I. INTRODUCTION
II. PRIVATIZATION HAS BEEN SUCCESSFUL ELSEWHERE IN LATIN AMERICA
A. Overview of Other Latin American Privatizations
B. Argentina' Successful Privatization Experience
C. Why Privatization Is a Preferred Economic Policy
III. THE CASE FOR FULL PRIVATIZATION OF PEMEX
A. Historical Context
B. Mexican Privatization Efforts in Non-Petroleum Sectors
C. Why Pemex Should Be Privatized
IV. CONCLUSION
I. INTRODUCTION
During the administration of former President Carlos Salinas, a
series of far-reaching free market reforms were implemented throughout
the Mexican economy.(1) However, the Mexican oil industry has been
largely excluded from privatization efforts.(2) Petroleos Mexicanos, or
Pemex, was formed in 1938(3) when then President Lazaro Cardenas
expropriated and nationalized the foreign-dominated oil fields,
consolidating all petroleum operations into one state-owned
enterprise.(4)
An oft-advanced explanation for the failure to include Pemex in
privatization efforts is Article 27 of the Mexican Constitution which
grants control over the petroleum industry to the state.(5) Some efforts
have been made recently to achieve a measure of privatization of Pemex;
for example, the Mexican government has recently agreed to sell up to
49% ownership in Mexico's 61 petrochemical plants with the state
retaining 51% ownership.(6) But the Mexican government has continued to
resist completely relinquishing control over this politically
profitable,(7) but economically volatile industry.(8)
II. PRIVATIZATION HAs BEEN SUCCESSFuL ELSEWHERE IN LATIN AMERICA
A. Overview of Other Latin American Privatizations
Several definitions have been advanced for the concept of
privatization.(9) A good, general definition is "the transfer of
asset ownership from the government to the private sector" in an
attempt to remove from political considerations "the commercial,
financial, and strategic decisions of the business."(10) The
worldwide pace of privatization, especially in developing countries, is
rapidly increasing.(11) In Latin America alone, 694 divestitures have
resulted in over US$59 billion in revenue for these developing
countries, a figure that represents more than half of the total revenue
from such transactions in all developing countries world-wide.(12)
Privatization in the developing world has been praised as a means of
establishing a government's commitment to liberalization,(13) as
well as promoting economic development and modernization.(14)
The scope of privatization, however, has not always extended to
state-owned petroleum enterprises.(15) While several countries have
formulated pre-privatization policies for state-owned petroleum
enterprises, this sector has remained largely immune from the
privatization trend.(16) However, the benefits of privatization are
themselves creating pressures to complete the privatization movement by
freeing the state-owned petroleum enterprises.(17) For example,
international investors demanding the break-up of state monopolies
before engaging in business have developed a major natural gas project
in Brazil and Bolivia.(18) By selling off their often dilapidated oil
refineries and gas plants, these governments hope to attract much needed
private investment capital to improve the quality of services.(19)
Another example of Latin American success with privatization is
found in the policies of Chile.(20) In addition to privatizing many of
its state-owned enterprises, the Chilean government implemented free
market economic principles through reduced import tariffs and the
elimination of both subsidies and price controls.(21) As a result, the
average rate of growth for the national gross domestic product was 7.1%
from 1975 to 1981,(22) and with a government committed to the
continuance of free market reforms, the average has continued at over 5%
from 1985-1996.(23) An additional benefit to Chile has been entry into a
trade and investment agreement with the United States(24) and the
probable accession of Chile into the framework of the North American
Free Trade Agreement (NAFTA)(25) or other free trade agreements.(26)
Latin America has become recognized as the fastest growing
regional market for exports from the United States.(27) As a result, the
Enterprise for the Americas Initiative (EAI)(28) has been formed to
encourage the further liberalization of Latin American economies.(29)
Latin American countries that institute free market reforms are rewarded
by the EAI with loans, investment programs, and opportunities to join
trade agreements.(30) These positive reinforcement measures are designed
to counteract the destructive effect of nationalist resistance to
foreign influences, such as capital investment.(31) But resistance to
the foreigner may also eliminate much needed foreign investment
capital.(32) This can, in turn, create an economic crisis that may
ultimately only be resolved by turning again to foreign capital
sources.(33)
B. Argentina's Successful Privatization Experience
By the end of the 1980s, the government of Argentina controlled
