Bull. Latin Am. Res., Vol. 18, No. 1, pp. 35—50, 1999( 1998 Society for Latin American Studies. Published by Elsevier Science Ltd

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The Political Constraints on Economic Policy inPost-1982 Mexico: The Case of Pemex

GEORGE PHILIPLondon School of Economics, Houghton Street, London WC2A 2AE, UK

Abstract — Fourteen years of market-oriented reform in Mexico have led to many economicchanges. However during 1982—1994 there was relatively little change in the hydrocarbonsector. This article seeks to explain the slowness of reform essentially in political terms. Whilepolitical constraints on reforming the hydrocarbons sector were genuine, it is also clear thatthe De la Madrid and Salinas governments chose to avoid controversial decisions in thissector as far as possible. Risk aversion seems, at least in this context, to have beena characteristic of Mexican authoritarianism during 1982—1994. Because of the inherentimportance of the oil and gas sector to the Mexican economy, the slow growth of productionsince 1982 (largely resulting from extreme policy caution) provides a part of the explanationfor the slow growth of the Mexican economy as a whole. ( 1998 Society of Latin AmericanStudies. Published by Elsevier Science Ltd. All rights reserved

Key words — oil, gas, politics, Mexico, economic reform

Most Latin American countries have, within the past generation, undergone what Greenhas called a ‘silent revolution’ (Green, 1995) in the direction of free market economics. At thesame time, though, the success of market-oriented reform in the region has been mixed.Some countries (notably Chile and Argentina) have achieved economic performances in the1990s markedly superior to those achieved in previous decades, while others have not. (InterAmerican Development Bank, 1996: 33). Mexico has been one of the slowest countries to seeany benefit from change. Per capita income in Mexico was in 1997 still below the levelreached in 1982 — and this growth performance was much worse than that achieved overany fifteen year period since the Revolution.

It therefore seems reasonable to ask whether poorly conceived or poorly executed policiesmay have been responsible, at least in part, for this generally disappointing performance.This is not to rule out the possibility that non-policy explanations may be partly respon-sible. While there may be a number of possible ways of considering policy issues, we areconcerned here with a clearly ‘political’ question — namely the way in which the goal ofsystem-maintenance can come into conflict with that of economic efficiency. Mexican oiland gas policy during 1982—1994 provides an example of the way in which a governmentcan choose to accept significant economic inefficiencies in order to avoid threats to its ownpower. Such a situation may not be especially unusual or surprising in itself, but there aretwo additional features worthy of note in this case. One is that the Mexican system during1982—1994 has often been seen as an authoritarian technocracy — a picture which is at firstsight hard to reconcile with the evidence presented here. The second is that economicinefficiency may have long-term political consequences. For this reason, the choice facing

the Mexican state (in retrospect) was one of short-term vs long-term political risk ratherthan efficiency vs. stability.

The existing ‘politics of development’ literature has clearly established the error ofseeking to reduce issues of economic policy to a polemic of states vs markets: successfuldevelopment requires both an effective state and some degree of responsiveness to marketforces (Wade, 1991; Amsden, 1989; Evans, 1995). It is also clear that the behaviour of statesis constrained by political factors. There nevertheless remains a problem of conceptualisingthe relationships which may exist between politics and policy. More than one method ispossible here. One feasible approach is to consider an example of state success in order tocreate an ‘ideal type’ against which other cases can be measured. A good example of thisapproach is Evans’ work on South Korea (Evans, 1995) which emphasises the virtues ofWeberian bureaucracy. Evans contrasts the developmental state with its opposite, the kindof predatory kleptocracy of Mobutu’s Zaire, where the state is both inefficient and in-capable of pursuing goals beyond the self-interest of the ruler.

Evans’ work is conceptually sophisticated. It substantiates the point that the develop-mental performances of different states vary, and that this variation has to do both with theway in which the public sector is organised and the state interacts with society. However,Evans’ categorisation of states into predatory, developmental and intermediate is ratherlimited. Most states, certainly in Latin America, would be classified as intermediate— a classification which is too broad to be interesting. A ‘one measure fits all’ ideal-typepresents problems for those wishing to understand the processes of change within a regionor, over time, within a country. To understand better a case such as Mexico we need a morenuanced approach — capable of distinguishing shades of grey.

Grindle (1996: 8—10) takes a further step forward by providing some medium-levelindicators of state capacity, which she breaks down into institutional, technical, administra-tive and political. The first three of these indicators seem clear and straightforward but thenotion of ‘political capacity’ poses problems. One of these is that Grindle’s (1996: 44)definition of political capacity as the ability to ‘promote political stability and enhance basiclegitimacy’ lumps together some very different concepts. Legitimacy and stability are rarelythe same thing, and sometimes downright opposites (Beetham, 1991). They are particularlylikely to conflict when democratisation and economic change are both on the agenda at thesame time. A further problem is that a state’s political capacity (if defined as Grindleintends) may come into conflict with its other capacities.

In addition to Evans’ work on embedded autonomy and Grindle’s notion of statecapacity, we need a more specific understanding of the way in which particular politicalsituations can constrain the use of state power. This article discusses an authoritariansystem undergoing gradual democratic change — Mexico during 1982—1994. The sugges-tion in this context is that the political situation principally influenced policy by inducingpolicymakers to adopt notably risk-averse policies in the oil and gas sector. A furtherinfluencing factor was a preference for gradualism due to the authorities’ assessment thatthey had more to lose from a political shock than from economic underachievementresulting from excessive slowness. Issues of risk and time preference may well be asymmetri-cal between different types of state — a fact which must have implications for theories ofstate behaviour and state autonomy.

