Richard Wells
The Lexington Group
View from the Top

Innovative Potential Must Lead to Prosperity

Wed, 02/24/2016 - 10:16

Q: What are your main concerns surrounding the Energy Reform and its impact on sustainability?

A: Mexico has had a tendency to place too much emphasis on history. In a sense, it has been too easy to do business in Mexico because it is next to the biggest market in the world, and historically, Mexico has had enormous amounts of resources at its disposal. However, the country relies too much on copying models from the US and Canada, and not enough on its tremendous natural and cultural heritage or the creativity and innovative capacity of its people.

Mexico will most likely benefit from hydrocarbons through the Energy Reform. There is some talk of renewables, but I am more concerned about the possible development of Mexico’s large shale gas resources in Nuevo Leon and Tamaulipas. These substantial resources are on a similar level to the Eagle Ford shale gas reserves in the US, making Mexico the world’s fourth largest shale oil reserve. If Mexico were to develop shale gas while following a successful US development model, it would only provide a temporary solution to an energy problem.

Q: What are the main factors that have hindered Mexico’s innovation potential?

A: Historically, this country has been able to capitalize on rich natural resources like petroleum, therefore encountering few problems in conducting business. In the early 1970s, Mexico was developing an entrepreneurial industry, particularly in chemistry. At the time, there were some highly innovative chemical companies that were at the cutting edge. When petroleum came along, it overwhelmed most other industries, transforming Mexico into a country reliant on oil exports. Later on, NAFTA redesigned the image of Mexico as a strategic manufacturing country for foreign exports. Then the country was hit by China, which could manufacture more cheaply after joining the WTO, and Mexico suffered another setback.

The country has to find a basis for growth that can be sustained over time, economically, socially, and environmentally. I believe this growth must be based on innovation and creativity, leveraging Mexico’s enormous natural and cultural diversity. Mexico has a tremendous creative and innovative capacity. It is right next to the world’s largest and most dynamic market, and it has an enormous short-term need for growth to address poverty and inequality. It is tempting for Mexico to become a supplier to such a major economy as the US in order to provide the quick fix that it urgently needs. I hope it can find a way to simultaneously promote necessary growth while building a future economy based on innovation and creativity.

Q: In your view, what policies are leading Mexico on the path of innovation?

A: I think that Mexico’s tax on carbon will be a highly successful initiative. I disagree with the argument that it is imposing an additional cost on Mexican industry that will make it less competitive. It may not have been implemented well, but objecting to stringent environmental regulations purely because they impose a near-term cost can be a mistake. What this tax is really doing is imposing a constraint that will force innovation. The Porter hypothesis states that countries with more stringent environmental regulations gain an advantage because they are forced to adjust. Mexico will have an advantage because, eventually, everyone will require a carbon tax. A carbon tax imposes a short-term loss that forces innovation, something that Mexico needs to promote.

Richard Wells is President and Founder of The Lexington Group, a consulting firm that specializes in sustainable development and social and environmental management for businesses, governments, and non-governmental organizations (NGOs). He has advised major companies, governments, NGOs, and institutions across the US and Latin America. The firm focuses on the design and implementation of competitive strategies and initiatives for positive social and environmental impact. The model developed by Mr. Wells for integrating sustainability into value chains has been implemented throughout Latin America and Asia in projects for the Inter-American Development Bank, the World Bank and USAID.