The origin of crony capitalism and corruption in modern Mexico and its current
impact on international business activities (Preliminary Version)
José Galindo
Focusing on Mexico, this paper analyzes to what extent and in which direction local crony
capitalism and corruption affect international business activities. First, I introduce the
origins, evolution and debate on crony capitalism in Mexico; then, I explore the new groups
of cronies in Mexico and how business networks currently operate in this country and how
corruption is related to crony capitalism. Finally, I explain in which ways these grey areas
have an impact on foreign direct investment or Mexican investments abroad. My main
argument is that crony capitalism and corruption do not necessarily imply negative
consequences for international business activities if other variables are controlled at the
domestic level. International investors seek order and institutional guarantees when making
investment decisions. Those variables are related to risk. In this sense, investors take their
investment decisions according to the risk they are willing to take. In addition, local
corruption and crony capitalism do not necessarily elevate the risk if, regardless of the legal
system, they are under the control of local power groups, including government officials,
who sometimes negotiate directly with foreign investors. This is one of the main reasons
why, even though Mexico has such big problems, many foreign companies and banks are
still willing to invest in Mexico: they obtain high earnings and they get guarantees to
operate their businesses from local governments. One clear example of this are the recent
investments that the South Korean company, KIA Motors, has been making in Mexico
supported by the government of the state of Nuevo León. This case will be analysed in
detail further in this paper.
Defining and explaining crony capitalism
Broadly speaking, crony capitalism is a term used to describe an economy in which success
in business depends on the relationships or links between businessmen and government
officials. The term crony capitalism is itself of recent origin. In the late 1990s, after the
Asian economic collapse, analysts, academics, and scholars from around the world
developed a particular interest in the subject. This is because the existence of crony
capitalism in East Asia is considered to be one of the primary causes of the deterioration of
the economies of the region after 1997.
The term has been used to highlight the virtues of American-style capitalism, and to
criticize the economic model of other countries that allow close links between government
and big businesses.1 However, crony capitalism exists in most of the world. Numerous
scandals have come to light in recent years to show that the U.S. has a considerable degree
of crony capitalism. I need only to mention the book published in 2014, All the Presidents'
Bankers, by Nomi Prins.2 This book shows the links between U.S. presidents and the
powerful bankers in the country, such as JPMorgan Chase and National City Bank. The
author argues and demonstrates that Wall Street and the White House collaborated to shape
national policy through the Great Depression of 1929, the World Wars, the establishment of
the World Bank and the International Monetary Fund, the Cold War, and the financial and
military expansion of the United States. Additionally, the author stresses that the alliances
between bankers and presidents and their cabinets continue to define the policies and laws
that direct the economy in the United States in the present day.
Stephen Haber, exploring this topic for Latin America, defined crony capitalism as a
system “in which those close to the political authorities who make and enforce policies
receive favors that have large economic value.”3 In other words, those connected with
political or economic agents usually receive cheap credit, tax exemptions, and protection
from international competition by tariffs, among other conditions, that allow them to earn
higher profits than those that would prevail in a competitive market, where all participants
start from the same set of conditions. 4 Furthermore, within the established system,
government officials get part of the extra-normal profits from private businesses in return.
Now, how can we differentiate capitalism from crony capitalism? First of all, it is important
to understand that capitalism, by definition, is an economic system, and crony capitalism is
a phenomenon that interferes with and has implications for the political and economic
spheres, as well as a cost to society. On the purely economic side, under a system of crony
capitalism, favored entrepreneurs can operate their businesses as monopolies or nearmonopolies.
Monopolies generally have two negative consequences for the economy: a company that
has a monopoly produces less than would be produced in a competitive market and
products are sold at higher prices than they would be in a competitive market. This creates
a loss to society, who, as a consumer, makes a transfer of resources to the privileged actors.
This has an effect on income distribution. Even if production is not reduced within certain
markets, the existence of protected sectors from national and international competition
1
Gulnaz Sharafutdinova, Political Consequences of Crony Capitalism inside Russia (Notre Dame, Indiana:
UniversityofNotreDamePress,2010),23.
2
NomiPrins,AllthePresidents’Bankers(NationBooks,2014).
3
Stephen Haber (ed.), Crony Capitalism and Economic Growth in Latin America: Theory and Evidence.
(Stanford:HooverInstitutionPress,2002),12.
4
Ibíd.,12.
allows privileged businesses to manipulate their prices to be higher than those that would
exist in a more competitive market, which is reflected in profits similar to those that
monopolies would obtain.