Issues of state autonomy have been very much discussed in relation to post-1982 Mexico.Some students of Mexican policy, notably Grindle (1996), Centeno (1996) and, at least byimplication, Lustig (1992) give a fairly strong weighting to the technocratic aspects of the

36 George Philip

state. A reading of these scholars would lead one to conclude that the Mexican state during1982—1994 had a clear developmentalist ‘core’. State autonomy was, clearly, not absolute.No serious author has disputed that this core was to some degree constrained by theclientelist character of much of the Mexican bureaucracy, the behind-the-scenes power ofsome trade union leaders and the PRI’s traditional commitment to the goals of revolution-ary nationalism (in which the oil expropriation of 1938 played a major part). Howeverneither does anybody seriously dispute that the top positions in the Mexicans state(including the presidency) have since 1982 been occupied by highly qualified technocratswho have appointed other technocrats to key cabinet positions. This process has beenfacilitated and reinforced by the process by which the outgoing Mexican president chose thePRI’s presidential candidate — none of whom has yet lost a presidential election. NeitherDe la Madrid, nor Salinas, nor Zedillo stood for any elective office other than thepresidency.

We can therefore rule out two possible hypothesis (derived from Evans and Grindle)relating to policy failure in Mexico. There certainly were predators within the Mexican stateduring 1982—1994, but this was not a predatory state in the ‘Mobutu’ sense. At the sametime, the governing elite was both economically and politically competent. Why, then, werethe economic consequences of twelve years of market-oriented reform so disappointing? Asnoted above, the key hypothesis here has to do with the relationship between authoritariangovernment and risk aversion. Constraints on state policy need not be absolute barriers.They may present themselves ex ante as risks. Successful economic reform inevitably entailssome acceptance of risk. However Mexican policy in the oil and gas sector during1982—1994 showed a high degree of risk aversion. Excessive risk aversion can beself-defeating and has perhaps proved to be so in the case being considered here. A bolderpolicy in this sector would have produced faster growth and this might have helped theMexican political elite which is now facing full-scale democracy — after fifteen years ofmarket-oriented reform failed to provide significant economic benefits to the majority ofMexicans.

Mexican risk aversion (at least in some key sectors) can be contrasted with the far moreradical policies of Fujimori in Peru and Menem in Argentina — which have so far yieldedbetter results than those of Mexico. Would the Mexican government have adopted a moreradical strategy if the transition to democracy in that country had been quicker? It isimpossible to be sure but both Fujimori and Menem, who took an immediately riskier andmore radical approach to reform, were both democratically elected (and indeed re-elected).Who dares, sometimes wins. It is also interesting that Zedillo, the first Mexican president tobe freely elected against real competition, has sought to speed up rather than slow down thepace of reform in the oil and gas sector.

In fully democratic systems, electoral hazards may actually encourage governments toadopt high-risk/high-reward strategies — because an elite consensus is no defence againstelectoral rejection. Electorates impatient for progress may therefore encourage some gov-ernmental risk taking. Even if a majority of voters may be opposed to a particular reform,they may still reward governments who carry it out if the result is macroeconomic success.The authoritarian government in Mexico, however, saw democracy as a threat to be fearedrather than a reward to be won and it sought above all to maintain unity within the elite.Such a strategy might seem sensible at first sight. However the result of adopting it is a verydifferent risk/reward ratio than that facing democratically elected government. Elite unitymay facilitate some kinds of policy, but the need to avoid challenging powerful interests

Economic policy in post-1982 Mexico: The case of Pemex 37

rules other policies out. For example General Pinochet radically deflated the Chileaneconomy in 1975, and even more dramatically in 1982—1983, but never privatised Codelco.A government dependent upon electoral support would almost certainly have preferred topress ahead with controversial privatisations than risk radical defaltion. By the same token,De la Madrid’s Mexico entered GATT, significantly to the disadvantage of small businessinterests, but regarded Pemex with extreme caution. President Salinas, for his part, radicallyreformed the agricultural sector while leaving oil and gas largely alone. It may indeed turnout that some of the policies carried out by de la Madrid and Salinas will have positivelong-term effects, but the decision to avoid reform in an area where short-term rewardsmight confidently have been expected merits comment.

This article shows that reform of the oil and gas sector was slowed down by politicalconsiderations. While this sector may be regarded in some respects as a special case, it wasimportant enough on its own to make a significant difference to the overall economy.Furthermore, a picture of the Mexican technocratic elite as system-maintaining politi-cians first and reforming developmentalists a distant second emerges from some otherrecent studies as well (notably Torres, 1997) and may have general resonance. At a min-imum, it is worth considering further whether the logic of seeking to maintain an authoritar-ian system for as long as possible held back the speed of economic policy reform in Mexicoafter 1982.

THE MEXICAN OIL AND GAS SECTOR PRIOR TO 1982

Pemex, the state owned-enterprise which monopolises the oil and gas sector, has alwaysbeen run in a very political way. This is due partly to the acrimonious nature of the 1938 oilnationalisation, which resulted in the Constitutional entrenchment of Mexico’s state mon-opoly. It is also partly due to the extraordinary power of the Pemex union. This, too, datesback to the post-nationalisation days when the private companies withdrew their managersen masse leaving the day-to-day running of the nationalised industry largely in the hands ofunionised blue-collar workers. Finally the rhetoric of the oil nationalisation was consis-tently used throughout the postwar period to assert (however implicitly) the independenceof the Mexican government from the USA. The annual celebration of the oil expropriation,held on 18 March, was overtly used for political purposes.