over 25% of the country's gross domestic product,(34) and the state
employed 20% of the total national labor force.(35) By 1989 these
state-owned enterprises were incurring huge budget deficits and
suffering from inept management.(36) The government, saddled with
enormous budget deficits,(37) was also unable to make necessary new
investments for modernizing the country's infrastructure.(38)
Absent timely and reliable capital investment from the central
government, performance could only fall among state-owned firms in these
sectors.(39)
Amid hyperinflation,(40) and strong political pressure from the
government workers' unions to perpetuate the state-dominated
situation,(41) President Carlos Menem assumed office in July 1989.(42)
Because President Menem had not advocated any liberalization of the
economy as a candidate for president, and because he was dependent upon
the support of the government workers' unions for his election,(43)
it was not expected that he would pursue privatization policies as
president.(44) However, shortly after assuming office, President Menem
issued a warning to the Argentine people to prepare for
"'major surgery without anesthesia,"'(45) and
directed the enactment of legislation that gave him the authority to
begin privatizing the economy.(46) Within the following three-year
period, the privatization process was largely completed(47) and a
capitalist, free market economy had been formed.(48)
The preferred method of privatization in Argentina has been the
outright sale of the state-owned enterprise to private investors who
immediately assume control of the venture.(49) Importantly, the oil
companies in Argentina were not excluded from privatization efforts.(50)
By 1991, sales of state-owned enterprises resulted in US$4.6 billion in
revenues, and an additional US$7.1 billion in debt conversion.(51)
The state's monopoly in the oil industry was methodically
eliminated through a course of action that began with a presidential
decree that privatized all secondary marginal-production areas and
offered private companies the option to join as partners with the
state-owned YPF oil company in the remaining primary areas.(52) Crude
oil extracted from primary and secondary areas was decreed freely
marketable, and export duties as well as foreign exchange remittances
were removed.(53) Government price controls were likewise eliminated,
allowing oil prices to be determined by free market forces .54 Finally,
in 1991, President Menem implemented the Argentina Plan, which removed
the remaining obstacles to full private exploitation of oil and gas
reserves.(55)
Argentina's national oil company, YPF, was fully privatized
by June of 1993.(56) The sale of YPF was the first divestiture of a
national oil company by a Latin American country.(57) The privatization
of YPF stands as a sterling example of how free market reforms can
increase productivity and profitability while enhancing overall economic
welfare.(58) Although employment in the new private companies was
initially cut by 90%, it is now growing efficiently with 130 new
upstream businesses.(59) In addition to converting a large portion of
the public's automobiles to natural gas, the Argentine economy has
also benefited from increased sales transactions such as purchases of
oil tools from American companies for YPF use.(60)
Argentina's privatization process was successful because it
was implemented as part of an overall market reform process.(61)
Specifically, four main areas were stressed to ensure the success of the
privatization process.(62) First, foreign law firms with expertise in
the legal transactions necessary to the process were consulted to plan
the legal framework necessary for selling the state-owned
enterprises.(63) Second, the government pursued a policy of swift,
outright sales whenever possible, and granted concessions when outright
sale was either prohibited by law or otherwise unattainable.(64) Third,
the government ensured that potential investors, including foreign
investors, were financially solvent and possessed the technical ability
to assume control of the enterprise before allowing the transfer to go
forward.(65) Finally, the government implemented a series of measures to
ensure that the former government workers were not unduly jeopardized in
the transition.(66) By implementing this principled procedure to guide
the sale of state-owned enterprises, Argentina ultimately realized an
astonishing drop in its inflation rate from 1,400% in 1990 to only 6% in
1993.(67)
C. Why Privatization Is a Preferred Economic Policy
There are many reasons why a government would want to privatize
state-owned enterprises. Private ownership may be ideologically
preferred,(68) or it may simply be a means of reducing the public debt
that is routinely incurred by operating state-owned enterprises.(69)
Privatization may also be founded upon the assumption that a privatized
firm will operate more efficiently.(70) Economically, privatization is