Society also loses on the supply side, i.e., it is limited as a producer in the economic sectors
in which privileged “friends” operate. In that sense, we can say that crony capitalist systems
distort economic incentives, negatively affecting the growth rates of various sectors of the
economy, because under crony capitalism "industries that would not exist otherwise arise . .
. and opportunities are denied to entrepreneurs who have the necessary skills and assets but
not the political access or the necessary protection.”5
If we analyze the six main requirements for modern capitalism that Max Weber identified,
there are two fundamental differences between capitalism and crony capitalism. The first
relates to the rule of law, and the second relates to property rights.
With regard to the rule of law, in crony capitalism “application of the law becomes
arbitrary, unpredictable and dependent on informal relations and factors other than
universal rules.”6 In short, the law does not apply equally to all social and economic actors,
as there is no calculable law. Second, in these systems, property rights are weak and
transient. Crony capitalism is a system that ensures the property rights of selected economic
actors.
Cronyism is not a new problem; bureaucrats have long used their power to help enrich their
friends and networks outside the government. When relations between government officials
and economic actors dominate policymaking, cronyism becomes crony capitalism.7
Various authors have studied the integration of government and economic groups during
very different time periods (e.g., pre-revolutionary France, pre-revolutionary Mexico,
Eastern Europe under communism, and Eastern Europe today). Even so, it is difficult to
determine a specific period in which crony capitalism first appeared. It dates back to the
origin of capitalism itself. The need to obtain financial capital was one of the main features
that stimulated the formation of social networks in general and among entrepreneurs and
government officials in particular.
In the work Crony Capitalism and Economic Growth in Latin America (2002), Stephen
Haber asks: if crony capitalism is not ideal for an economy to produce what it needs or to
be competitive, why do these systems arise? He responds by saying that crony capitalism is
5
Ibíd.,16.
G.Sharafutdinova(2010),23–24.
7
Ibid.,2.
6
the second-best solution to a problem—the problem of commitment: "Any government
strong enough to protect and arbitrate property rights is also strong enough to abrogate
them."8 Haber ponders how a government can create a credible commitment that does not
abuse this power? Simply promising that it will not do it is not enough. The government
can always break its promise at some later time.9 Haber argues that members of the
government itself or members of their families should share the revenue generated by
entrepreneurs in economic activities: "The intermingling of economic and political elites
means that it is extremely difficult to break the implicit contract between government and
the privileged asset holders."10
Shortly thereafter, in 2003, Haber, along with Armando Razo and Noel Maurer, published
the book The Politics of Property Rights: Political Instability, Credible Commitments, and
Economic Growth in Mexico, 1876–1929, which presents a VPI model11 that posits the
existence of crony capitalism in Mexico.
Gulnaz Sharafutdinova 12 goes further and categorizes different explanations of the
phenomenon of crony capitalism into three approaches: cultural, historical institutionalism,
and new institutionalism. She states that under the cultural approach, cronyism, and the
importance of informal relationships at various levels of society, is the result of old cultural
patterns of behavior in a particular society: "Corruption and patronage based on personal
relationships are therefore culturally embedded practices." 13 Second, with regard to
historical institutionalism, which is the approach that the author adopts in her book on
Russia (2010), the author mentions that different types of limited access orders require a
careful historical examination.14 In fact, historical institutionalists focus on the lasting
8
S.Haber(2002),7–8.
Ibid.,8.
10
Ibid.
11
IntheVPImodel,athirdparty(manyactorscanbeathirdparty;forexample,themilitarygeneralsand
organizedlaborplayedvariousthirdpartyrolesinMexicoatdifferenttimes)receivesaneconomicbenefit
fromthesecondparty(owners:mainlylandownersandindustrialists)toensurecomplianceofaninformal
agreement between the first party (the government) and second party (the owners). This agreement
ensures the protection of the government of the property rights of the owners, as well as other policies
favorable to their interests. In return, the owners guarantee an income for the government, generally
throughtaxes.
12
G.Sharafutdinova(2010),27–34.
13
Ibid.
14
In Russia "cronyism" has always played a significant role in political and economic life of this country.
However,thestudyofcronycapitalism,assuch,hasfocusedinthelast25years,afterthefalloftheBerlin
Wall.Businessmenandpoliticianslinkedthroughspecialrelationshipsofmutualsupport.Theformationof
such networks began under Gorbachev, during the process of spontaneous privatization, and then
accelerated with the economic reforms of the 1990s. These networks embody the common interests of
politicians,whofacedtheneedtobere-elected,andeconomicactors,whosoughttoacquirepropertyand
the protection of their property rights. These informal structures are well known among Russian society.