The history of Pemex is long, complex and eventful (Morales, 1992; Duran, 1985;Grayson, 1981; Philip, 1982). The industry was expropriated in 1938 in the context ofa bitter labour dispute, and it was kept in the public sector during the 1940s despiteconsiderable pressure from Washington to allow the readmission of private capital. In theend, the Mexican authorities decided to run oil and gas as state monopoly industries. Afteraround 1950, and in deliberate contrast to the earlier period of confrontation, the politics ofPemex were kept low profile in every respect. Successive presidents generally managedPemex so as to avoid political problems. Directors-General were given significant auton-omy in managing the agency but kept out of other political roles. Between 1946 and 1976not one Director General failed to complete his full term, and only one (Reyes Heroles whosignificantly was not eligible to be president of Mexico due to his foreign parentage) movedon from the Directorship of Pemex to top political appointments elsewhere. Even then, hispromotion to the Cabinet was not immediate. The technical and economic record of Pemexwas mixed. The company was efficient enough to avoid disaster or major scandal, but itoperated as a largely closed community with self-imposed limitations.

38 George Philip

Major change occurred during the 1970s. Due to a combination of geological andeconomic factors, the Mexican government — especially under the Presidency of LopezPortillo — turned Mexico into a major exporter of oil. The semi-failure of the LopezPortillo strategy and Mexico’s subsequent economic crisis of 1982 have been heavilyanalysed in the literature (Kraft, 1985; Luke, 1988; Lustig, 1992). There is general agreementthat overall macroeconomic mismanagement played the greater part in what went wrong.Nevertheless there is a more specific ‘oil’ side to the story which is relevant to whathappened later. The key point was that the low profile politics of Pemex proved impossibleto sustain once Mexico became a large-scale oil exporter. Economic change created powerconflicts which, in turn, created policy problems.

An aggravating factor here was the evident desire of Jorge Diaz Serrano, Lopez Portillo’sDirector General of Pemex, to become president of Mexico in 1982 (with the tacit supportof Lopez Portillo himself, at least for a time) — and the equally evident desire of many keycabinet ministers to block him (Teichman, 1988; Torres, 1997; Proceso, 1981). Opposition toDiaz Serrano went far beyond the normal dislike ambitious politicians tend to feel for eachother. Diaz Serrano came into government from a private sector background. He hadserved no political apprenticeship in Mexico. He was a former business associate of GeorgeBush and was seen as a very pro-American figure. He was also suspected of personalcorruption — and served several years imprisonment on corruption charges after 1982. Forthese reasons, his opponents considered him totally unfit to be president. On the otherhand, Diaz Serrano’s managerial effectiveness could not seriously be disputed. At someconsiderable price in terms of pollution, corruption and general upheaval, Pemex didachieve very rapid increases in oil production. Output rose from 191,000 b/d in 1973 to2,746,000 b/d in 1982.

At the same time, one of Lopez Portillo’s personal enthusiasms was for economicplanning. In 1977 he set up a new Secretariat of Planning and Budgeting. After some earlyproblems, Miguel de la Madrid was appointed Planning Minister in 1979. De la Madridand Diaz Serrano disliked each other intensely, and there was little co-operation betweenPemex and the planners. A document prepared in the Planning Ministry in late 1980 wasleaked to (and reproduced in) Proceso which summarised its characterisation of Pemexas ‘administratively chaotic, financially insolvent, and politically autonomous’ (Proceso,1981: 62).

Lopez Portillo did not really know how to resolve this conflict. He wanted rapid increasesin oil production, which under the circumstances of the time perhaps required a freewheel-ing management style, but he wanted planning as well. In the end the control of Pemex wasmainly achieved (to the extent that it was achieved at all) by diverting profits away from thecompany by keeping taxes on Pemex high and domestic prices low (See Table 1 for details).The macroeconomic distortions engendered as a result explain a great deal about why the‘oil boom’ strategy failed macroeconomically.

Table 1 shows that Pemex’ financial position actually deteriorated during the oilboom period. The most important reason for this is the low income received fromdomestic sales. During 1980—1981 approximately half of Mexican oil output was consumedat home — the same was true of Pemexs petrochemicals output. Because locally soldoil has to be refined and marketed, the cost of sales will be higher than that of crude oilexports. However in 1981 Pemex earned over three times more from its exports thanfrom its domestic sales. As we can see, there was an enormous subsidy to the domesticconsumer.

Economic policy in post-1982 Mexico: The case of Pemex 39

TABLE 1 Pemex+ Income and Expenditure 1977—1981. ºS.m.

1977 1978 1979 1980 1981

Income 3.64 5.04 8.09 15.58 19.1of which exports 0.85 1.93 4.42 9.81 14.6domestic sales 2.20 2.65 3.18 4.11 4.4Inventory etc. 0.59 0.46 0.49 1.66 0.1

Current costs 1.48 1.94 2.91 4.34 5.4Investment 1.54 3.06 3.66 5.25 9.3

‘Other costs’ 0.2 0.29 0.28 0.40 1.2Other liabilitiesTaxation 0.83 1.19 2.06 7.00 9.9Debt service 0.81 0.81 2.45 4.36 9.1Financial surplus /(deficit) (1.22) (2.26) (3.27) (5.77) (15.7)

Source. Taken from Szekely (1983: 123).Note. Although these figures are taken from Pemex’ official accounts they are best treated assomewhat approximate for reasons set out in Proceso (1981).

There was an economic strategy, however misguided, behind the policy of subsidisingdomestic oil prices. The government sought to use cheap oil both to promote industrialdevelopment and to hold down the rate of inflation. Clearly, though, there was a politicalstrategy as well. Price increases are always unpopular, and gasoline prices in Mexico wereno exception. In the early 1970s, however, the inflationary trend in Mexico was upward, andgovernments faced a perennial problem of how to adjust state enterprise prices in the lightof this. With some exceptions, the direction of policy was to hold prices down (Snoeck,1989). We have also seen that a policy of low domestic prices, consistently opposed byPemex management, was a means of exerting political control over the agency.

