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Opening markets: Mexico uncovers and slashes local barriers to competition

Marialisa Motta's picture

In the state of Chiapas, Mexico — where nearly 1 million people live in moderate to extreme poverty — bus fares have been too high, and the availability of buses has been limited. Over four years, consumers on a single route have paid $2.5 million more than necessary. Tortillas in states across Mexico are more expensive than they need to be. In one state, firms overcharge for road construction by an estimated 15 percent, making it difficult to provide the high-quality transport services for cargo and construction materials that are necessary to build a logistics hub to diversify the state economy beyond petroleum. Another state has a very dynamic economy, hosting a greater density of industrial parks than comparable states. Given the positive spillover effects — industrial activity boosting local employment, demand, and purchasing power — the state expected growth in retail markets. Yet, stores have not been opening. Yet another state relies on tourism to generate business opportunities and jobs, including for poor people. However, until recently, tourists found that commercial establishments in the state’s primary municipality closed in the evenings and at night, often preventing them from going shopping.
 
What do these examples have in common? Local barriers to competition.

In the past few years, the Mexican Federal Competition Authority (COFECE) and Better Regulation Authority (COFEMER), internationally recognized institutions, as well as the World Bank Group, have pointed out that subnational regulations restrict competition in local markets. In many municipalities in Mexico, regulations and government interventions allow market incumbents to deny entry to new firms, to coordinate prices, to impose minimum distances between outlets, or to grant incumbents exclusive rights to artificially protect their dominant position. In total, a lack of vigorous marketplace competition costs the Mexican economy about one percentage point of GDP growth each year – a shortfall that affects the country’s poorest households by an estimated 20 percent more than its richest households. Most countries, however, have never systematically scrutinized local barriers to competition.


 
To address such issues effectively, competition policy experts from the World Bank Group’s Trade & Competitiveness Global Practice have developed an innovative tool – the Subnational Market Assessment of Competition (SMAC) – to systematically identify, prioritize and support the removal of local barriers to competition. (The SMAC is built from the World Bank Group Markets and Competition Policy Assessment Tool, or MCPAT.) The World Bank Group designed the SMAC to prioritize the reform of the rules and practices that most severely prevent healthy competition in the primary sectors for each state’s economic development.

In the state that is seeking to build a logistics hub but finding transportation costs too high, the SMAC revealed that the existing regulatory framework grants monopoly rights to municipal transport unions with backhauling restrictions between municipalities. As a result, incumbent transportation firms have minimal incentives to innovate or to set competitive prices. Thanks to the application of the SMAC, the state has now prioritized opening transportation-services markets.

In the state with many industrial parks but few retail outlets, the SMAC revealed that the state regulations on urban development require entrepreneurs who want to set up any new establishments (including retail stores) to follow a tedious, incoherent and unpredictable administrative process. This process not only raises the cost of doing business, but also leaves space for discretionary application. Also, different rules apply to shops operating in neighboring markets. As a result, towns with stricter rules have fewer supermarkets. Even tiny establishments must endure this discretionary entry process. Thanks to the application of the SMAC, the state prioritized reforms that will ensure a more coherent and predictable process to set up new retail outlets, aiming to unlock positive spillover effects of the state’s industrial specialization in the form of a greater number and diversity of stores and an increase in local retail sales.
 
In the state that depends on tourism, regulations in the state’s largest municipality restricted the opening hours of commercial establishments, limiting tourists’ ability to go shopping in the evening and at night. The SMAC supported a municipal reform that allows convenience stores and other shops to operate around the clock, which will translate into higher sales and a better offer for the tourists. Following changes in 2015, key convenience-store chains have begun to operate around the clock and expect to benefit from higher sales.
 
The World Bank Group piloted SMAC in three states in Mexico over the last two years with the help of COFEMER. The Mexican Government adopted it a few months ago by presidential decree as part of the national strategy for regulatory improvement in Mexico and as one of the key pillars of the “Justicia Cotidiana” (“everyday justice”) presidential initiative. COFEMER chose the World Bank Group as a strategic partner to apply the SMAC systematically in all 32 Mexican states over the next two years.
 
Other nations face comparable challenges in aligning subnational regulations and practices with federal competition principles. More and more governments realize that failing to unlock the potential of local markets can intensify regional disparities and inequality. However, authorities must drive that process consistently. Australia added 2.5 percent to its GDP in the 1990s thanks to its National Competition Policy Program. Since then, however, no other country has reviewed its subnational regulatory framework as systematically and as comprehensively, focusing on impact in the major markets.

Building on the pioneering experience in Mexico, using the SMAC in additional countries can accelerate the reform process to shape regulations that are more effective and, ultimately, promote better-performing local markets. With its visionary initiative, Mexico is poised to show the way forward, and the World Bank Group is honored to accompany the country on its journey toward effective pro-competition reforms. 

 

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