THE TWO “POLITICS OF NAFTA”
IN MEXICO
Pamela K. Starr*
T
HE North American Free Trade Agreement shapes and is shaped
by politics in Mexico. The NAFTA brand is used by Mexican politicians to make political points while Mexican politics has prevented the treaty from having a greater positive impact on economic
growth and development in the country. Neither of these statements is
startling, especially given the central role of “NAFTA” in U.S. trade policy and a large and still growing body of literature–both academic and
popular–pointing to political obstacles to needed structural reforms as
the source of a Mexican per capita economic growth rate of less than one
percent over the past twenty-five years. Yet each point contains an interesting and not commonly identified internal story-line. Surprisingly, the
NATFA brand is far less damaged in Mexico than in the United States,
and is thus much less potent as a political and rhetorical tool in Mexican
politics than north of the border. The inability of Mexican governments
to implement needed reforms of tax, competition, labor, energy, and education policies, meanwhile, is not a pure reflection of its most commonly
identified culprit: divided government. Instead it is due to the actors,
among whom government has been divided, and how they have dealt
with Mexico’s transition to democracy. Put simply, the perpetuation of
the economic policy status quo reflects an unstated and often unacknowledged agreement evident in the Mexican political and economic elite during the past quarter century to ensure the “survival of the Institutional
Revolutionary Party (PRI)”–the political party at the heart of Mexico’s
long-standing twentieth century authoritarian regime–regardless of the
economic costs.
I. THE NAFTA BRAND IN MEXICAN POLITICS
Mexican politicians rail against NAFTA at moments of political convenience, namely when giving speeches in peasant communities in southern
Mexico or when the United States fails to meet its treaty obligations such
as opening the U.S. transportation market to Mexican trucks. Yet their
* Pamela K. Starr is Director of the U.S.-Mexico Network @USC, http://college.usc.
edu/usmexnet, and an Associate Professor at the University of Southern California; [email protected].
Prepared for SMU/Tower Center Conference Challenges and Opportunities in
Mexico: Implications for US-Mexico Relations Dallas, Texas 25-26 March 2010
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use of NAFTA as a trade or broader economic policy whipping boy is less
common than one might imagine given the powerful utility of this rhetorical tool in U.S. politics. This is a direct reflection of Mexico’s particular
experience with the agreement and the population’s resulting attitudes
toward it. Mexicans are disappointed with the outcome of the treaty, believe that the United States has benefited more than Mexico, and feel a
visceral discomfort with a treaty that has dramatically increased their
country’s reliance on the United States. Yet a large majority of Mexicans
continue to believe that NAFTA was the right decision for Mexico, that
Mexico has benefitted from the treaty, and that free trade is a generally
good thing. A quick look at poll numbers demonstrates this reality.
In a 2001 survey, fifty-six percent of Mexicans agreed that entering
NAFTA was the right decision for Mexico, forty-four percent agreed that
the treaty has been good for Mexico, and sixty-one percent supported
free trade.1 A 2006 survey showed that fifty-nine percent of Mexicans
still saw free trade as a good thing for the Mexican economy while fiftyfour percent of the U.S. public believed that free trade had been good for
the U.S. economy.2 More tellingly, this survey noted that just twentyseven percent of Mexicans saw free trade as bad for Mexico while fortytwo percent of Americans selected this option.3 A late 2008 Gallup survey, taken in the midst of the “Great Recession,” unsurprisingly shows a
drop in positive sentiments toward NAFTA in both countries, but it also
shows that U.S. attitudes are both more strongly negative and more intensely felt than in Mexico.4 It also shows that in the midst of the deepest
recession in memory in Mexico–one that was imported from the United
States due in large measure to NAFTA–Mexicans who saw NAFTA negatively remained a strikingly low twenty-three percent.5 Negative impressions of NAFTA in the United States, meanwhile, had jumped to fiftythree percent.6 The number of Mexicans who saw NAFTA in a mainly
positive light did indeed fall sharply, down to twenty percent, but this
translated into a sharp jump in those who were undecided about the
treaty’s impact.7 Such public attitudes in Mexico obviously put a damper
on the ability of politicians to use NAFTA as shorthand for bad policy
decisions. What then is the source of this much less negative view of
NAFTA in Mexico than in the United States?
1. Alejandro Moreno, Mexican Public Opinion toward NAFTA and FTAA, in
NAFTA IN THE NEW MILLENNIUM, 167-184 (Edward Chambers & Peter Smith
eds., 2002).
2. CIDE AND COMEXI, MEXICO AND THE WORLD 2006 (2006).
3. Id.
4. Cynthia English, Opinion Briefing: North American Free Trade Agreement, Gallup, Dec. 12, 2008, http://www.gallup.com/poll/113200/Opinion-Briefing-NorthAmerican-Free-Trade-Agreement.aspx?utm_source=email%2Ba%2Bfriend&utm
_medium=email&utm_campaign=sharing&utm_term=Ooinion-Briefing-NorthAmerican-Free-Trade-Agreement&utm_content=morelink (accessed Sept. 1,
2010).
5. Id.
6. Id.
7. Id.
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TWO “POLITICS OF NAFTA” IN MEXICO
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The backlash against NAFTA was much less profound in Mexico than
many expected, especially given its difficult early years and the persistent
opposition of the Mexican left well into the 21st century, for at least four
reasons–the performance of the Mexican economy, the rise of democracy,
an effective anti-poverty program, and migration. In the United States,
the implementation of NAFTA was correlated with two particularly
wrenching economic changes–declining employment in the manufacturing sector and a growing trade deficit. There was a consequently natural
tendency to equate correlation with causality, in spite of the existence of
more important developments affecting these changes including rising
manufacturing productivity and the entry of China into the world trading
system. Mexico’s experience was quite different.
The Mexican economy did not undergo equally difficult economic adjustments in conjunction with NAFTA. Mexico’s painful adjustment to
increased international competition came in the years preceding NAFTA
(marked by the 1986 decision to join the GATT), its adjustment to increased productivity in manufacturing occurred just as manufacturing investment and job opportunities grew due to NAFTA, and its adjustment
to the flood of low-cost Chinese goods entering global markets happened
in conjunction with a NAFTA-induced trade surplus. Further, during the
NAFTA debate and the first year of its operation the Mexican economy
grew strongly and, even when faced with an economic collapse due to the
1994-1995 peso crisis, NAFTA came out looking like a savior rather than
the villain. The collapse of the Mexican peso produced the worst economic crisis in twentieth century Mexico–the economy shrank almost
seven percent, unemployment jumped, and real wages plummeted.
Blame for the crisis, however, fell squarely on the shoulders of formerPresident Carlos Salinas and his administration’s manipulation of
macroeconomic policy. While Salinas’ decision to maintain an overvalued exchange rate policy was partly motivated by the extended debate
on NAFTA in the United States, its additional objective of pulling middle
class voters into the PRI electoral coalition in advance of the 1994 presidential election received the lion’s share of the blame in the media.
Sweetheart deals for bankers arranged by the Salinas administration in
exchange for political support were blamed for the crisis-related collapse
of the banking system. The willingness of the United States to provide a
huge assistance package in the midst of this crisis, meanwhile, was widely
attributed to NAFTA, as was the rapid post-crisis recovery of the Mexican economy. This does not mean that the image of NAFTA did not
suffer in the eyes of the Mexican population in the wake of the crisis. But
the negative impact on NAFTA’s image was smaller and less lasting than
one would have expected.
The NAFTA-era in Mexico is also correlated with the rise of democracy, with the political opposition gaining control of the national legislature in 1997 and of the presidency in 2000. The causal relationship
between NAFTA and democratization in Mexico is the topic of continu-
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ing debate among academics and Mexican pundits. For the average Mexican, however, the relationship is much more simple and basic–some very
good things happened in the NAFTA-era, which helped inoculate
NAFTA from a viscerally negative public reaction.