While domestic prices were low, taxation of Pemex was kept high and its net investmentwas almost entirely financed by debt. (Depreciation provisions did release some investmentresources from Pemex itself.) In addition Pemex was required to borrow in order to relendto the rest of the public sector via the so-called ‘Fondo de Financamiento del SectorPublico’ (Proceso, 1981: 55). Apart from the purpose of clipping the agency’s wings, this wasalso because (so it was believed) Pemex could borrow internationally more cheaply thanother agencies of the Mexican government. As a result Pemex became ever more highlygeared. According to internal government estimates, Pemex’ asset to debt ratio fell from1.16 in 1978 to 0.65 by August 1980 (Proceso, 1981). This left Pemex extremely vulnerablewhen (internal and external) interest rates rose after 1980 and the international oil pricestarted to fall.

Because of these politically influenced economic distortions, Mexico derived less benefitfrom its oil reserves than might otherwise have been possible, while retaining all thedisadvantages of a cumbersome and partially corrupt state monopoly. The impact ofpolitical conflict was again evident in June 1981 when Diaz Serrano cut prices in order tomaintain Mexico’s export sales: his enemies were given the opportunity to combine againsthim. They did so and, on this occasion, Lopez Portillo backed them. Seeing his chancesof the presidential succession evaporate, Diaz Serrano resigned. However Mexico’s attempt

40 George Philip

to return the price to its previous level led to a major reduction in sales. In the summerMexico had to admit defeat and reduce the price to the level prevailing after DiazSerrano’s cut.

By mid-1981 Mexico’s oil boom had reached its peak and the financial position of thestate company was nevertheless weak. Pemex’ reliance for investment on debt financeevidently could not continue. For the rest of the decade the Mexican government sought tobalance its books by controlling Pemex and cutting its investment rather than allowing thecompany to produce more oil. Mexico’s overall financial difficulties played a part here, butthere were political concerns as well, and these were key.

PEMEX UNDER DE LA MADRID (1982—1988)

President de la Madrid, whose term of office started in December 1982, made it a toppriority to bring Pemex under political control and cut it down to size (literally as well asmetaphorically). One means of achieving this was by building up the Energy Ministry(SEMIP) and extending its influence. De la Madrid also aimed to make Pemex moreaccountable and efficient, and sought to extract surplus from the company in order to copewith Mexico’s debt crisis. As part of this process, subsidies on domestic consumption ofhydrocarbons were phased out. The declining trend in international oil prices during1982—1986 reinforced this trend toward greater emphasis on efficiency. Ramon Beteta,Director-General of Pemex from 1982—1988, expressed something of the new spirit in hisfirst Informe (18 March 1983):

‘The disparity between the growth of Pemex and its control, planning and informationsystems has led to a problematical situation, made the more so by financial difficulties onthe domestic and international scene. This has been aggravated further by human failurewithin the institution often involving corrupt practices’ (Translation by author).

However this new managerialism did not succeed in taking Pemex out of politics. Insteadthe focus of political attention shifted to labour. Previously the management of Pemex hadalways sought, and mostly enjoyed, good relations with labour. It may have been inevitablethat tensions would rise at a time of falling real wages and cutbacks in investment, but theconflict between the increased emphasis on financial control and the essentially lawlesscharacter of the STPRM (Union of Mexican Oil Workers) added fuel to the fire. At this timethe vast majority of Pemex’ employees were members of the STPRM, which operateda closed shop. A few positions, known as ‘confidence’ posts, were traditionally filled at thediscretion of management. However Beteta brought some 3,000 management appointeesinto the organisation, essentially to acquire financial control over it. These were resented bythe existing union leadership and by some of the older engineers who nicknamed theincomers ‘smurfs’ (Proceso 11 February 1985, and 1 December 1986; Grayson 1988). Theallusion was that smurfs are of uncertain parentage and they multiply very fast: thedescription was not intended to be complimentary.

Changes in procurement policy were also significant in this context. In the past,the STPRM was given the first choice of all contracts awarded by Pemex. It would nor-mally take a percentage and farm out the work to the private sector. This pattern waschanged in January 1984 with a decree that required all government contracts for goodsand services to be awarded on the basis of public bidding, with subcontracting prohibited.This reform, as applied to Pemex, met with strong union resistance, but nonethelessproceeded.

Economic policy in post-1982 Mexico: The case of Pemex 41

It should be remembered that Mexico in the mid-1980s was still an authoritarian statewith vast powers vested in the presidency. At first, it seemed likely that the governmentwould purge the oilworkers’ unions just as it had the Pemex management. In August 1983a dissident oilworkers’ leader, who had opposed the existing leadership and found himselfgaoled, wrote to de la Madrid formally denouncing various cases of corruption within theSTPRM. He also gave an interview to the Left-wing journal Proceso in which the allega-tions were repeated (Scherer, 1986). Press reports gave a considerable stir to the story andthere were strong rumours for a time that the government would take over and reform theoilworkers union.

In the event, however, nothing happened. The government did not want to risk theconsequences of a fight. On 10 October 1985 the ¼all Street Journal reported a seniorfigure in Pemex as saying that: ‘Maintaining social peace is a creed in Pemex. You can’tpush the union to the point of having an explosion’. To an extent the failure to confrontthe oilworkers was typical of de la Madrid who began by promising ‘moral renovation’but soon adopted a policy of seeking to head off major conflict.

