Political Economy Analysis ofAverting the Resource Curse:

Mexico Case Study

Alberto Diaz CayerosCenter for US - Mexico Studies

IR/PS, University of California, San Diego

Prepared for the Workshop “Myths and Realities of CommodityDependence”, Washington, DC, September 16-17 2009

Four Interrelated Findings

• Mexican proven oil reserves not fixed: – international price of oil– availability of extraction technologies– skills of engineers and technicians– managerial culture of PEMEX– relationship with the oil workers union– fiscal regime and regulatory framework

Interrelated findings cont’d

• Value chain– Bilateral bargaining in royalties– Soft budget constraint– Investment shortfalls

• Role of oil rents– relationship between state governors and the

federal executive– redistributive role of federal expenditure

• Counterfactual in mining

Mexican commodity booms

• Highly diversified national economy• Highly diversified export platform, especially since

NAFTA• Commodity dependence only in specific regions• Monopolistic structures in both private and public

sector enterprises in extractive industries– PEMEX– Grupo Mexico– Peñoles– CEMEX

• Tax revenue: high oil dependence

Commodity production is not simplya natural endowment

• Wright (1990) asks “whether resource abundance reflectedgeological endowment or greater exploitation of geologicalpotential”

• Sachs and Warner (1995) argue that “economies withabundant natural resources have tended to grow less rapidlythan natural-resource-scarce economies.”

• US Economic History:– Geological surveys and public knowledge (USGS founded in

1879)– University training in management– “Ethos of exploration”– Endogenous incentives and tax lobbying

• Link to political regime: Karl (1987, 1997), Ross (2001), Haberand Menaldo (2008), Dunning (2008)

OIL AND GAS

Natural Endowments in Oil

PEMEX production has declined,so earnings were kept by the price

boom

Potential oil and gas production inMexico (statistical expected values)

14.7 billion barrels proven oil reserves in 2008The Chicontepec Basin has been certified to have 17.7 billion barrels

Known since 1913, but technological hurdle: requires drilling 16,000wells, due to low permeability (PEMEX has 5000 wells in operation)

Geologic Regions Oil Gas Natural Gas

(Mill Barrels) (Billion Cubic ft) (Mill Barrels)

Tampico-Misantla Basin 893 2,051 119

Veracruz Basin 955 5,832 288

Saline-Comalcalco Basin 7,018 16,423 895

Villahermosa Uplift 7,436 15,623 918

Campeche-Sigsbe Salt Basin 2,478 5,565 309

Yucatan Platform 754 1,496 89

Sierra Madre de Chipas-Peten Foldbelt 890 1,846 110

Fiscal Dependence on OilUnderperforming Revenue Yield

MINING

Humboldt map of New Spain

Mining activity (silver) in 1800

Silver mining activity in 2009

Overall mining activity in 2009

Mineral commodity boom enjoyedby private sector

Industrial structure of Mexicanextractive industry firms

Share of TotalCapacity

Main Firm EffectiveNumber ofCompaniesCement 62.6% CEMEX 2.21

Copper 80.5% Grupo Mexico 1.45Coal 30.6% AHMSA 3.32Gold 64.1% Peñoles 2.25Iron Ore 40.5% ALFA 3.45Lead 33.7% Peñoles 2.43Silver 73.9% Peñoles 1.72

…not much revenue(subsumed in Income Tax)

NYT June 22, 1895

Current royalty regime perhectare

ARTÍCULO 263. Los titulares de concesiones y asignaciones mineras pagaránsemestralmente por cada hectárea o fracción concesionada o asignada, elderecho sobre minería, de acuerdo con las siguientes cuotas:

Concesiones y asignaciones mineras Cuota por hectáreaI. Durante el primer y segundo año de vigencia. $ 4.42II. Durante el tercero y cuarto año de vigencia. $ 6.61III. Durante el quinto y sexto año de vigencia. $ 13.68IV. Durante el séptimo y octavo año de vigencia. $ 27.51V. Durante el noveno y décimo año de vigencia. $ 55.01VI. A partir del décimo primer año de vigencia. $ 96.83

POLITICAL ECONOMY

Political economy• Patronage networks financed by oil

revenue (excedentes petroleros captureby governors)

• Labor union strength and ducts ashostages

• Public opinion dynamics and thenationalization – privatization cycle

• Subnational authoritarian enclaves– but this depends on the transfer system

(revenue sharing rules and discretionarytransfers)

Estimating rent extraction andappropriation in oil

• Union and Management as residualclaimants

• Bargain between Federal Government andPEMEX management to determine Royalties

• Windfall revenue for Stabilization Fund and tobuy off support of governors

• No longer subsidy to consumers, energysector or energy intensive firms (perhapsCFE in fact provides an inverse subsidy)

Estimating rent extraction andappropriation in minerals

• Capital intensive investments with highrisk

• Windfall gains during booms are not tied toroyalties

• Obscure process of adjudication of bids• Employees are mostly unionized in large

firms, but small producers are lessprotected

• Ejido land for mineral exploitation not tiedto productive projects

Billionaires counterfactual:add oil tycons

Name Forbes RankAge Net Worth (Bil)Main Sector

Carlos Slim Helu & family 3 69 35 Telecommunications

Alberto Bailleres & family 83 76 5.7 Metals and Mining

Ricardo Salinas Pliego & family 124 53 4.2 Retail and Media

Jeronimo Arango & family 178 83 3.4 Retail

German Larrea Mota Velasco & family246 55 2.6 Mining and Transport

Roberto Hernandez Ramirez 601 67 1.2 Finance

Joaquin Guzman Loera 701 54 1 Shipping (Drug Trafficking)

Emilio Azcarraga Jean 701 41 1 Media

Alfredo Harp Helu & family 701 65 1 Finance