This is not to say that the Mexican economy did not experience difficult
adjustments that were correlated with the signing of NAFTA. The most
profound adjustment, however, happened in a politically weak sector
with an economic escape valve–small and medium-scale agriculture. As
the theory of modern political economy states, it is not enough to have a
powerful incentive to lobby the government for policy change.8 The capacity to bring sufficient resources to bear on the issues matters even
more and the poverty of small farmers in Mexico ensures they will never
have the financial resources on their own to lobby the government effectively. Their only recourse is to rely on their numbers through organization and protest. But Mexican peasant farmers have long been co-opted
and controlled by PRI-era institutions and dependencies that still operate
in much of rural Mexico. In addition, as the logic of collective action
teaches, individuals who are not geographically concentrated (or in the
internet-era, virtually concentrated) find it difficult to overcome the freerider obstacle to effective organization.9 While organizations of small
and medium-sized farmers did pop up during the early years of NAFTA,
(the most notable being the Zapatistas and the Barzón) their ability to
change government economic policy or seriously tarnish the NAFTA
brand was quite limited.
Two additional factors, The Progresa/Opportunidades anti-poverty program and migration, reduced the incentive for Mexico’s small and medium-sized farmers to invest in organizing to protest their plight.
Initiated during the Zedillo administration and reinforced and expanded
by ensuing administrations, Progresa/Opportunidades is Mexico’s first
highly effective anti-poverty program. It provides economic assistance to
Mexico’s poorest families without consideration of political affiliation, a
first in Mexico, and thereby created an economic backstop for Mexico’s
rural poor. Perhaps more importantly, Mexican farming families with
slightly greater resources had another alternative that lessened their incentive to protest–migration to Northern Mexico and the United States
and reliance on the resulting flow of remittance income. Although it is
difficult to determine the precise causal forces driving different migration
episodes, there is little doubt that the growing difficulties faced by smallscale farming (peasant and capitalist) in Mexico created an incentive to
migrate during the 1990s and 2000s. It is also clear that Mexican migration to the United States in this period evidenced a sudden surge of migrants from “new sending regions” which tended to be concentrated in
8. See Jeffrey Frieden, Method of Analysis: Modern Political Economy, in MODERN
POLITICAL ECONOMY AND LATIN AMERICA: THEORY AND POLICY 35-43 (Jeffry
Frieden, Manuel Pastor Jr. & Michael Tomz eds., 2000).
9. See generally MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION: PUBLIC
GOODS AND THE THEORY OF GROUPS (1965).
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TWO “POLITICS OF NAFTA” IN MEXICO
843
regions characterized by small and medium-scale agriculture;10 anecdotal
accounts point to migration as an explicit economic escape valve for rural
families.11 As a consequence, the largest sector of the Mexican economy
to suffer serious economic costs that were correlated with NAFTA was
also a sector that lacked both the capacity and ultimately the incentive to
pressure the government for policy change and in the process to brand
NAFTA a bad thing.
NAFTA is therefore not a powerful symbol of something gone awry in
Mexico, but neither is it something that Mexican society warmly embraces. This is due in part to the previously mentioned sense of disappointment with a treaty that was massively oversold to the Mexican
public. NAFTA was supposed to be the key to sustained and rapid
growth and development in Mexico–the country’s entry visa into the first
world. It has instead been associated with little significant change in the
living conditions for most Mexicans–for better or for worse. Perhaps
more important are the nature of Mexican nationalism and the persistent
power differential between Mexico and its main NAFTA partner, the
United States.
Post-Revolutionary Mexican nationalism was constructed on a foundation of anti-Americanism created by the need of a weak state to loudly
assert its national sovereignty and independence from the great power
sitting on its northern border whose willingness to intervene in Mexican
affairs was a proven fact, reinforced by the demands of Mexican domestic
politics, and enabled by an economy and society with few links to the
outside world. This anti-Americanism was characterized by a principled
opposition to U.S. intervention throughout the world (even as Mexico
assiduously reassured the United States in private of its loyalty in the
Cold War), an effort to maintain as much public distance as possible between itself and the United States, an extraordinary level of sensitivity to
any appearance of U.S. involvement in Mexican domestic affairs, a tendency to blame the United States for Mexico’s domestic problems, and a
consequently powerful political motivation for each government to prove
its “revolutionary” credentials by lashing out against the United States
and “imperialism.” Yet during the final decades of the twentieth century,
each of the factors motivating Mexico’s post-revolutionary form of antiAmericanism began to fade.12 Without taking this into account it is hard
to explain the limited amount of public opposition to NAFTA, even given
the economic setting, the authoritarian structure of Mexican politics, and
the heavy influence of government over the media.
10. See Elena Zúñiga Herrera & Paula Leite, Los procesos contemporánios de la
migración México-Estados Unidos: Una perspectiva regional, in MIGRACIÓN MÉXICO-ESTADOS UNIDOS: IMPLICACIONS Y RETOS PARA AMBOS PAÍSES 49-82 (Elena
Zúñiga Herrera et al., eds., 2006).
11. See generally LA ECONOMIA POLITICA DE LA MIGRACION INTERNACIONAL EN PUEBLA Y VERACRUZ: SIETE CASOS DE ESTUDIO (Leigh Binford ed. 2004).
12. See Soledad Loaeza, The Changing Face of Mexican Nationalism, in THE NAFTA
DEBATE: GRAPPLING WITH UNCONVENTIONAL ISSUES 145-57 (M. Delal Baer &
Sidney Weintraub eds., 1994).
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As early as the 1970s, globalization began to affect Mexico as foreign
direct investment increased, migration and other sources of citizen contact with the world beyond Mexico grew, and Mexican foreign policy for
the first time embraced the world. This increased exposure to the world
helped a society that was educated by a shared history in which contact
with foreigners was rarely benign to gradually see the world with less
trepidation and fear.13 With regard to the United States, this was reinforced by several factors. First, Mexican migration north underwent significant growth beginning in the 1970s leading to a marked increase in the
number of Mexicans with personal knowledge of the United States and
its citizens.14 This experience helped undermine many Mexican myths
about “gringos” and thereby soften Mexico’s historic fear and mistrust of
its northern neighbor. Second, advances in communication technology
further expanded Mexico’s exposure to U.S. culture and increased contact between Mexican and American societies with a similar effect.15
Third, U.S. intervention in Mexican domestic affairs from the 1930s forward was a shadow of its former self, fading into a policy of “benign neglect” throughout the 1950s and 1960s. Although U.S. meddling in
Mexican affairs revived a bit in the mid-1980s, this was temporary and
minor compared to the past and faded completely with the 1986 Reykjavik summit marking the beginning of the end of the Cold War. By the
early 1990s, U.S. policy toward Mexico evidenced a clear bias against actions that might create the impression that the United States was trying to
influence Mexican domestic affairs. As a result, Mexican fears of a hostile world and a threatening neighbor began to subside somewhat.16
These same factors have also undermined the utility of anti-American
rhetoric in Mexican domestic politics, especially when combined with the
economy’s considerable reliance on U.S. investment, tourism, and migrant employment and the resulting need to ensure that Americans see
Mexico as a friendly partner.
To say that Mexico’s post-revolutionary anti-Americanism has faded,
however, does not mean that Mexican mistrust of the United States and
its motives has disappeared. Quite to the contrary, the power asymmetry
between the two countries, the weight of history, and cultural differences
ensure that mistrust and misunderstanding will continue to characterize
the bilateral relationship. As such, it is hardly surprising that Mexicans
find it difficult to like a trade treaty that has deepened Mexican dependence on the United States and whose very name symbolizes the “surrender” of Mexican autonomy under the weight of geographic determinism.
13. See id.
14. See Frank Bean & Gillian Stevens, America’s Newcomers and the Dynamics of
Diversity, in MEXICO AND UNAUTHORIZED MIGRATION 42-65 (Russell Sage ed.