De la Madrid’s cautious attitude toward conflict was not entirely unsuccessful in respectof Mexico as a whole. He was able to slow down the process of democratisation and pursuelimited market-oriented reforms while avoiding heavy repression at a time of severeeconomic difficulty. In retrospect, the de la Madrid period marked a decisive shift by theMexican political elite in the direction of market-oriented policies. This was a difficultproject to achieve given the strength of statist-nationalist opinion within both the publicbureaucracy and the official party. De la Madrid evidently believed that he could bestachieve his objectives by moving slowly and softly.

However the oilworkers’ union was an exceptionally aggressive opponent of any signifi-cant change in policy. Its leaders openly insulted Beteta and, on one memorable occasion,came close to insulting the president himself. This defiance was quite calculated. Theoilworkers union leadership simply did not believe that the government would dare attackit (confidential interview). This calculation proved correct, at least as far as de la Madridwas concerned.

Power issues came to the forefront during this period in another respect as well, namelyinternational oil marketing. In general the de la Madrid government was market oriented,but it was surprisingly more supportive of Mexican collaboration with OPEC than LopezPortillo had been (Grayson, 1988). This change of emphasis can be understood in partthrough cabinet politics and in part through a plausible (though in the end erroneous)interpretation of Mexico’s interest. As far as Mexico’s interest was concerned, the govern-ment believed that greater solidarity among oil exporters would enable the high oil pricelevels of the early 1980s to be defended despite the slowdown in world oil demand after1980. It is clear that Mexico had much to lose from a sharp downturn in oil prices and itmade some sense for the government to show restraint in production. Unfortunately, theresult of government policy was to turn Mexico into a classic ‘losing player’ in a prisoner’sdilemma game. Mexico kept to its production limits. Some other countries failed to observetheirs, and the price of oil fell anyway.

However this new attitude toward OPEC was also coherent with the way in which De laMadrid ran the Mexican government. As part of his policy of tightening control overPemex, he strengthened the ministerial structure supervising the agency, and gave SEMIP(the Energy, Mines and Oil Secretariat) much more power over oil marketing than itspredecessor (the Secretary of Patrimony) had enjoyed in the past. Most of de la Madrid’s

42 George Philip

cabinet was economically liberal, but in the interests of balancing the macroeconomicportfolios the SEMIP position was given to a Left-leaning politician, Francisco LabastidaOchoa. Labastida took a fairly rigid line on oil pricing.

Other factors behind the new marketing policy included government efforts to checkcorruption within the agency. One of the means by which corruption occurred in Pemexprior to 1982 was via unauthorised selling of oil on the spot market. (The revenues earnedsimply disappeared from the accounts.) A report critical of Pemex pointed out in 1980 thatthere were inconsistencies in Pemex’ sales figures which indicated that very large sumsmight have been misappropriated (Proceso 1981). Putting a stop to spot market sales closedthis particular door to corruption. After 1982 oil exports were controlled by an inter-secretarial committee organised within SEMIP. While this did operate in good faith, itproved too bureaucratic to be able to respond swiftly to changing market conditions(Szekely, 1992).

The problem was that Mexico was consistently too slow to react to falling prices and lostwell over $1bn. in 1984—1986 by forgoing market share when facing price-cutting competi-tion. (Grayson, 1988; Szekely, 1992). When the loss of market share became clear, LabastidaOchoa was released from Cabinet responsibilities to become governor of Sinaloa andPemex was given back its control over pricing.

Caution also prevailed in respect of broader aspects of oil and gas policy. The dela Madrid government accepted the desirability of privatisation in some areas of the eco-nomy, but any fundamental change to the oil sector was not seriously considered. There wasa very limited deregulation of the petrochemical sector in October 1986, following Mexico’sentry into the GATT earlier in that year. This, together with changes to procurement policyreferred to above, were effectively the sum total of the structural changes accomplishedunder de la Madrid.

Changes to the domestic pricing and taxation systems were more significant, however,and these turned Pemex into a major contributor to the Mexican budget. We can see theway in which the tax burden impacted on Pemex from Table 2. Tax increases bit so deeplyinto Pemex’ income that in July 1989 the new Director-General of Pemex, Francisco Rojas,told a group of Mexican Deputies that the 1989 Pemex budget was, in real terms, below thelevel of 1973 although Pemex was producing around fifteen times more oil than in that year(Proceso, 21 August 1989).

TABLE 2 Pemex’ contribution to Federal tax revenues, ºS$ and as % oftotal public receipts

1982 1984 1986 1988

Pemex’ export 16.6 16.6 6.1 6.7earnings (gross)Taxation paid by 10.0 13.8 7.9 10.2Pemex*Oil taxation as

% of federal revenue 37.7 46.4 38.3 35.0

*Includes sales taxes.Source: Pemex (1991, 1996).

Economic policy in post-1982 Mexico: The case of Pemex 43

Increasing the tax take from Pemex was certainly a part of the government’s strategy ofraising revenue in order to cope with Mexico’s debt problems. The contribution made byPemex to central government revenues barely diminished after 1982 despite the lack ofgrowth of the company and the worsening trend in international prices. The squeeze on thecompany intensified when world oil prices fell during 1985—1986. Largely as a result ofpolitical decisions made for other reasons, therefore, Pemex found its investment budgetseverely squeezed. The Mexican government was willing to sacrifice the growth whichmight have been achievable had Pemex been allowed to invest more, in return for enjoyingsome short-term fiscal advantages. At the same time, fear of opposition held back anyserious attempt to reduce Pemex’ operating costs (which would have involved confrontingthe union) or to deregulate the sector as a whole to any significant degree. There were,admittedly, real constraints stemming from the weakness of the international oil marketand the serious debt problems facing the government — but these were far from being thewhole story. Even independently of these constraints, it was clearly government policy after1982 to restrict the growth of Pemex.(Interview with Jaime Willars, Pemex, September1986). Mexico’s energy policy also sought to diversify domestic dependency on hydro-carbons (SEMIP, 1994).

