by Paul Gregory
The New York Times’s Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle suggests that Wal-Mart violated the Foreign Corrupt Practices Act. The smoking gun: Seven years ago, Wal-Mart de Mexico hired two outside lawyers for $8.5 million to “facilitate” store permits. The lawyers were effective: “Legal and bureaucratic obstacles melted away after payments were made to minor officials who could thwart Wal-Mart’s growth.” Wal-Mart executives, the article charges, did not take appropriate action after an internal investigation.
No believer in free enterprise should excuse or make light of violations of laws by Wal-Mart or any other private company. We hope that Wal-Mart moves forcefully to put this business behind it.
In its anti-Wal-Mart fervor, the Times inflates the $8.5 million into an “orchestrated campaign of bribery to win market dominance” that erected Wal-Marts on “virtually every corner of the country.” No mention of the possibility – if not probability – that local officials could not pass up a once in a lifetime opportunity to extort Wal-Mart. A Wal-Mart success story explained by its “everyday low prices” does not fit the Times’ political agenda. Greasing the palms of local officials with a few dollars is a more convenient explanation.
A few blocks away from 620 Eighth Avenue, Carlos Slim, the Times’ second largest shareholder behind the Sulzbergers, oversees his sprawling Telmex and Latin American telecommunications empires from atop Rockefeller Center. Slim is a welcome guest at the most exclusive of Manhattan cocktail parties. Wal-Mart’s hillbilly executives from Bentonville, Arkansas would simply not fit in.
Economics 101 teaches that only efficient businesses survive and prosper in competitive markets. They compete, customer living standards rise, and prices fall. Monopolies, in contrast, earn extraordinary profits, provide poor customer service, charge monopoly prices, and lower living standards. Economists of all stripes favor competition and warn against monopoly.
Carlos Slim, the world’s richest man and owner of Mexico’s telephone monopoly (Telmex), single-handedly retarded Mexico’s economic development and reduced its standard of living, while Wal-Mart de Mexico raised Mexican living standards, particularly among the poor as following quotes from local Mexican websites suggest:
“(Mexico’s) monopolized telephone system charges outrageous prices causing people to avoid using the phone.” (from a Mexico retirement website)
“With the money I save at Wal-Mart, I take my family to the movies.” (Interview with a Mexican plumber.)
“Until recently, relatively few people had a private home telephone line due to the high cost of installation.” (Vallarta online)
“Spam goes for 26.00 at Wal-Mart, 28.50 at Soriana, and 37.50 at SuperLake. U.S. brand peanut butter is consistently cheaper at Wal-Mart and Soriana than at SuperLake. For cheese lovers, Soriana’s mild cheddar is a steal at 84.90 per kg.” (Guadalajara online)
Carlos Slim was the highest bidder for Mexico’s dilapidated national telephone company, when it was privatized in 1990. Slim was wealthy at the time, but he was not in the top 100. Telmex made him the world’s richest man, quite a feat for someone from a desperately poor country.
Slim’s story is “business-as-usual” in a crony-capitalist country. Using his close ties to the ruling PRI party, Slim arranged to pay for Telmex out of company profits. He gained a seven-year anti-trust exemption that left him free to operate Telmex as a monopoly. He arranged a deal that was in his interests and contrary to the interests of the people. Slim’s monopoly gave Mexico one of the worst connection rates in the world, and its customers pay among the highest rates for telephone service. Telmex’s forty percent plus profit rate caused Slim’s personal wealth to soar. It was not until August of 2011 that Mexico’s antitrust watchdog began breathing down his neck.
A 2012 OECD report entitled Telecoms reform would boost competition and growth in Mexico reveals the damage that Carlos Slim’s Telmex wreaked on the Mexican economy:
“From 2005 to 2009, Mexican consumers paid $13.4 billion a year excess for phone and internet services, with high fees disproportionately hitting the poor. In total, overcharging cost the economy $129 billion over the five-year period, nearly 2 percent of the country’s economic output… Mexico cannot reach its growth potential until the cost of phone and internet access comes down and more people have easy access to telecom services.”
Carlos Slim’s $13.4 billion overcharge cost the average Mexican household some $600 per year, or over six percent of household income! It seems Carlos Slim became the world’s richest man at the expense of an entire country!
Wal-Mart de Mexico is a quite different kettle of fish.
We do not have special studies of the “Wal-Mart effect” on Mexico’s retail market, but it must have been as great or greater than in the United States. Wal-Mart directly saved American households more than $200 per year in lower prices – a gross underestimate that does not count Wal-Mart’s contribution to increasing competition. Wal-Mart also raised productivity throughout the economy. McKinsey, in its exhaustive study of U.S. productivity, concludes that:
“Wal-Mart directly and indirectly caused the bulk of the productivity acceleration through ongoing managerial innovation that increased competitive intensity and drove the diffusion of best practice (both managerial and technological).”
Wal-Mart de Mexico is the largest private employer in Mexico, with over 200,000 employees in its more than 2,000 retail outlets. It has applied its winning business model to Mexico, where it has had the same positive effects on Mexican living standards and productivity. Wal-Mart de Mexico’s rivals — Comercial Mexicana, Soriana and Gigante – have overhauled their purchasing and pricing strategies, revamped their stores, introduced new products and spent heavily on computer systems and distribution centers. They are giving Wal-Mart a run for its money.
Carlos Slim became rich at the expense of Mexico. Wal-Mart de Mexico earns a competitive profit and has made Mexico richer.
The Times is less voluble about Mexico’s growing distaste for its illustrious shareholder. The sensational news of a $1 billion fine against Carlos Slim and the approval of a new anti-monopoly law that calls for prison terms ended up as a short piece on page B1 of its May 9, 2011 edition. Since then we have heard little on this matter from the Times.
As an observer of Russia in the 1990s, I was an eyewitness to the transition from street-mafia corruption to crony capitalism. Up until the mid 1990s, crew-cut young thugs dressed in jogging outfits shook down store owners. Without their “protection,” they could not stay in business. In the second half of the 1990s, I saw health, tax, and fire inspectors displacing the street thugs, but now the shakedown was by state officials. Under Putin, the mafia game moved to the highest levels. Putin’s KGB state now hands out monopolies to favored billionaire oligarchs and state officials.
Wal-Mart de Mexico was captive of the state inspector, without whose permission it would not be possible to do business. The level of competition and normal profit rates tell us that Wal-Mart did not freeze out competitors. All it wanted was a chance to compete.
We will never know what deals Carlos Slim made to gain the Telmex monopoly. But we know this was crony capitalism in its most destructive form. The damage to the Mexican standard of living was colossal (in contrast to Wal-Mart’s which was probably victimless).
If the venerable Times is interested in ferreting out corruption in Mexico that harms ordinary people, why not investigate a case right under its own nose and mega times more consequential? Such coverage of state-sanctioned monopoly would show its readers the huge harm that flows from crony capitalism – excuse me, I meant to say government-private partnerships.
Paul R. Gregory is a Research Fellow, Hoover Institution Cullen Professor of Economics, University of Houston. Gregory has a regular blog http://blogs.forbes.com/paulroderickgregory/at Forbes.com