2003).
15. See Pamela K. Starr, Pax Americana in Latin America: The Hegemony behind Free
Trade, in BETWEEN COMPLIANCE AND CONFLICT: EAST ASIA, LATIN AMERICA,
AND THE “NEW” PAX AMERICANA 77-109 (Jorge I. Dominguez & Kim ByungKook eds., 2005).
16. See Loaeza, supra note 12.
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TWO “POLITICS OF NAFTA” IN MEXICO
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Mexicans strongly dislike the idea of being reliant on the United States,
yet they see few alternatives in the current global setting. The majority of
Mexicans thus dislikes NAFTA and the loss of sovereignty it embodies,
but they have no wish to overturn it in an effort to return to the preNAFTA past.
The use of NAFTA in Mexican politics affirms these mixed popular
sentiments toward the treaty. While politicians with a strong base of support in regions dominated by peasant agriculture continue to rail against
NAFTA (for example, Andres Manuel Lopez Obrador and his faction of
the left-leaning Democratic Revolutionary Party (PRD), and a small but
vocal segment of the former ruling Institutional Revolutionary Party),
most other politicians rarely mention the treaty. There is a notable exception to this rule: when the United States refuses to honor its commitments under the treaty thereby hitting the highly sensitive nerve of a
weak country that feels mistreated and disrespected by a strong neighbor,
and whose weakness and dependence leaves it virtually no recourse beyond rhetoric. Yet even in these cases, the villain is not NAFTA but the
United States. NAFTA simply does not resonate strongly in Mexican
politics.
II. THE POLITICS OF MAKING NAFTA WORK
The other “politics of NAFTA” revolves around the persistent inability
of the Mexican government to implement a series of structural reforms
deemed essential to maximizing NAFTA’s ability, and that of Mexico’s
other free trade treaties, to encourage export-led growth and development throughout the country. This difficulty clearly owes much to the
divided government that has accompanied the rise of Mexican democracy
and the obstacle it poses to building the legislative majorities needed to
approve controversial reforms of tax, competition, labor, energy, and education policies. Yet this explanation is insufficient since the political impediments to economic restructuring in these five key areas predate
Mexico’s experience with divided government. Miguel de la Madrid
(1983-1988), Carlos Salinas (1989-1994), and Ernesto Zedillo (1995-2000)
found it equally difficult to gain legislative approval for this set of economic reforms and thus bequeathed to democratic Mexico this long
agenda of pending policy reform.
The core obstacle to effective economic policy-making in Mexico is not
simply divided government but the actors among whom government
came to be divided and how they dealt with both the declining legitimacy
of the PRI-led authoritarian regime and Mexico’s ensuing transition to
democracy. For a quarter century, the power of the Institutional Revolutionary Party to guarantee governance has limited the scope of the economic reform Mexican presidents–whether from the PRI or the
opposition National Action Party (PAN)–could undertake. Without support from the PRI, the party that dominated the national legislature and
Mexican state houses, populated and directed the national bureaucracy,
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and strongly influenced key national unions, there would be no restructuring of the Mexican economy of any sort. Yet with the PRI’s support,
this restructuring would inevitably be truncated by the demands of the
party and its allies. This political reality not only drove President Miguel
de la Madrid (1983-1988) to abandon his early experiment with democratic reform when party members rebelled against the lost access to office and the economic opportunities that implied. It ended De la
Madrid’s effort to increase efficiency in Pemex, the national petroleum
company (the union would have lost important sources of revenue), informed his decision to undertake privatization slowly and limit it mostly
to small, non-strategic firms (to protect unionized jobs), and ensured that
cutbacks to the state bureaucracy would be restricted. Deficit reduction
under De la Madrid thus relied on cuts to investment spending, subsidies
and price supports, and worker wages. While de la Madrid’s policies did
reduce the reach of the state, they were designed to do so without dramatically diminishing its size by eliminating jobs.
His parallel effort to stabilize the economy by cutting the country’s
twin deficits and reducing the state’s role in the economy was equally
influenced by politics. This strategy was explicitly implemented with an
eye to regaining the support of a historically indispensable ally of the
PRI–big business. Reducing the budget deficit, for example, did not involve significant tax increases on business, despite the government’s desperate need for resources in 1983 and again following the 1985-1986
collapse in international oil prices. De la Madrid’s governing logic was
clear: without business support there would be no investment and growth,
and without growth the PRI system could falter and potentially even lose
power in the near future, and without PRI control there would be no
economic reform.17 Proponents of reform thus had to walk a fine line.
They had to regain business support, but do so without damaging the
interests of the core PRI constituencies in the unions and the government
bureaucracy so much that party unity and support for De la Madrid’s
economic policies would be threatened (the defection of the PRI’s socalled Democrat Current in 1987 and the PRI’s near loss in the 1988 presidential election indicates that this policy was less successful than De la
Madrid hoped).
The “survival of the PRI syndrome” was even more evident during the
presidency of Carlos Salinas, the core phase of Mexico’s economic restructuring. To win over a private sector that remained unconvinced by
De la Madrid’s efforts to stabilize and restructure the economy, President
Salinas profoundly deepened the privatization process and included
banking and telecommunications, sectors central to the operation of a
modern economy. In the process, he provided the new owners a protected domestic market with only limited regulation that allowed them to
17. See generally MIGUEL DE LA MADRID HURTADO (with collaboration of Alejandra
Lajous), CAMBIO DE RUMBO. TESTIMONIO DE UNA PRESIDENCIA, 1982-1988
(2004).
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TWO “POLITICS OF NAFTA” IN MEXICO
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profit handsomely at the expense of Mexican consumers and taxpayers.
Following a similar logic, Salinas broke the television monopoly but permitted only one additional national network to be run by a close ally who
quickly adapted to operating as part of a duopoly. And, of course, Salinas negotiated and oversaw the approval of the North American Free
Trade Agreement to lock-in Mexico’s shift from a state-directed to a market-led development model and thus lock-in the confidence of Mexican
and international investors. The central objective of these reforms was
not economic efficiency (although this remained a long-term goal of the
administration), but instead the building of the investor confidence
needed to produce the economic growth required for the PRI’s political
victories.
This political bottom-line is even more evident in the long list of reforms that were blocked, watered down, or never even attempted during
the Salinas years because of their negative impact on the PRI. Restructuring and reforming the energy sector, education policy, labor law, and
the state bureaucracy were deemed too damaging to the interests of key
PRI constituencies and apt to undermine party unity and its support for
the Salinas reform project.18 In the energy sector, Salinas privatized
some secondary petrochemicals, transportation, and storage and forced
through a restructuring of Pemex, supposedly in preparation for the
privatization of some of its subsidiaries. That privatization, however,
never took place nor were general prohibitions on foreign investment in
exploration and production eliminated. The equally inefficient electricity
sector, meanwhile, passed through the Salinas years untouched by reform. In part this reflected real popular opposition to a reversal of nationalizations, especially in the petroleum sector, that had come to
represent the highest expression of Mexican sovereignty relative to the
United States and its corporations. But these decisions were also shaped
by the strong opposition to reform from the powerful Pemex workers
union (a key component of the PRI union structure) and other power
centers in the party. It seems likely Salinas concluded that forcing
through a far-reaching reform in the energy sector could have produced a
rebellion in the PRI, an exorbitant and unacceptable political cost to pay.
This was especially true as rising private sector confidence and the rapidly
advancing NAFTA negotiations undercut the likely net gain in confidence that could have resulted from a Pemex privatization. Despite the
profound economic advantages of opening Pemex to increased private
participation, the short-term political costs of doing so outweighed the
likely political and economic benefits. Real energy reform would have to
wait.