It is important to note that the cutbacks in Pemex’ investment were not based on anycareful study of the costs and benefits of particular investments. Investment downstream inthe oil sector would almost certainly have been a better use of public money, in bothfinancial and environmental terms, than the very expensive nuclear energy programme withwhich de la Madrid continued (Redclift, 1989). There can be little doubt that Pemex did faceprofitable opportunities which it could neither take itself nor divest to the private sector.Even if an increase in crude oil production was ruled out because of its possible effect oninternational markets (which was, as we have seen, a rather rigid policy) this did not exhaustpotential investment opportunities. Oil refining, petrochemicals and natural gas production(including the export of natural gas to the United States) were all covered by the statemonopoly so that any deficiencies in state funding could not be made up from the privatesector, except perhaps at the margin.

By way of illustration of this point, let us note that Mexico was a large-scale producer oflow-priced heavy oil. Capacity was lacking to upgrade the quality of the oil to anysignificant degree (Interview with Marcela Serrato, SEMIP, 28 August 1985). For thisreason, the Mexican government encouraged the local burning of heavy fuel oil anddiscouraged the production of natural gas. While this made some sense in terms of Mexico’sresource endowment (during the 1980s most of Mexico’s gas reserves were non-associatedwith oil and could therefore be shut in) the environmental consequences of preferring fuel oilto gas were negative indeed. Air pollution in Mexico City is a significant problem for publichealth and it deteriorated notably in the 1980 s.

We can therefore see how, as in 1976—1982 but in a different way, political conflictslimited the ability of the oil and gas sector to contribute to the Mexican economy. It wasquite reasonable that a period of rapid oil expansion should be followed by one ofconsolidation and increased efficiency, especially when the world price of oil was weak.However the cutback to investment was indiscriminate rather than targeted and somepotentially good projects were not proceeded with. Furthermore there was neither signifi-cant liberalisation to permit more private investment nor a truly determined pursuit ofmanagerialism. Some efficiency gains were made, but the labour issue prevented more frombeing done. Government distrust of the Pemex management also prevented it from enjoying

44 George Philip

the managerial autonomy which was necessary for the company to compete effectively inworld markets and billions of dollars of potential income was thereby foregone.

PEMEX DURING THE SALINAS PERIOD

Carlos Salinas, much more than de la Madrid, was prepared to confront key issues of powerboth in the oil sector and elsewhere. His government was far more aggressively in favour ofmarket-oriented reform than that of de la Madrid, but the amount of change in the oil andgas sector remained very limited. Once more, political factors were allowed to slow downthe pace of change.

Mexico’s national political context changed significantly after 1988. Until that year thestate could be seen as essentially authoritarian with elections serving to legitimate authorityrather than providing a real contest for power. The presidential elections of 1988 were,however, far from being the formality than many people expected. Cuauhtemoc Cardenas,running for the Left-wing opposition, achieved 31% of the vote according to official resultsand may have been the outright winner were it not for many well-attested cases of electoralfraud. When Salinas took power, he accepted that the official party would not again seek toretain power by large-scale fraud. This, for the first time in post-Revolutionary Mexico, heldout the possibility that the PRI might lose subsequent elections.

In some respects, however, Salinas used presidential powers in a less restrained waythan his predecessor had. This quickly became clear in the oil sector. We have already notedthat relations between the STPRM and the government were relatively bad in the 1980s.What complicated matters further was the fact that Cardenas emerged in 1987 as thepresidential candidate of the Left-wing opposition. As the son of Lazaro Cardenas, whohad expropriated the oil industry in 1938, Cuauhtemoc Cardenas was naturally identifiedwith economic nationalism. On 18 March 1988 he held a rival event to the officialcelebration of the oil nationalisation. Cardenas attracted around 70,000 people to theZocalo in Mexico City where he attacked the government for using the oil revenues to paythe national debt (Bruhn, 1997). The oilworkers union ostensibly remained loyal to the PRI,to which it was affiliated, but covertly supported Cardenas. STPRM leader La Quina waswidely believed to be the author of an anonymously published personal attack on Salinashimself.

In January 1989, in his first major move as president, Salinas ordered the arrest ofoilworkers leader La Quina on charges which included racketeering and murder. While thereason for the arrest was manifestly political, the consequences for Pemex were significantlymanagerial. The weakening of union power was made clear in a collective contract agreed(or perhaps imposed) later that year. Subsequently, the size of the Pemex labour force wasradically reduced, from some 210,000 in 1988 to 125,000 in 1992 and 107,000 at the end of1993. While the labour union remained an important influence, it was clearly much less ableto restrict change than it had been prior to 1988.

In other respects, however, there were fewer changes to the hydrocarbons sector underSalinas than might have been expected. Two major figures in the Salinas government, PedroAspe the Finance Minister and Jose Cordoba who was a key presidential advisor, wanted topush market-oriented reform in the oil sector (Grayson, 1994). However both Salinashimself and the Pemex management were at best only cautiously reformist.

Some change did take place. There was a significant de-regulation of the petrochemicalssector which was largely opened up to the private sector by the end of 1993 (Morales, 1996).