desirable because a private enterprise functioning in a competitive
environment will be compelled to make better use of scarce resources to
achieve efficiency.(71) This efficiency standard, in effect, gauges the
nation's economic welfare.(72)
Privatization of state-owned enterprises can also be a way to
attract the investment capital and trained personnel necessary to
modernize a country's infrastructure.(73) In addition to removing
the operating costs of the state-owned enterprise from the general
government budget, privatization can actually generate funds through
sales of assets and from the influx of foreign investment capital which
can be applied to reduce budget defiCitS.(74)
Each government will set privatization priorities based on its own
objectives which will be driven by a unique combination of these
motives.75 In general, there are three reasons why privatization is an
economically sound policy.(76) First, privatization improves the use of
public resources and frees those resources for more important uses.(77)
Second, the operational efficiency of privatized entities is usually
greater and results in the more efficient use of resources.(78) Finally,
privatization has a positive effect on dynamic efficiency.(79) Dynamic
efficiency simply means that the economy as a whole realizes an increase
in investment capital and technological innovation.(80)
Professor Cass has offered a useful metaphor to help visualize the
potentially different operating philosophies of state-owned enterprises
and privately-owned enterprises.(81) A state-owned enterprise whose
purpose is to produce 10,000 pounds of nails annually can easily satisfy
that goal by producing a single nail that weighs 10,000 pounds.(82)
While obviously wasteful and inefficient, the question of whether it is
better to cease production of the 10,000 pound nail immediately or
gradually over time is debatable.(83) As in the cases of Argentina and
Mexico, for example, the government workers' unions often wield
tremendous political influence to continue the state-dominated
situation.(84) However, two fundamental economic principles illustrate
the need to quickly cease the inefficient activity: (1) continued
production of the useless 10,000 pound nail can only lower the
nation's overall economic welfare;(85) and (2) continued employment
of a large proportion of the nation's workforce in the inefficient
activity can also only lower the nation's overall economic
welfare.(86)
The imaginary 10,000 pound nail illustrates, in part, that
privatization of state-owned enterprises cannot be accomplished without
giving due regard to the potential effects on employment.(87) Studies
have shown, however, that postprivatization employment is often higher
than pre-privatization employment, and at most, suffers only a slight,
temporary setback.(88) When unemployment does occur, it tends to be
regionally concentrated(89) and reflects the excessive overstaffing by,
and nonproductivity of, the state-owned enterprise.(90) Unemployment
results from reducing this overstaffing and shutting down non-viable
enterprises rather than merely from privatization itself.(91) One
alternative is for the government to continue to pay the unemployed
until they can find replacement work.(92)
Although an initial burden, these layoffs reflect productivity
pressures that are created because the enterprise no longer has access
to general government funds to make up for operational
inefficiencies.(93) There is some evidence that reductions in the
workforce often result from attrition rather than from layoffs.(94)
Other evidence indicates that workers actually benefit more from the
overall economic stimulation that privatization creates than the initial
losses caused by reductions in the workforce.(95) Although not everyone
necessarily benefits, or shares evenly in the realized gains,
privatization generally increases economic welfare.(96)
Privatization should, as a general rule, be accomplished as
quickly as possible in order to eliminate the drag on the economy that
an unproductive sector can create.(97) Rapid privatization is the better
policy because transitional costs will tend to grow over time.(98) Rapid
privatization can also demonstrate a government's dedication to
free market reforms and liberalism.(99) The reforms achieved in
Argentina, for example, clearly show the country's resolve to make
a clean break with its statist past while basing the future on free
market principles.(100)
III. THE CASE FOR FuLL PRIVATIZATION OF PEMEX
A. Historical Context
Modern Mexico came into being in 1867 when the French Archduke
Maximilian of Hapsburg was executed in Queretaro.(101) The predominant
political figure of the ensuing era was Porfirio Diaz.(102) During the
Diaz administration, oil was discovered by an American, Edward L.
Doheny, in Tampico, Vera Cruz.(103) A favorable investment climate
sponsored by the new administration resulted in a massive influx of
foreign investment capital.(104) By 1911, foreigners owne