A similar dilemma transformed the much-ballyhooed Salinas education
reform into a “reformita” with almost no impact on the quality of secondary education in Mexico. The reform focused on decentralization in the
18. See Pamela K. Starr, Monetary Mismanagement and Inadvertent Democratization
in Technocratic Mexico, 33:4 STUD. IN COMP. INT’L DEV. 35-65 (1999).
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belief that transferring the responsibility for education policy from the
federal to state and local control would bring it closer to the end user.
This should make education policy more responsive to parental demands
and improve its quality. The potentially positive impact of this strategy
was undermined by teachers union demands that it retain complete control over the assignments of all teachers and principals and that promotions continue to be based on tenure rather than performance. As a
result, it was virtually impossible for parents or principals to force out or
penalize poorly performing teachers. Ultimately, the only real change
was that the union now had a second opportunity to negotiate for wage
increases at the state as well as the federal level. The reason for this
pathetic result is the political power of the teachers union, both as the
largest union within the PRI and as a union facing strong internal opposition from a left-leaning faction allied with Salinas’s arch political enemy,
Cuauhtemoc Cardenas and his Democratic Revolutionary Party (PRD).
Salinas needed to create the impression that education reform—a key
tool for signaling the rosy future of the Mexican economy for outside
investors—was under way, and that decentralization is indeed considered
to be an important element of a truly accountable educational system.
But Salinas also needed to reinforce the position of the new leader of the
teachers union, his personal selection for the post after replacing a less
cooperative personality. He thus signed on to a policy that looked nice
on paper but would have little real positive impact on the quality of education in Mexico.
Salinas never even attempted to modernize the labor code nor did he
seriously consider eliminating any government ministries. He also abandoned what began as a serious effort to restructure the PRI away from its
corporatist/union foundation toward an individual/territorial structure
that should have been more amenable to the broad “Salinista” policy
agenda. Like his predecessor, Salinas quickly faced the strong opposition
of the party’s traditional power centers, which posed a greater threat to
party unity than most of his proposed policy reforms. Cornered by his
internal opponents and having made his political point—support me or I
will hit you where it really hurts—Salinas surrendered to the reality that
he needed a strong, unified PRI to govern. The survival of the PRI, including its internal structure and traditional mode of operation, thus defined the reach of Salinas’s drive for structural reform.
Unlike Salinas—who had hoped to lead an eventually-restructured PRI
that would retain power well into the future and gradually complete the
restructuring of the Mexican economy—Ernesto Zedillo disliked politics,
mistrusted the PRI, and wanted to have as little to do with the party as
possible. President Zedillo quickly learned that he needed the PRI’s support to govern the country as much as his predecessor did. He could not
obtain legislative approval for a post-peso crisis package of measures
needed to reestablish macroeconomic stability and growth, and thereby
ensure the survival of Mexico’s market-based economy, without the sup-
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TWO “POLITICS OF NAFTA” IN MEXICO
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port of the PRI. Following this early lesson, Zedillo continued to rely on
the legislative support of the PRI for the remainder of his presidency,
albeit often in alliance with the PAN, especially after the PRI’s 1997 loss
of majority control of the national legislature. But there were clear limits
on what Zedillo could ask of the PRI. The party’s traditional constituencies were incensed by Zedillo’s demand that they support his unpopular
post-crisis economic package and his ensuing unwillingness to repay the
favor by helping the PRI avoid paying the political cost for its loyalty in
the 1997 midterm elections. Zedillo’s poor relationship with the PRI
made it completely impossible for him to gain party support for any policy change that might negatively affect the party’s interests such as labor,
energy, and education reform. Given the president’s absolute refusal to
invest his political capital in the party, the PRI became completely unwilling to risk its political survival by sticking its neck out again for the
president.19
With regard to taxation and competition policy, Zedillo, along with the
entire political system, was increasingly boxed in by the unintended consequences of President Salinas’s supposed privatization success story. By
creating a series of private monopolies and oligopolies with the aim of
winning private sector allies for the PRI while reviving investment in key
economic sectors, Salinas reinforced the traditionally concentrated structure of the Mexican economy in a big way. Rather than rebuilding the
traditional PRI-business alliance designed to strengthen the PRI, the result was the construction of a business elite with enormous independent
economic and political resources. This new elite could be a formidable
ally, but would also prove to be a daunting impediment to fiscal reform
and competition policy. This new elite also faced a weakened PRI system. The party was divided between supporters and opponents of the
market reform, alienated from the president who was the traditional
leader of the party and the system, and soon would be without a legislative majority for the first time in its history. This circumstance prevented
Zedillo from raising taxes, reducing tax evasion, or significantly strengthening competition policy, especially in the all-important telecommunications sector. Economic policy change of the past and present that was
designed first and foremost to promote the PRI’s political survival once
again blocked progress on Mexico’s long list of needed economic reforms.
The 2000 election of Vicente Fox—Mexico’s first non-PRI president in
seventy-one years—made matters worse, but not simply because his National Action Party lacked majorities in both houses of Congress. The
opposition president would take the reins of a political order still dominated by the PRI and the institutions it created to perpetuate authoritarian rule rather than promote democratic governance.20 Fox faced an
early, existential decision about how to govern in this political circum19. See id.
20. See Pamela K. Starr, Neither Populism nor the Rule of Law: The Future of Market
Reform in Mexico, 15 L. & BUS. REV. AM. 127-151 (2009).
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stance. He could “kill the PRI,” as one of his closest advisers put it, by
throwing a sequence of PRI leaders into jail on corruption charges, making it known who was next in line, and daring them to defy the president.
Alternatively, he could attempt to accommodate the former ruling party
by bringing it into a grand governing alliance that would implement a
series of democratic and market-reinforcing policies. Although the first
option was tempting (and Fox would return to its tactics at several points
early in his presidency seemingly to coerce the PRI to cooperate), the
second was much more in tune with Fox’s personality and his sense that
Mexico’s first opposition president ought to be a conciliator and a unifier,
and thus he chose this course of action. Fox made a similar decision
about his relations with the private sector: conciliate in the belief that all
Mexicans of good faith would join together to help make Mexico’s transition to democracy a great success.
Once Fox decided to govern with the PRI, he was placed in a very
similar position as his three presidential predecessors: he needed to ensure the survival of the PRI to guarantee effective governance. In other
words, once the PRI found its bearings following the traumatic experience of losing the presidency for the first time in its history, the PRI
found its bearings, (and it was helped along the way by several key political missteps by the new administration and its supposed allies in the PAN,
Fox faced a powerful political rival capable of protecting its interests in
exchange for any legislative cooperation it might offer.21 The PAN’s
drubbing by the PRI in the 2003 midterm elections made a bad situation
worse, but it was not the root of the problem. On the business side, Fox
allowed the private sector to capture key regulatory bodies, placed a former employee of the nation’s largest television network in charge of the
ministry of communication and transport, never addressed competition
policy, and promoted a fiscal reform that called for increasing consumption taxes while reducing the highest income tax rates. This performance
reflects Fox’s personal predilections as well as a growing competition between the PRI and the PAN for the electoral support of the business elite.
Neither party was willing to risk alienating a potentially powerful ally by
promoting policies to increase competition or raise business taxes. Although the precise details of each of failed policy reform tell a slightly
different tale (fiscal, labor, energy, and education) they all share a common theme: the PRI (and business) opposition to reforms that would
harm its parochial interests regardless of the benefit to the nation.
Fox gambled that preserving the PRI and conciliating the business elite
would promote governance and real legislative progress toward implementing key reforms, but the bet did not pay off. It instead perpetuated
the power of key institutions inherited from the authoritarian past, often
tied to the PRI, and strongly opposed to further structural reform including: a corrupt union movement that exists to enrich itself and the PRI at
the expense of workers and broader economic efficiency; political parties
21. See id.
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851
whose members live off the government dole (a PRI characteristic that
has infected all political parties in Mexico); and a coddled private sector
lacking incentives to expand its global competiveness. To compensate for
the lack of reform in the fiscal sector, the Fox government took advantage of high international oil prices and ordered Pemex to maximize production at the expense of both exploration and long-term productivity in
the affected fields. Fox thus passed on to his successor the political/economic status quo he had inherited from Mexico’s authoritarian past, albeit now with oil production in decline.