Economic policy in post-1982 Mexico: The case of Pemex 45

In 1993 a new law lifted the remaining restraints on foreign ownership of secondarypetrochemicals. There were plans to privatise the remaining state-run petrochemicals plants— which were not opposed by the oil nationalists within Pemex (Interview with AdrianLajous, Mexico City, April 1993) — but in the end these were abandoned due to doubts thatthe assets would fetch an acceptable price.

There were also changes to procurement rules to allow foreign companies to work withPemex. The Triton drilling contract of 1991 was a key step. Pemex was able to use a loangranted by the US during the Gulf conflict in order to pay a (US owned) contractingcompany to drill for oil. On 20 August 1993 the Financial ¹imes could report that ‘of about60 wells in the Bay of Campeche, 36 are being drilled by private oil companies’ (‘Mexican oilgiant profits from private tuition’). Both American and Mexican companies were involvedin the private drilling, with contracts issued on a turnkey basis based on payment per metredrilled. The NAFTA agreement led to some further liberalisation of the law relating toprocurement, though the overall effect of the treaty on the oil and gas sector was verylimited (Plourde, 1994). The Salinas government, fearing that any NAFTA accord mightattract domestic criticism, did not want to give the opposition an obvious target at whichthey could shoot. The potential complaint that ‘Mexico is being forced to privatise its oilsector because of American pressure’ was seen as being too much of a gift to the oppositionand the US government did not insist on major change to this sector.

The question of whether the Pemex monopoly could be further relaxed to the point ofallowing contracts permitting risk capital was, however, actively considered. Studies withinPemex were commissioned on the kinds of risk contract prevailing in other parts of theworld (Confidential interview with a Pemex employee, April 1992). However economicnationalists within Pemex were active in opposing any such measures. During 1990—1991the organisation conducted an audit into its own operations. It found that the cost ofproducing oil was low: around $2.50 to $3.00 per barrel (Interview with Adrian Lajous,April 1993). This data, combined with a relatively bullish interpretation of some disputed oilreserve figures, allowed moderate nationalists to argue that reform within Pemex was moreimportant than any dilution of the state monopoly.

Adrian Lajous, who was then Director of Planning, was personally opposed to openingthe oil exploration sector to private capital in any form. He argued that the sector waspotentially profitable and that Pemex rather than foreign oil companies should have theprofit. He was also privately concerned that any very significant increase in oil exportsmight upset the international oil price — at least in the Western Hemisphere. Lajous andothers who thought in the same way were able to persuade the board of Pemex and thenceSalinas himself that more could be achieved by an organisational reform to Pemex than bya reform to its ownership structure (interview with Adrian Lajous, April 1993). A severeindustrial accident involving Pemex in Guadalajara in 1992 made it easier to persuadeSalinas that further reforms to Pemex were necessary.

Serious industrial accidents involving Pemex have been lamentably frequent since 1982.They are extremely unpopular. It is possible (though detailed research is lacking) that theyhave some connection with the severe budgetary constraints imposed upon the statecompany.

In the end, the Mexican government did not deregulate the oil and gas sector in anymajor way. It calculated that this would be too risky politically. The government wasexpecting that Cuauhtemoc Cardenas would make a renewed challenge for the presidencyin 1994 and it was government policy to avoid, as far as possible, giving him campaign

46 George Philip

TABLE 3 Pemex’ pre-tax profit, tax payments and post-tax profit, 1988—1994. $bn

1988 1989 1990 1991 1992 1993 1994

Total sales 13.6 15.8 19.6 19.4 25.1 28.7 29.7Pre-tax income 6.4 9.0 11.3 10.8 14.6 15.0 17.2Taxation* (a) 5.9 7.7 9.9 9.8 13.5 14.0 16.3Post-tax income 0.5 0.3 1.5 1.0 1.1 1.0 1.0

*I have considered the ‘special tax on production and services’ as a simple tax on Pemex.Source. Pemex: income statements. p.35. Pemex (1995).

issues. Oil deregulation was seen as precisely such an issue (Interview with Pedro Aspe,London, January 1992).

There can be little doubt that the political constraints which the Salinas governmentfaced were real enough. Cuauhtemoc Cardenas was heavily critical even of existing policytoward Pemex which he considered was based excessively on commercial considerations(Cardenas, 1995). For example, in a speech delivered on 18 March 1993, he accused Pemexof exaggerating its oil reserve figures. He called for an end to contracting out of oil drilling,greater emphasis on exploration work by Pemex itself and (at least by implication)a reduction in oil exports. The financial implications of such an alternative policy were (notsurprisingly) left largely implicit, but Cardenas also argued against the service or repaymentof Mexico’s foreign debt and was clearly out of sympathy with the government’s entiremarket-oriented strategy.

The Salinas government believed itself to be more vulnerable to political attack over oilpolicy than over reforms to other sectors, some of which were energetically pursued (Grindle,1996). This political calculation may have proved correct. The PRI did, after all, win the 1994elections with Cardenas coming a poor third. However the loss of potential national income(including export income) from holding back growth in the sector was also significant.

The key economic problem was that the oil and gas sector was still starved of capital. Thesurplus which Pemex earned after 1988, largely due to increased efficiency, was largely taxedaway, as we can see from Table 3. The extent to which Pemex’ ability to invest and expandwas curtailed by taxation is clear. While there was some opportunity to borrow abroad after1989, and there was of course a ‘depreciation’ allowance, there is no disputing the point thatPemex’ ability to invest was held back. Grayson’s conclusion, that Aspe kept Pemex ‘ona tight rein’ (Grayson, 1994) seems amply justified. A tax reform designed to take effect in1993 would have reduced taxation on Pemex, but this was postponed due to generalmacroeconomic anxieties. While such anxieties were in the event fully justified, it wouldsurely have made long-term economic sense for Mexico if had Pemex been allowed to investsomewhat more of its own income earlier on. As it was, Mexico’s oil reserves, drillingprogramme and refinery capacity were all lower in 1994 than they had been in 1988 (Pemex,1995).

