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Last week’s enactment of the “secondary legislation” to implement Mexico’s energy reform is an impressive step forward. That country’s economic future could be fundamentally transformed, if Mexico’s leaders follow through on a transparent, sustained effort to modernize the oil, gas, and electricity sectors and keep government spending and interference from undermining prosperity.
For the first time in 80 years, Mexico has opened the door to private investment in the energy sector, leaving behind years of anachronistic resource nationalism that has contributed to the decline of the state-owned oil company, Pemex, and the Federal Electricity Commission (CFE).
Insufficient investment in exploration and infrastructure, over-taxation, political interference, union influence, and corruption all have contributed to the decline of Pemex. From 2001 to 2013, oil production in Mexico fell more than 30 percent. Meanwhile, the CFE has lost almost a billion dollars in 2012 and 2013 for similar reasons. Without the ability to receive investment and cutting-edge technology from the private sector, these companies will continue to underperform.
Measures to invigorate an industry that is crucial to Mexico’s growth have been discussed for decades. The industry needs to be open to private capital and competition to have the necessary tools to leverage Mexico’s energy resources. However, until very recently, the debate has been gridlocked—polarized between reformers who understand the need to modernize the sector and politicians wielding nationalist arguments to protect entrenched interests and to cling to economic power.
In the past, meaningful reforms were blocked by stalwarts of the Institutional Revolutionary Party (PRI), which governed Mexico for over 70 years until 2000, that venerated the 1930’s nationalization of the oil industry as part of its legacy. The first tentative steps toward energy reform were taken during the administration of former president Felipe Calderón (2006-12), of the conservative National Action Party (PAN). However, his efforts were thwarted by the powerful oil workers’ union and its political allies.
The current reform is part of an historic economic reform agenda of Enrique Peña Nieto, who reclaimed the presidency for the PRI almost two years ago. Although the far left continued to oppose these measures, Peña Nieto delivered the solid backing of the PRI and worked with the PAN opposition to win congressional approval.
These hard-won reforms will show their true potential if they are implemented vigorously and transparently, as Peña Nieto has pledged. In particular, because Pemex remains the property of the state, how it is restructured and managed is more important than ever. Moreover, prudence and restraint in government spending will be just as crucial to boosting the economic prosperity of the country.
Former PRI president José López Portillo (1976-82) governed Mexico when the discovery of billions of barrels in oil reserves promised to convert the country from a mediocre oil producer to one of the most important exporters in the world. That opportunity was squandered with the adoption of unorthodox economic policies and profligate spending. Instead of bringing prosperity to Mexico, these policies led the country to bankruptcy.
In Brazil, a similar energy reform was implemented in 1997, and the state-run oil company Petrobras was allowed to receive outside investments and technology and forced to compete with private companies. Today, due to statist and populist policies, Petrobras cannot fulfill the expectations from vast oil discoveries because too much of its revenue has been redirected to social programs aimed at buying votes rather than advancing the long-term prosperity of the country. During the administrations of presidents Luiz Inácio “Lula” da Silva and Dilma Rousseff, government spending, corruption and mismanagement have stunted the growth of an energy sector that should be a powerful engine of growth.
Mexican leaders can learn from these experiences and make choices that will advance the sustained wellbeing of their people rather than short-run gain of politicians. Peña Nieto already has exceeded expectations by committing his presidency to the modernization of the energy and electricity industries. His vigorous and transparent implementation of these reforms, as well as his careful management of the economy and government spending, will determine whether he succeeds where others have failed.
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