Start-Up system.


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Regulatory policy also contributed to the mod-ernization of the institutional design of crucialregulatory agencies. Cofemer and the FederalCompetition Commission now play central rolesin promoting transparency and economic

efficiency within the federal government and inspecific economic sectors. These institutions havebeen joined by the Federal Institute for Access toInformation, the regulator responsible forensuring public access to nonclassified govern-ment information.

Sustainability

Despite these gains, the reform agenda is incom-pleteand the sustainability of the process

unclear. As a result of the changes to the FederalAdministrative Procedures Law in 2000, Cofemerand the regulatory reform process have continuedto contribute to the setting of public policypriorities. Compliance with regulatory qualitycriteria has improved as the culture of regulatoryimpact analysis becomes increasingly embeddedin the normal process of developing regulations.The number of proposals for review has increaseddramatically, reflecting greater compliance withthe regulatory review process.16

The administration of President Vicente Fox(200006) increased Cofemers budget andpersonnel by around 50 percent in 2001, even inthe midst of a net reduction of both in the rest ofthe government. Other important developmentsalso have occurred. These include congressionalapproval of the federal freedom of informationlaw, a presidential decree to accelerate improve-ment of the Federal Registry of Formalities andServices and reduce the number of formalities byanother 20 percent, a rapid increase in thenumber of cities participating in the RapidBusiness Start-Up program, and a moratoriumon new regulations in April 2004.

Nevertheless, some observers perceive a greaterrisk of regulatory capture in some areas of thegovernment, leading to more friction in the regu-latory review process with Cofemer, less successby Cofemer in fighting bad regulation, and less

efficient regulatory results. Worse, the reformprocess has stalled at the legislative level becauseof partisan divisions in Congress. As a result, theFox administration focused its regulatory im-provement efforts on the executive branch.

Moreover, Mexico has not been successful inlaunching new structural and regulatory reformsor in implementing and enforcing many alreadyenacted. Structural reforms in such key sectorsas water and energy have either not started or, if

started, have not been implemented or deep-ened. The lack of competition in many sectors,particularly infrastructure, has led to persistentlyhigh operating costs for businesses. Mexican laborlaws are still considered very restrictive. Successiveadministrations have been unable to implementmodern fiscal reforms. And significant problemspersist in contract enforcement.

Context is important for sustainability. Privatizationwas a fiscal success, partially meeting many of the

governments goalsincluding strengthening publicfinances, eliminating socially or economicallyunjustified spending and subsidies, promotingeconomic productivity, and improving the efficiencyof the public sector by reducing its size (Rogozinski1993, 41). But privatization undermined thesustainability of the wider regulatory reforms. Theprivatization fiascos that occurred after the 1994financial crisis reduced the benefits of marketreforms and elevated public distrust in reform. By1995, the government was obliged to intervene and

directly or indirectly renationalized most of the toobig to fail banks, highways, and airlines.

More important, the political economy of reformchanged rapidly in the mid-1990s, makingfurther progress extremely difficult. Ac

Regulatory Transformation in Mexico 1998 2000

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