9
effects on institutions and political patterns, which appeared in response to key challenges
faced by key political actors and societies at particular moments in time.15 The author notes
that different historical and cultural contexts have led to different manifestations of the
phenomenon we are studying.16
Instead, for Sharafutdinova, the neo-institutionalist approach that Haber and his followers
adopted "provides a solid starting point, but it does not address the issue of the origins of
cronyism."17 Coatsworth18 makes a similar criticism. He says that the model used by Haber,
Razo, and Maurer does not address time horizons. In addition, neo-institutionalist models
cannot explain the existence of some characteristics of crony capitalism in developed
countries, which have supposedly solved the commitment problem of governments through
setting limits on government (those that respect due process and are bound to respect
individual and universal political and economic rights through formal institutions). In this
sense, neo-institutionalist models operate with a high level of generalization, one that
cannot distinguish between specific versions of crony capitalism or systems with some
degree of limited access.
Razo acknowledges the lack of time horizons in his analysis performed with Haber and
Maurer, which does not, according to him, theorize about the factors behind the prolonged
existence of informal arrangements. And in his book, Social Foundations of Limited
Dictatorship, published in 2008, he seeks to explain the durability of informal agreements
and to specify the political and social bases that extended beyond the Porfiriato (18761911) to the kind of informal arrangements among President Diaz and entrepreneurs.19
Since1995,theprogram"loansforshares",whichpromotedthere-electionofYeltsinanddividedsomeof
themostattractiveassetsofstatepropertyamongasmallcircleofwell-connectedbusinessmen,theterms
"oligarchs"and"clans"havebeenwidelyusedbythepublictorefertostructuresthatreallymatterinRussia
inpractice.Infact,duringthe1990stheexistenceofthesenetworkswasinstitutionalizedinthesensethat
they are considered as part of the system among the Russian public. Gulnaz Sharafutdinova, “Crony
capitalismanddemocracy:ParadoxesofelectoralcompetitioninRussia’sregions”WorkingPaper#335.(The
HelenKelloggInstituteforInternationalStudies,February,2007),6.
15
S.Sven,K.Thelen,andF.Longstreth,eds.,StructuringPolitics:HistoricalInstitutionalisminComparative
Perspective(NewYork:CambridgeUniversityPress,2002).
16
G.Sharafutdinova(2010),25.
17
Ibid.
18
J.Coatsworth,"Structures,EndowmentsandInstitutionsintheEconomicHistoryofLatinAmerica,"Latin
AmericanResearchReview40,no.3(2005):127–145.
19
The Porfitiato is considered to have been the period when Mexico formally entered capitalism. Before
that, the political, social and economic instability of the country after Independence had not allowed this
countrytoapplyadurablepolicytoformallyoperatewithinthecapitalistrules.
According to Razo, 20 the book The Politics of Property Rights, Political Economy of
Institutions and Decisions Series (2003) accurately shows that economic and political
actors during the Porfiriato found it to be in their interest to collaborate, but microlevel
mechanisms that enabled cooperation and integration are not explained in this work.21
Razo says Díaz offered private protection, rather than universal protection, to a limited set
of actors, and that there were selective credible commitments. Razo also mentions that
specific concessions granted from the government to private companies were variable, even
when the concessions were to companies in the same industry. “Firms with higher expected
rents were more likely to obtain better concession terms.” 22 Razo summarizes his
contribution by saying,23 "The network structure of special privileges that Díaz awarded
created a critical mass of actors with the incentive to defend the system against predation."
He also concludes that Díaz's network was not particularly dense but included central actors
powerful enough to keep the dictator in check.24 These arguments demonstrate a significant
neo-institutionalist influence on the author.
Aurora Gómez published a review that was highly critical of Razo's book. She says “the
Porfiriato did not resemble the dictatorship in Razo's model as much as the author would
like” because “recent historiography has shown [. . .] that Porfirian Mexico's institutional
framework was more complex and that there existed stronger legal and political constraints
to the dictator's power, than the author acknowledges.”25
Gomez says that the significant presence of public officials in Razo's network is largely the
product of the sources used, which are strongly biased towards large companies in sectors
in which government concessions were necessary and in which foreign investment was
generally present. She explains that in order for a public concession to be given to a foreign
investor, federal laws required that the company had to have at least one public official on
its board.26
20
Armando Razo, Social Foundations of Limited Dictatorship: Networks and Private Protection during
Mexico'sEarlyIndustrialization.(PaloAlto,CA:StanfordUniversityPress,2008).
21
Ibid.,15–16.
22
Ibid.,170.
23
Ibid.,171.