Felipe Calderon entered office in December 2006 without a legislative
majority and with the legitimacy of his presidency in question and his
capacity to govern in doubt.22 Facing the concerted and unrelenting opposition of the left-leaning PRD and its losing presidential candidate Andres Manuel Lopez Obrador, Felipe Calderon had little option other than
to double down on Fox’s bet. Since the PRD refused to recognize Calderon’s victory in the contested July 2006 presidential election, there was
very little likelihood that the party’s legislators would be willing to work
with his government at all, much less to strengthen a market-based economic model the PRD still hesitated to embrace. Calderon’s only hope
for building a governing coalition in the legislature was to form an alliance with the PRI.23 But working with the PRI meant, once again, placing that party in the legislative driver’s seat from which it could protect its
interests and those of its union allies.
This strategy actually bore some fruit during Calderon’s first year in
office: a revision of the government workers’ pension system, a limited
but still significant fiscal reform, and a noteworthy package of changes in
judicial and security policy. The PRI’s asking price for this included
dropping proposals to cut government spending by eliminating entire
ministries and reducing the size of automatic transfers to state governments (dominated by the PRI), guaranteeing an increased flow of investment funds to an unreformed and still massively inefficient Pemex (and
thus to the union), increased party influence over the previously independent election oversight board (the Federal Electoral Commission), and
the ability to argue that the PRI was the responsible opposition working
to improve the president’s proposals and thereby “governing from the
legislature.” Following this semi-productive first year, however, the Calderon–PRI alliance of convenience stalled over a proposal to revise energy legislation to allow private investment in petroleum exploration and
production.24 Over a year of negotiation and compromise resulted in another “reformita” that is likely to have little positive impact on Pemex’s
bottom line. Although the tale of this legislative initiative is long and
complicated, the basic story line is a familiar one: the PRI ultimately refused to risk supporting legislation that risked dividing its ranks, under22. See id.
23. See id.
24. See id.
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LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16
mining popular support, and harming its chances of recovering the
presidency in 2012. The education reform followed the Salinas-era script:
it looked great on paper but by placing the union and its allies at the
education ministry in charge of implementation the result has been a
marginal improvement at best.
President Calderon initially enjoyed an important degree of flexibility
relative to the private sector because of the threat to business interests
posed by the near victory of the PRD’s Lopez Obrador in the 2006 presidential election. This was magnified by his promise to use his party’s
power in the legislature (the PRD and its allies controlled nearly a third
of the legislature) and on the streets to prevent Calderon from governing.
The threat of a Lopez Obrador victory united the business community
behind Calderon’s presidential campaign, and his continuing threat to political stability made the business elite hesitant to confront the government directly, even when this translated into a new tax law that
eliminated corporate tax loopholes and thus significantly increased their
tax bill. The business elite’s support for Calderon always had its limits,
however (progress toward increasing competition in the telecommunications sector has been truncated at best), and it weakened markedly as the
threat from Lopez Obrador and the left receded.
The outcome of the 2009 midterm elections further weakened President Calderon—his party lost badly while the PRI won a majority in the
lower house of Congress—and placed the PRI in nearly complete control
of the legislative agenda, although it still lack a majority in the Senate. In
conjunction with the political jockeying associated with a series of key
gubernatorial elections in 2010, this new correlation of political forces terminated the PRI–PAN legislative alliance of convenience. With the PRI
focused on 2012 and the private sector holding the electoral purse strings,
there is very little hope for additional forward movement on economic
reforms during the remainder of the Calderon presidency.
The pivotal position of the PRI in Mexico’s political system—whether
under an authoritarian or a democratic guise—made its unity and survival
essential to effective governance throughout the past quarter century.
There likely would not have been economic stabilization and structural
reform without the support of the PRI and its union allies. The PRI’s
internal structure and mode of operation, however, inevitably made it a
formidable obstacle to effective economic restructuring and the construction of an efficient market economy in Mexico. This dynamic forced five
presidents, both authoritarian and democratic, to truncate reform in order to ensure the survival of the PRI and thereby have at least the hope
of implementing some policy advances. One unintended consequence of
this was to reinforce the concentration of economic power in Mexico, but
now in the hands of a business elite that operates independent of the
government or any political party, that is as powerful as, or more powerful than, the government, and that forms another potent barrier to market-enhancing reforms. A final unintended consequence of a political/
2010]
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853
economic strategy based on preserving the PRI was the construction of a
market economy unevenly competitive on global markets and thus unable to take full advantage of the opportunities offered by NAFTA and
other trade treaties signed by the Mexican government since the mid1990s.
854
LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16
THE ADMINISTRATION OF DECLINE:
MEXICO’S LOOMING OIL CRISIS
Duncan Wood*
I. INTRODUCTION
I
N November 2008 Mexico’s national Congress passed reform legislation that was hailed by the Calderon administration as a major step
forward in the modernization of the Mexican energy sector. After
months of hard negotiation between the two major parties and intense
public debate, the legislation that finally emerged from the Congress was,
in fact, far less ambitious than the proposal that Calderon had sent to the
legislature. To many it seemed as though the entire reform package, although a positive step in the right direction, would do little to correct the
multiple problems faced by Mexico’s oil industry.
This paper examines the process and politics of energy reform in Mexico during the Calderon administration and argues that the ultimately
gridlocked negotiations between President Felipe Calderon’s ruling Partido de Acción Nacional (P.A.N.) and the dominant party in the Congress, the Partido Revolucionario Institucional (P.R.I.), have resulted in a
future for Mexico that will likely see the country importing oil. Since the
reform process in 2008 was hijacked by political considerations by the
opposition, the mid-term elections in 2009 saw a return to majority status
for the PRI, meaning that further oil reforms are highly unlikely to pass
before the end of the Calderon mandate in 2012. Further, this paper argues that Mexico’s oil future will only be decided once the newly determined fiscal and psychological impact of the country’s change to an oil
importer hits the country’s political elite.
II. A BRIEF HISTORY OF MEXICAN OIL: FROM GLORIOUS
REVOLUTION TO UNSTOPPABLE DECLINE
When oil was discovered in Mexico’s Faja de Oro in 1910 by the British-owned company Mexican Eagle, an oil rush began that spread far beyond Mexico’s borders. The instantaneous and fabulous wealth created
for Sir Weetman Pearson (later Lord Cowdray) by the discovery of the
Potrero de Llano well meant that other, primarily U.S., firms entered the
Mexican market seeking to discover such untold riches for themselves. In
* Duncan Wood, Center for Strategic & International Studies, Senior Associate
(Non-Resident), William E. Simon Chair in Political Economy.
855
856
LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16
the space of a few years, Mexico had become the world’s second largest
oil producer, supplying one fifth of U.S. demand.
But at the same time, due to the ongoing struggles of the revolution,
political turmoil was beginning to affect the Mexican climate for production, as well as the relationship between foreign investors and the government. By 1918 Lord Cowdray had given up his interests in Mexican oil by
selling out to Shell. The revolution began to impact the production levels
in the oil fields, but more importantly the Constitution of 1917 had
changed the balance of power between the private and public sectors in
petroleum. By enshrining the principle of national ownership of sub-soil
resources, the Constitution overturned the guiding principle of the Dı́az
regime and made foreign investors increasingly nervous about the security of their business holdings. The foreign investors began to look elsewhere for oil-related opportunities. The issue of oil became firmly
established as a thorn in the side of United States-Mexican relations as
Washington threatened a succession of Mexican presidents in defense of
U.S. oil interests. After reaching almost half a million barrels a day in the
early 1920s, Mexican oil production fell by almost eighty percent in the
next ten years.1
Although Mexico was soon left behind in terms of production levels
and technology, its nationalization and the creation of PEMEX in 1938
set a precedent that would be followed years later around the world. The
National Oil Company (N.O.C.) would become a model copied at different times and places, involving very different business strategies and rationales, and ultimately the N.O.C.’s would come to challenge the
privately-owned International Oil Companies (I.O.C.’s) in international
markets due to their control of reserves.
