Heritage Foundation Leadership for America

President Felipe Calderón has made significant progress in the fight against narcotrafficking, but Mexicans are still waiting to see whether his govern­ment will successfully challenge the private- and public-sector monopolies and duopolies that domi­nate huge portions of Mexico's economy in energy, telecommunications, construction, food production, broadcasting, financial services, and transportation and have long been a drag on competitiveness and job creation. Notwithstanding Mexico's membership in the North American Free Trade Agreement (NAFTA), this "roping off" of large sectors of the Mexican economy to benefit politically powerful rent-seekers has the same practical effect that tradi­tional protectionist trade barriers have.

Calderón should also lead the fight to dismantle a state-corporatist system of price supports, subsi­dies, and special-interest tax exemptions that gives an unfair advantage to the wealthy and well-con­nected while restricting competition and holding down economic growth and job creation.

Evidence of the damage to the Mexican economy from the lack of competition can be seen in the 2008 Index of Economic Freedom, published by The Heri­tage Foundation and The Wall Street Journal. Mexico achieved only ninth place out of 29 Western Hemi­sphere countries, well behind Canada, the U.S., Chile, and El Salvador.

"Supply Push" and "Demand Pull." There is a clear link between Mexico's economy and America's immigration problems: Mexico's 50-year failure to realize its full economic potential has caused unemployed, unskilled Mexicans to be "pushed" toward the U.S. The artificially low cost of this ille­gal labor here has multiplied its value and created a strong "demand pull."

It is equally clear that illegal immigration directly affects America's economy, culture, and future as a nation. Currently, anywhere from 12 million to 20 million illegal aliens reside in the United States— enough to populate America's three largest cities: New York, Los Angeles, and Chicago. An estimated half-million more people enter illegally every year.

If Mexico made the changes required to reduce the "supply push," and if the U.S. diminished the power of the "demand magnet" by simultaneously implementing much-needed improvements in its border control and immigration laws, the result would be new, sustainable private-sector jobs. More Mexicans would want to stay home to start busi­nesses; others would stay to work for them. Some Mexicans currently in the United States would likely return home and use their savings to start small businesses. In the U.S., prospective employers of legal laborers would be forced to pay the true cost of that labor, including taxes to offset the additional costs to the government that are generated by these new residents; migration pressures would be reduced; the unemployment rate would drop; and national security would be enhanced.

An emerging industrial nation, Mexico is at a point similar to that of the United States at the begin­ning of the 20th century, when President Theodore Roosevelt pressured Congress to enforce existing anti-trust legislation and create the Interstate Com­merce Commission. By doing so, Roosevelt led the U.S. government to curb the ability of powerful banking, oil, and steel magnates to block competi­tion. President Calderón faces a similar situation today, with entrenched economic interests and a Congress—dominated by leftist parties that favor statist policies—that obstinately defend the status quo. Can Felipe Calderón be the Teddy Roosevelt of Mexico? He has five more years to secure that place in history. If he succeeds, both Mexico and the United States will be the better for it.

What Should Be Done. Mexico should open its nationalized oil, natural gas, and electricity sectors to private investment and participation. Pemex should lease deep-water areas in the Gulf of Mexico to private oil companies to develop the fields, sell the oil, and pay royalties from profits to the Mexican government. Private electric companies in Mexico and the U.S. should be encouraged to sell power to the state-owned Federal Electricity Commission and Central Power and Light and to build and oper­ate additional power plants in Mexico.

Mexico should break up private-sector monopo­lies and duopolies with more effective anti-trust leg­islation and should enforce its laws more aggressively to protect intellectual property rights (IPR) for both Mexicans and foreigners, increasing funding and staffing of the three relevant govern­ment agencies (the Office of the Attorney General, the Mexican Institute of Industrial Property, and the National Institute of Author Rights), and should train Mexican police and the Mexican Customs Ser­vice to spot—and prosecute—IPR violations.

Mexico should eliminate the price controls and subsidies that have tilted the competitive playing field toward monopolies and duopolies. This would encourage foreign direct investment and competi­tion in all sectors, resulting in lower prices for Mex­ican consumers.

Mexico should implement a multi-year infra­structure-improvement plan with dramatically increased public and private funding (e.g., privately owned toll roads), beginning with the Mexican Congress's passage of the ambitious infrastructure program recently proposed by President Calderón.

The U.S. Department of Justice should investi­gate the operations of Mexican monopolies in the United States, especially in the telecommunications, transportation, and energy sectors. The department should identify those monopolies and describe any actions that the U.S. government can take to encourage them to welcome viable domestic and foreign competitors. The U.S. Department of the Treasury should commission an independent study to determine the level of remittances in all forms that are sent to Mexico by migrants in the U.S.

The Bush Administration and the Mexican gov­ernment should design new co-funded programs focused on intensive infrastructural, developmen­tal, and technical assistance in regions of Mexico that are the major sources of migration to the U.S. The Bush Administration and the Mexican govern­ment should also design new assistance programs in conjunction with leading U.S information technol­ogy and adult-education companies to improve educational opportunities in Mexico. Private U.S. companies should fund the bulk of the projects in return for access to the Mexican market.

James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for International Trade and Economics (CITE), and Israel Ortega is a Senior Media Services Associate in the Media Services Department, at The Heritage Foundation. CITE Research Assistant Caroline Walsh made many valuable contributions to this paper.