PEMEX UNDER ZEDILLO: A HETERODOX COMPROMISE?

There is not the space here for more than a brief note on Pemex and Mexican hydrocarbonspolicy since 1994. The election of Ernesto Zedillo in 1994 was genuine and has not seriously

Economic policy in post-1982 Mexico: The case of Pemex 47

been disputed. However the devaluation of December 1994 and subsequent recessionchanged Mexico’s economic situation for the worse and greatly strengthened the oppositionparties. The government looked increasingly to Pemex as a source of tax income and, tosome extent, as an exporter as well. Faced with an economic crisis, the Zedillo governmentallowed Pemex to pursue actual expansion rather than just efficiency gain. Oil and gasproduction are once more on an increasing trend and investment in the sector is risingsharply.

In addition to allowing Pemex to expand, the government also sought to speed up theprocess of de-regulation. Here the consequences were mixed. The privatisation of thepetrochemicals sector was promised in 1995, but this proposal led to major politicalopposition. Once it became clear that the PRI in Congress would not support such a move,a compromise was agreed. This was that individual petrochemical plants would be sold ona joint-venture basis with Pemex keeping a 51% shareholding. The share offerings in thejoint-venture arrangement were due to come onto the market subsequently, though it is farfrom clear how much interest there will be in taking 49% of a state asset in a politicallysensitive sector. Meanwhile all further restrictions on private (including foreign) investmentin the petrochemical sector were scrapped.

The importation of natural gas into Mexico (though not its production) was deregulatedin 1995. Foreign investors are now allowed into the transportation, storage and distributionof natural gas, with Pemex-owned pipelines to be used as common carriers. An importantcontract in March 1997 allowed the temporary transfer of Pemex-owned gas pipelines tothe private sector as part of a contract to supply the city of Chihuahua and has since beenfollowed up by other contracts.

A heterodox policy of increasing oil and gas output in the by a mixture of private andpublic investment seems to have evident merit. There is a considerable potential forincreasing production, to the combined benefit of Pemex, the Mexican government andsome private sector interests. However the economic benefits enjoyed by Mexico in andafter 1995 from a carefully targeted increase in energy investment rather throws into reliefthe inability of previous policymakers to achieve this at any time earlier. It is also clear thatthe new policy, while in some respects a compromise, continues to be opposed by the Left inMexico. Thus in March 1997 the oilworkers’ union leader made public his objection tomanagement policies of using contracting-out policies, as appropriate, in order to increaseefficiency. On 18 March 1997 Cuauhtemoc Cardenas once more repeated his opposition toincreasing oil exports which, he believed, threatened to deplete Mexico’s own oil reserves.

BY WAY OF CONCLUSION

The kinds of political constraint operating in Mexico have changed over time. They are alsoilluminatingly different from the kinds of constraint which, it may be supposed, would haveoperated in a full-scale democracy. It is reasonable to suppose that a democratically electedgovernment would have taken the fact of political opposition for granted and pressed onwith its policies. This is very much what Zedillo has done since 1994. It does seem that thefear of opposition acted as more of a constraint on oil and gas policy prior to 1994 than theeffect of opposition has done since. This is because the effect of strengthened opposition hashad to be balanced against the government’s evident need to raise tax revenue and engineereconomic recovery. Some political risks have had to be taken. The de la Madrid and Salinasgovernments believed that they had the option of simply avoiding difficult policy issues. The

48 George Philip

problem was that the effect of policy caution to inhibit both a seriously independent Pemexand any significant degree of privatisation.

As a result of this, the potential advantages of increased oil and gas production were lost.Given the economy’s over-dependence on oil in 1982, some economic rebalancing awayfrom oil may have made good sense. Admittedly, too, there were some efficiency gainswithin Pemex. However, more than outweighing these advantages was the fact that thesector as a whole was starved of capital. As a result, oil production in Mexico was barelyhigher in 1994 than in 1982: refinery capacity and natural gas production were actuallylower (British Petroleum 1997, 1989). In 1982 oil made up 75.3% of Mexican exports whilethe corresponding figure for 1994 was 15.1%. This stagnation occurred despite the fact thatMexico possesses abundant, low cost resources of both oil and gas. Even modest growth inproduction during the intervening period would have made a significant difference to boththe Mexican trade account and the fiscal situation.

It would be controversial to judge that Mexico should have part-privatised Pemex orfound the necessary public money to allow Pemex itself to expand. It is less controversial toassert that one or the other of these strategies, or perhaps a heterodox combination such aswas eventually adopted under Zedillo, ought to have been pursued earlier. Maintaining thestate monopoly essentially intact (except at the margin) while starving it of funds waseconomically costly.

If political criteria are taken into account, then the management of the sector isunderstandable. A Mexican government can no more manage the oil and gas sector withoutreference to politics than an elephant can fly. On the other hand, political criteria dependupon the nature of political systems, and the nature of the Mexican system during1982-1994 may not have been as helpful to economic reform as many observes supposed atthe time.

A note on interviews

Published sources were supplemented by a number of interviews carried out over a fairlylengthy period. Two sources specifically requested anonymity. Those quoted in the text whodid not do so were

Pedro Aspe, interviewed in London in January 1992, Adrian Lajous, interviewed at varioustimes, and at length in April 1993, Monica Serrato, interviewed in SEMIP in August 1985,Jaime Willars, interviewed on several occasions but specifically in September 1986.

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