III. EARLY YEARS
After the creation of PEMEX in 1938 by presidential decree, the oil
industry did indeed run into difficult times in Mexico. The loss of foreign
capital, technology, and innovation ultimately lead to significantly declined production. Although there was never any doubt about the oil
wealth under Mexico’s soil, getting to it was a perpetual challenge. So
why had Cardenas decided to nationalize oil? Despite the huge economic
costs involved, he had chosen that particular option in response to pressure from the unions and nationalists and because it was another way to
utilize anti-yanquismo to consolidate internal control. As is so often the
case in the annals of Mexican history, dictates of domestic politics triumphed over economic pragmatism and long-term planning.
At the same time, the costs in terms of international relations were
relatively minor. Given the increasing tensions in Europe and the slide
into the Second World War, neither Britain, nor more importantly the
1. See generally LAURA RANDALL, THE POLITICAL ECONOMY
(1989).
OF
MEXICAN OIL
2010]
ADMINISTRATION OF DECLINE
857
United States, was willing to risk alienating Mexico at a time when the
country’s oil would be of enormous strategic importance. Moreover,
PEMEX rapidly consolidated itself in the Mexican public’s imagination
as the representative of national oil sovereignty, firmly establishing itself
alongside other national symbols and myths in the Mexican political pantheon. Until 1958, multiple risk contracts were permitted under Mexican
law, involving cooperation with predominantly U.S. firms. But the 1958
Ley Reglamentaria del Artı́culo 27 Constitucional definitively prohibited
such activities, concentrating power once and for all in the state and in
PEMEX. The long term consequences of this focus on sovereignty, state
control, and national pride would only become apparent much later.2
IV. BOOM TIME AGAIN
Although Mexico would become an oil importer in the early 1970s, the
major discoveries of that same decade once again established the country
and PEMEX as central actors in the international oil system, particularly
given that Mexico was not an OPEC member state. The flow of Mexican
oil onto global markets, particularly to the United States, was of vital
importance in stemming the growing power of OPEC in the late 1970s
and early 1980s. It was at this time that PEMEX began to assume its
current legal and business form. The dramatic rise in oil production
(from less than a million barrels a day in 1976 to almost three million day
by 1983) and exports served to internationalize the company to a certain
extent. But of far greater importance was the leadership of Jorge Dı́az
Serrano, director of PEMEX between 1976 and 1981. Despite his later
conviction on charges of fraud and embezzlement, Dı́az Serrano’s understanding of the oil business, of the sector’s importance for Mexican economic growth, and, most importantly, of oil production maximization,
were crucial in establishing PEMEX on an international level. The discovery of the Cantarell oil field in the Gulf of Mexico occurred during
this time, and Dı́az Serrano was instrumental in developing the field to its
full potential. Discovered in 1976 and in production by 1979, Cantarell
was to become the most important field for Mexican oil production and
the second largest oil field in the world. It would not be an exaggeration
to say that Cantarell single-handedly saved PEMEX’s position and Mexico’s economy. Also during the 1970s, Mexico became a world leader in
petrochemical production after significant governmental investment in
the sector.3
A third factor in transforming PEMEX in the 1980s was the pressure
imposed by the debt crisis. Mexico struggled to meet its international
debt obligations as the drive for foreign currency intensified and the
Washington Consensus began to have its full impact on Mexican eco2. See generally LORENZO MEYER & ISIDRO MORALES, PETRÓLEO Y NACIÓN: LA
POLÍTICA PETROLERA EN MÉXICO (1900-1987) (1990).
3. See generally ISIDRO MORALES, CECILLIA ESCALANTE, & ROCIO VARGAS, LA
FORMACIÓN DE LA POLÍTICA PETROLERA EN MÉXICO, 1970-1986 (1988).
858
LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16
nomic policy-making, and PEMEX was forced to concentrate its efforts
on maximizing production as a guarantee of the country’s economic reputation and for access to future credit. The culmination of these efforts
was to restore PEMEX’s balance sheet, strengthening its position as an
international oil company. But at the same time, the efforts served to
prove that PEMEX was central to the Mexican government’s fiscal viability and that the destiny of the company was to be determined in accordance with the financial needs of the government, not the dictates of
efficiency, good business practices, and competitiveness.
V. CONTEMPORARY PROBLEMS AND THE
LOOMING CRISIS
Mexico’s need for oil revenues was further compounded by the peso
crisis of 1994. The continued treatment of the company as a cash cow for
the government became unavoidably entrenched in this period, and came
to be seen as an entirely normal state of affairs. The Mexican government had now used PEMEX as the core of its income for so long that it
had become almost impossible for the government to detach itself from
oil revenues. With PEMEX providing approximately one third of all government revenues, successive governments have been able to avoid the
thorny issue of fiscal reform so long as the funds have kept flowing from
PEMEX into government coffers.
But, more importantly, the steady and aggressive milking of the company as a source of fiscal revenue for the state has become the single
biggest problem facing PEMEX today. With the government taking up
to eighty percent of income, there has been little left over for investment
in new exploration, infrastructure, and technological innovation. This has
led PEMEX to fall behind its international counterparts since the 1980s
due to its failure to develop new technologies and new production fields.
The boon bestowed by Cantarell has turned out to be a double-edged
sword: it gave PEMEX the production it needs to satisfy national and
export demand, but also blinded the company’s management and the
government to the need for a long-term strategic approach to oil
production.
Cantarell’s fall over the past few years has been precipitous. From a
high point of 2.136 million barrels per day (bpd) in 2004, production had
declined to only 545 thousand bpd by the end of 2009. Cantarell was the
mainstay of Mexican production for almost three decades, and its rapid
decline has pushed PEMEX to scramble for alternatives. Lacking the
technological and technical capacity to venture successfully into deep
water exploration, where it is believed most of Mexico’s remaining
reserves are to be found (estimated between thirty to fifty billion barrels),
PEMEX has had to look to existing wells to boost production.
2010]
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859
CANTARELL’S DECLINE
Source: Comisión Nacional de Hidrocarburos, Reporte de Indicadores de Explotación al 23
de mayo de 2010, http://www.cnh.gob.mx/.
This loss of over one and a half million barrels a day in oil production
has been partially offset by increased production in fields such as KuMaloob-Zaap (K.M.Z.), which in 2008 surpassed Cantarell as the nation’s
highest producing oil field and continues to pump out around 850 thousand bpd. K.M.Z. will begin to decline within the next three to five years,
but in the short term, it has helped to reduce the catastrophe for
PEMEX.
KMZ PRODUCTION
Source: Comisión Nacional de Hidrocarburos, Reporte de Indicadores de Explotación al 23
de mayo de 2010, http://www.cnh.gob.mx/.
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LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16
But, other projects that have been feted by PEMEX as holding the key
to saving Mexico’s oil production have not fared so well. A number of
new oil fields have seen their potential as replacement fields for Cantarell
exaggerated by PEMEX and the government, which has seriously weakened faith in such announcements.4 PEMEX’s best bet under the Calderon administration is Chicontepec. This field, in small-scale production
since the early part of the 20th century was, according to government
estimates, supposed to be producing over 100,000 bpd by the end of 2009.
