Mexico’s road to economic sanity

March 15, 2013, 2:58 PM UTC

FORTUNE — With a bill introduced by the president and backed by all three political parties, Mexico is poised to take on a few of the country’s biggest monopolies and moguls. But for Mexico to truly engage in economic competition, it needs to do much more.

A lack of competition pervades the Mexican economy, as one or a few companies dominate sectors as diverse as glass, cement, flour, soft drinks, sugar, and tortilla flour, not to mention the state’s control of energy and electricity. This hits consumers’ bottom lines — an OECD study estimates that it increases the costs of basic goods for households by some 40%. It hurts Mexico’s working and middle classes the most, as they must spend a larger proportion of what they earn on these goods and services. It also hits the burgeoning manufacturing sector, which has to pay more for raw materials and basic inputs.

Few question the need to reform telecommunications and broadcasting, as the dominance of a few companies has hurt Mexico’s broader economy and, at times, warped its politics. Consumers and businesses alike pay far more for their phone calls than the OECD average (over 30% and 80%, respectively), even though Mexico’s telecom investment lags all other OECD countries. And Mexico trails not just China or Russia, but even Bosnia in broadband access.

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The nation’s television duopoly has not only made significant profits, but it has also thrown its weight around in Mexico’s politics. Where once the PRI famously controlled the press, now it often seems the reverse. Both Televisa and TV Azteca have shown themselves able and willing to both make and destroy political reputations, scaring many politicians and officials into silence or acquiescence. The 2006 “Televisa law” was perhaps the most blatant example, when, on the eve of elections, Mexico’s Congress passed legislation that would have guaranteed the duopoly’s ongoing control — by automatically renewing their licenses and giving the firms preferential access to new bandwidth. Mexico’s Supreme Court later overturned the unpopular legislation.

This isn’t Mexico’s first try at reining in these companies’ power. Legislative changes in 2006 gave Mexico’s regulators a few more teeth, including the power to investigate anticompetitive behavior, to block mergers, and to impose heftier penalties on businesses. In 2011, Felipe Calderón signed a bill that upped fines on monopolies to some 10% of their revenues and jail terms for their CEOs to up to 10 years. The Supreme Court jumped into the fray as well, ruling that the regulations would go into effect immediately, rather than waiting for years as the companies exhausted all legal means and appeals. Each of these efforts has chipped away at what is a decidedly uneven playing field.

Still, the new telecommunications bill, if implemented, would bring sweeping changes to the sector. It would create a new regulator and strengthen current ones, giving these entities, at least in theory, the power to take away licenses and even break up monopolies on their own. It redefines as “dominant” any company with more than 50% market share — for which companies like Telmex, Telcel, and Televisa all qualify. In the television network space, it introduces “must offer/must carry” provisions that should help smaller cable providers by ensuring access to popular Televisa and TV Azteca content, all for free. And it finally opens the broadcast market by putting at least two new national television channels up for auction (off limits to the current players), and opens the telecom market to 100% foreign ownership.

Mexico is known for its elegant laws but less refined practices. And even as these reforms were being announced, Mexico’s courts quietly ended the legal wrangling that had held up Televisa’s entrance into the cellphone market through its joint venture with provider Iusacell — a step many worry will concentrate rather than open up the sector. Still, if passed and implemented, these regulatory measures would bring about remarkable change.

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If Mexico’s government can push through this bill and follow through with the other reforms it has promised (such as energy and fiscal overhauls) it could tip the balance in the right direction. But even with these new tools, regulators will continue their David and Goliath struggle. Until this changes, Mexico’s competitiveness problems will affect not just its increasingly global manufacturing sector and growing middle class, but also the United States, whose economy is ever more connected to its southern neighbor.

Shannon O’Neil is senior fellow for Latin America studies at the Council on Foreign Relations and author of Two Nations Indivisible: Mexico, the United States, and the Road Ahead.