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Business as usual in Mexico?

By Carlos Ramirez

Allegations that WalMart-Mexico's executives bribed local officials to speed up permitting for new stores highlight the issues of corruption in Mexico, but will have little impact. In the short term, the Mexican federal government has announced an investigation regarding the federal permits granted to the retailer. But that seems to be a political response to the growing criticism of inaction by the authorities rather than a serious case against the company. Because the allegations of wrongdoing relate to local-level permitting, any federal investigation will likely turn up little, if anything, of note. Furthermore, with the present federal administration entering its last few months, the investigation will probably fail to reach any meaningful result before its November 30 deadline.

In reality, federal officials are legally constrained from pursuing the allegations. They would first need a formal accusation by a third party before being able to launch any investigation regarding the alleged bribery. Furthermore, the division of powers under Mexico's constitution gives states and municipalities control over construction and most environmental permits, and national prosecutors have limited leeway to investigate local affairs other than when federal crimes are suspected.

A formal investigation at the state and/or municipal levels is even less likely. Since Mexico's transition to democracy, political power has shifted from the once all-powerful presidency toward the 32 state governors and the mayors of some of Mexico's biggest cities. The governors have strengthened their leverage over important decision-making within their jurisdiction through their control of local institutions. Increased budgetary and debt resources, with little related accountability and transparency (which increase the likelihood of corruption), have only reinforced the governors' political clout. Moreover, because the alleged corruption occurred five or six years ago, and reelection is banned in Mexico, politicians who served at that time will no longer be in office, which would further complicate a formal investigation.

Ultimately, both federal and local governments welcome companies that bring jobs and economic activity and that will likely to trump other considerations. WalMart-Mexico is currently Mexico's largest private sector employer with more than 210,000 employees. Local and federal authorities are unlikely to constrain WalMart-Mexico's growth, particularly when citizens cite jobs as among their principal concerns. In fact, federal and local authorities are likely to continue to regard the company as an important contributor to the economy.

In the short term the most likely immediate outcome for WalMart-Mexico is increased scrutiny of its operations by the media, competitors, and NGOs that oppose its presence in the country, but this is unlikely to hamper the company's ability to keep expanding in Mexico.

The episode does raise questions about whether Mexico's next president, to be chosen in July, will be able to tackle the lack of local-level transparency and accountability. Not only do governors face few checks, but the ban on reelection also means that politicians have few incentives to govern with any concern for their longer-term public reputation. If Enrique Pena Nieto from the Revolutionary Institutional Party (PRI) wins the July election, cooperation between federal and local authorities would improve in some areas. Calderon was frustrated with the lack of cooperation from the states on security, leading to tense relations, especially with PRI governors.

But the fact that the PRI controls most states and many municipalities means there are few incentives for a PRI president to seriously attempt to improve transparency. If elected, Pena Nieto is likely to prioritize the need to win support from governors for his own agenda, rather than pursue the complex political reforms needed to seriously tackle accountability and transparency issues at a local level.

Carlos Ramirez is an analyst with Eurasia Group's Latin America practice.

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