This has not been the case, however, and the field had only reached
29,000 bpd by December 2009.5 Chicontepec holds massive reserves of
oil, but is also highly complicated. Covering an area of 3800 km2, it is
estimated that the total reserves may reach 17.7 billion barrels. The government has estimated that by 2017 Chicontepec could produce between
550 and 700 thousand barrels per day. This will require huge investment,
the development and application of new technologies, and a lot of time.
The extra production has failed to materialize despite massive investment by PEMEX, the drilling of hundreds of wells, and large-scale environmental degradation. This is mainly due to the complex geological
structure of the field, which is marked by thousands of small pockets of
oil in difficult rock formations. This structure makes it extremely difficult
and costly to retrieve the oil deposits. Chicontepec reserves are considered low quality oil held in low permeability rock with low pressure in the
reserve, thus resulting in highly complex production.
Therefore, Mexico’s national oil production has fallen dramatically.
From its high point in 2004 of almost 3.4 million bpd, PEMEX now produces only 2.6 million bpd.6 This loss of almost 800 thousand bpd from its
peak and over half a million bpd since the beginning of the twenty first
century threatens PEMEX’s economic viability, government fiscal balances, and the national balance of payments-not to mention national energy security. Although PEMEX authorities have promised that
production will not fall below 2.5 million bpd in the next few years and
that production will hopefully rise to 3.3 million bpd by 2024, there is
little evidence of a coherent plan to make this happen, despite the publication and Congressional acceptance of a National Energy Strategy in
2010.7
4. See generally DAVID SHIELDS, PEMEX: LA REFORMA PETROLERA (2005).
5. See Comisión Nacional de Hidrocarburos, Reporte de Indicadores de Explotación
al 15 de agosto de 2010, http://www.cnh.gob.mx/.
6. Id.
7. Carlos Manuel Rodriguez, Pemex May Need to Invest More Than $25 Billion
Yearly (Update2), BLOOMBERG BUSINESSWEEK, Apr. 30, 2010, http://www.business
week.com/news/2010-04-30/pemex-may-need-to-invest-more-than-25-billionyearly-update2-.html.
2010]
861
ADMINISTRATION OF DECLINE
MEXICAN NATIONAL OIL PRODUCTION
Source: Comisión Nacional de Hidrocarburos, Reporte de Indicadores de Explotación al 23
de mayo de 2010, http://www.cnh.gob.mx/.
As Mexico’s production has declined, so have its oil exports. As one of
the most important sources of oil to the United States, this decline has
obvious relevance for both U.S. energy security and for the relationship
between the countries. In order to keep exports as high as possible,
PEMEX has begun to resort to some desperate tactics, even sacrificing
supplies of crude to its petrochemical industry to keep the oil flowing
northwards.8
Thousands of barrels daily
DECLINING EXPORTS
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1870.33
1817.12
1792.73
1686
1403
year 2004 year 2005
1279
year 2006 year 2007 year 2008 year 2009
Source: PEMEX, PEMEX in numbers, May 2010, http://www.ri.pemex.com/index.cfm?action=statusfilecat&categoryfileid=5440.
8. Robert Campbell, Mexico Cuts Petchems Crude Runs, Helps Oil Exports,
REUTERS, May 4 2010, http://www.reuters.com/article/idUSN0411161820100504?
rpc=60.
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LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16
The only way for PEMEX to develop new fields is through significant
new investment in exploration and drilling. Estimates range from fifteen
to twenty-five billion dollars a year in new investment that is needed to
sustain PEMEX and avoid the importing of oil in the near future. Where
this money is to come from is a crucial question. Either the government
must allow the firm to keep more of its profits, or PEMEX will have to
contract more debt, and as a parastatal, PEMEX’s debt may be national
debt.
Moreover, although it is almost certain that major new sources of oil
exist in the Gulf of Mexico, these reserves are in deep water, and
PEMEX lacks the technology needed to find and exploit the oil there.
This leaves the company with a dilemma. It can either attempt to develop the technology itself, which will take many years, or it can consider
working with other oil firms (either an I.O.C. or N.O.C.) so as to take
advantage of their technological lead. Whereas the first option would
greatly delay the discovery of new reserves, the second option seems to
be unacceptable in Mexico’s current political climate. One minor exception might be the signing of a deal with another publicly owned N.O.C.
from Latin America, perhaps Petrobras. This option would solve one of
the most pressing of PEMEX’s problems: its lack of deepwater
technology.
When these problems are combined with PEMEX’s deteriorating financial balance sheet and its need for massive investment in mid-stream
and down-stream infrastructure, the situation looks dire. The challenge
the company faces from the deteriorating state of its infrastructure, particularly in terms of refining capacity and petrochemical production, is
enormous. Abortive efforts aimed at privatizing parts of PEMEX during
the Salinas and Zedillo administration have brought about a stagnation of
capacity in these two areas. The 2003 Proyecto Fenix, in which private
Mexican companies were invited to participate in a joint venture to build
a petrochemical plant producing secondary products not covered by the
Constitutional exclusion on private investment, has produced nothing.
Of course, private petrochemical producers do operate in Mexico, but
this has done nothing to spur PEMEX to improve its facilities or
competitiveness.
As for refining capacity, by the dawn of the 21st century, PEMEX’s
plants were aging, and had for years been incapable of providing the
Mexican economy with the fuels it needs. This has led to the rather ridiculous situation of Mexico exporting crude while importing expensive refined products such as gasoline, predominantly from the United States.
In 1993, PEMEX entered into a joint venture with Shell, investing one
billion dollars to expand Shell’s facility in Deer Park, Texas. PEMEX
became a fifty percent owner in the facility, and has since been exporting
refined products from Texas to Mexico. What has always been impossible
in Mexico suddenly became a reality in the United States. But this has
not been sufficient to stem the decline of the nation’s refineries. In 2009,
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ADMINISTRATION OF DECLINE
863
a new refinery project in Tula, Hidalgo was announced. By the time of
this writing, however, the project had yet to begin its construction phase.
To overcome the problem of lack of funds and the prohibition on private investment in PEMEX, in the recent past the innovation of the
Proyectos de Inversión Diferida En El Registro del Gasto (PIDIREGAS) (long term investment projects) has permitted some indirect private investment in the company, but doubts exist as to the sustainability
of this form of financing. Moreover, as PEMEX’s total debt mounts, the
PIDIREGAS are an extra burden on the company, leading PEMEX to
seek help from the finance ministry in May of 2010.9
VI. A CHANCE AT REFORM
The problem of reforming PEMEX, its fiscal burden in particular, has
been a pressing question for more than a decade. Unfortunately, meaningful change in the company and in its relationship with the government
has been made impossible by the polemic that has taken place within
Mexico over privatization and foreign involvement. In the early 1990s
the idea of privatizing the firm was publicly aired and drew a vociferous
reaction from the traditionalists in Mexican society and politics, once
again affirming the link between sovereignty and oil production. This
tone has defined the question of what to do with PEMEX ever since. The
slightest mention of reforming the company immediately solicits calls to
defend sovereignty and la patria, negating any chance of generating a
constructive debate on the topic. President Vicente Fox attempted to reform PEMEX in the early years of his mandate to no avail, and throughout his administration the company’s problems grew, despite the fact that
oil production reached record levels.10
When Felipe Calderón won the Mexican presidential elections in 2006
under highly controversial circumstances, his first priority became that of
establishing credibility in the eyes of the Mexican people and rebuilding
confidence in the office of the President. In order to do so, he took on
the growing influence of the drug cartels in Mexico, a decision that has
increased violence in the short term and has cost over 23,000 lives. His
second priority was to begin a national debate on the future of oil production in Mexico. In order to maximize the chances of getting an eventual
reform that closely reflected the Calderón administration’s concerns, the
government increased the frequency of public statements by Calderón,
Georgina Kessel (Secretary of Energy), and Jesus Reyes Heroles (Chief
Executive Officer of PEMEX), highlighting the coming crisis in the state
oil company.
9. Israel Rodriguez J., Pemex Propondrá Rescate a Hacienda, LA JORNADA (Mex.),
May 28, 2010, at 28, available at http://www.jornada.unam.mx/2010/05/28/index.
php?section=economia&article=027n2eco.
10. See Fox Vows Pemex Will Not be Privatized, EFE WORLD NEWS SERVICE, July 24,
2002, http://business.highbeam.com/436103/article-1G1-89495520/fox-vows-pemexnot-privatized.
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LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 16
One speech by Reyes Heroles laid out the situation succinctly: “Overall the situation of PEMEX is critical and deserves immediate attention.
The main oil field is in decline, demanding redoubled efforts and greater
investment to halt it”.11 Referring to the need to reform the internal
structure and workings of PEMEX, Reyes Heroles argued “The new
management model requires greater operational flexibility in PEMEX,
guaranteeing at all times the transparent handling of resources and strict
accountability”.12 At this time, it seemed as though a political consensus
for reform of the National Oil Company was becoming more and more
likely, as important figures from the left, such as former PRD leader and
PRD governor of Michoacan, Cuauhtémoc Cárdenas, and his son, Lazaro
Cárdenas, both came out in favor of more autonomy for PEMEX.
Cuauhtémoc even suggested that private participation in PEMEX would
improve the company, a revolutionary statement for the son of the President who nationalized the oil industry in Mexico.13
To build on and confirm the growing movement in favor of drastic reform of Mexico’s oil sector, the Calderón administration called on
PEMEX to produce a diagnostic of its current problems. At the same
time as its public statements, the government began to filter more and
more information into the popular press detailing the coming decline in
Mexico’s oil production, PEMEX’s lack of capacity to drill for oil in the
deep waters of the Gulf, and the need for all major oil companies to share
risk with other firms. In addition, a spate of government-aided and government-funded conferences on the future of Mexico’s oil industry and
on examples of other countries took place in 2007. In addition, the government coordinated a massive public relations campaign, namely enlisting respected academics, opinion leaders, and media personalities to
communicate the government’s message to the public.
The thrust of the government’s argument in favor of reforming
PEMEX was directed towards convincing the public that Mexico’s remaining oil “treasure” or tesoro was hidden away in the deep waters of
the Gulf of Mexico and that in order to reach it, PEMEX would need
help from the private sector. This help would be either in the form of
alliances, risk contracts, or incentive-based contracts. Though the government repeatedly reassured the public that privatization was not an option, the left-wing media openly accused Calderón of attempting to bring
in a greater role for the private sector and of wanting to sell the national
treasure.14
11. Juan Sebastián Solı́s, Situación de Pemex es Crı́tica: Reyes Heroles, TELEVISA
NEWS (Mex.), Mar. 18, 2007, http://www.esmas.com/noticierostelevisa/mexico/
612552.html.
12. Id.
13. See Alma Muñoz, Participación Estatal y Privada en Pemex, Plantea Cárdenas , LA
JORNADA (Mex.), Mar. 19 2007, http://www.jornada.unam.mx/2007/03/19/index.
php?section=politica&article=005n1pol.
14. See Ioan Grillo, Mexico Braces for an Oil War, TIME, Mar. 17, 2008, available at
http://www.time.com/time/world/article/0,8599,1723153,00.html.
2010]
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The government’s report on the problems facing PEMEX, titled
“Diagnostico: Situacion de PEMEX,” was released on the March 31,
2008.15 128 pages long, the document laid out in detail the multiple challenges facing the National Oil Company, focusing on declining reserves
and production, the ensuing problems for exports, the lack of investment
in refining infrastructure, the administrative capacity of PEMEX, and the
National Oil Company’s financial situation. Within eight days, the government had tabled its proposal for energy reform with the Senate, sparking a debate that included the political parties, expert opinions, and the
general public, which extended until the 22nd of July.
The day after the Senate debates concluded, the PRI presented its
counter-proposal in the Senate, and over the next few months the major
political forces came to a consensus about the acceptable content of the
reform package. On the second of September PAN senators presented a
bill titled “Ley para el Aprovechamiento Sustentable de la Energia,” a
reform package that was much less ambitious than the original proposals
from the government. It was abundantly clear that the negotiations with
the other main parties, and in particular with the PRI, occurred from the
ninth to the twenty-third of October while the bill was debated in the
Congress, with all parts of the package finally receiving approval between
the 23rd and 28th of October. In the early days of November, President
Felipe Calderón signed the reforms into law.
The package included seven distinct laws that can be divided into three
main areas:
1. Renewable energy and energy savings:
a. Ley para el Aprovechamiento Sustentable de la Energı́a
b. Ley para el Aprovechamiento de Energı́as Renovables y el
Financiamiento de la Transición Energética
2. Better planning and strategic controls:
a. Artı́culo 33 de la Ley Orgánica de la Administración Pública Federal (nuevas atribuciones a SENER)
b. Nueva Ley de la Comisión Nacional de Hidrocarburos (CNH)
c. Ley de la Comisión Reguladora de Energı́a (CRE)
3. Strengthening PEMEX:
a. Ley Reglamentaria del Artı́culo 27 Constitucional en el Ramo
del Petróleo
b. Ley de Petróleos Mexicanos
c. Ley Federal de Derechos
The most important areas affecting PEMEX were: the creation of a
new National Hydrocarbons Commission (CNH) that would be entrusted
with the regulation of the oil and gas industries; significant reforms to the
internal management structure of PEMEX; and changes to the fiscal liabilities of the company, freeing up more money for investment in Explo15. Secretaria de Energı́a & Petróleos Mexicanos, Diagnostico: La situación de
PEMEX, Mar. 31, 2008, http://www.pemex.com/files/content/situacionpemex.pdf.
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ration and Production activities. The reform package also brought in the
possibility of issuing bonos ciudadanos, citizen bonds that could be sold
to the public to raise capital without transferring any control of PEMEX
away from the state.
The changes to PEMEX’s management structure focused primarily on
the board. Before the reforms, a survey of the board of governors
showed that of its eleven members, six were members of the government
(normally the ministers of energy, finance, environment and natural resources, communications and transport, foreign affairs, and the economy). The other five members of the board were representatives of the
oil workers union, Sindicato de Trabajadores Petroleros de la República
Mexicana. This guaranteed that it was very difficult for meaningful
change to happen in PEMEX.
The president of the board has always been the Minister of Energy. In
2007, not one member of the board of governors had any kind of business
training, leaving the firm in the hands of politicians, unions, and bureaucrats. The reforms of 2008 mandated the hiring of four new independent
board members, all of whom must have a background in the oil industry
and who are free from political allegiances. These consejeros independientes were hailed as a breakthrough in the administration of
PEMEX, and their appointment was eagerly awaited.
The final reform that was touted by the government as fundamental
was the prospect of new contracts for PEMEX’s service providers. These
contracts would offer the service providers bonuses for discovering oil,
for producing more oil than had been estimated, and for producing oil
faster than had been estimated. The legal opening for these contracts was
at first ignored by political commentators, and it seemed to slip by opposition legislators too. This achievement by the administration was shortlived.
The government immediately hailed the reforms as game changing.
The Energy Ministry released graphics and prognostications that suggested the reforms would mean the discovery of new reserves, sustained
production levels, and greater efficiency for PEMEX. Although the
thrust of the government’s campaign had been to convince the public and
political elites that the only way to save Mexico’s oil production and to
increase reserves was to increase private sector cooperation and venture
into deep water drilling, the government immediately announced that
predictions of Mexico’s reserves and production figures would be revised
upwards, despite the fact no fundamental opening for the private sector
had in fact occurred under the reforms.
It was an amazing declaration from the government. Of course, few
observers believed that the fundamental problems of the oil sector had
been resolved that quickly, and the reforms were seen as having been