24
For the Brazilian case, it has proven that businessmen used networks for mutual monitoring and to
negotiatewithinasystemthatintheearlytwentiethcenturywasbasedonconventionratherthanpublicly
declared standards for operation. Similarly, business networks in that period facilitated the exchange of
information between companies. Aldo Musacchio and Ian Read. "Bankers, Industrialists and Their Cliques:
EliteNetworksinMexicoandBrazilduringEarlyIndustrialization."EnterpriseandSociety8,(2007),846-847.
25
Aurora Gómez-Galvarriato, Review of Social Foundations of Limited Dictatorship: Networks and Private
ProtectionDuringMexico'sEarlyIndustrialization,byArmandoRazo,PublishedbyEH.net,September2008.
26
Ibid.
Similarly to Gómez, Edward Beatty, in his book, Institutions and Investment: The Political
Basis of Industrialization in Mexico before 1911 (2001), implicitly questions the idea that
the Porfiriato was a case of crony capitalism.
Beatty shows that Díaz's government favored the development of a national industrial
sector through a carefully planned and administered series of laws and policies, including
trade policy (import tariffs), intellectual property law (patents), and the program of new
industries, providing tax incentives to employers who established new industries. Beatty
argues that these formal institutions (laws and policies) played a critical role in the
formation and behavior of investment in Mexico. And, in fact, there were a number of
small and medium enterprises that did not have special privileges during the Porfiriato and
that were subject to the laws.
Sandra Kuntz also affirms that during the Porfiriato, the situation of the rules undoubtedly
improved, and Kuntz proposes the analysis of crony capitalism over a longer term. That is,
“going backwards, we can better appreciate the institutional progress of the Porfiriato.”27
In this author's opinion, the reality falls somewhere between what neo-institutionalists like
Razo have argued about crony capitalism in Mexico, and what Beatty, Gómez-Galvarriato,
Kuntz and others have asserted.28 That is, crony capitalism was not as prevalent as the neoinstitutionalists say, but more prevalent than what the other authors acknowledge. In fact, if
as Gómez asserts, federal law required that some companies had at least one public official
on their boards, these officials must have obtained economic benefits; thus, the economic
incentives in these sectors may have been distorted under these conditions.
Whether or not the effects of the Porfiriato in Mexico had more weight than what neoinstitutionalists recognize, the formulation of laws and policies in this period was often the
product of the mixed interests of political and business elites, which, as previously defined,
is an important differentiation between cronyism and crony capitalism. A clear example of
this is found in the construction of the General Law of Credit Institutions of 1897 by the
federal government in conjunction with the few banks that existed at the time. This led to a
highly concentrated banking sector that led to a highly concentrated industrial structure.
27
SandraKuntzinterviewedbyDr.JoséGalindoRodríguezinXalapa,Veracruz.October27,2014.
Humberto Morales, from the Benemérita Universidad Autónoma de Puebla, says that in the process of
capital formation, all countries went through a similar process, from the creation of family businesses to
managerial economics, passing through limited partnerships and corporations. In Mexico, managerial
economicshavestillnotbeenconsolidatedbecauseMexicohasnotgonethroughtheprocessofmanagerial
revolution.Moralesalsonotedthatatthebeginningoftheprocess,nocountrymeetstheassumptionsof
neo-institutionalism of capital markets and competition, and that this represents an ahistorical analysis in
thecaseofMexicointheearlytwentiethcentury.
28
New groups of cronies
A large number of entrepreneurs have been able to maintain their positions within the
power elite in Mexico since the Porfiriato despite the emergence of other business groups
and the armed conflict of the Mexican Revolution and its institutional consequences, which
included land reform and the strengthening of the labor movement. In the table below, we
can observe the most influential Porfirian companies between 1920 and 1980 in Mexico:
Table 1. The Most Influential Porfirian Companies and Banks, 1920–1980
Name
of
Company
the Owner
Field
Rank
Banca Serfín.
Private
Founded in 1977,
included the Serfín
chain, Banco de
Londres y México
(1864),
and
Financiera
Aceptaciones, SA
Banking
--
Banco Nacional de Private
Mexico, SA
Founded in 1854,
managed by the
Legorreta family
Banking
--
Cervecería
Private
Moctezuma
Founded in 1894 in
Orizaba, Veracruz, it
was managed by the
Suberbie
brothers,
then by Alberto
Bailleres
Manufacturing
21
Compañía de las Private
Fábricas de Papel
San
Rafael
y
Anexas, SA
Founded in 1894 and
managed by San
Manufacturing
49
Rafael Group
Banamex
and
Compañía
Private
Fundidora
de
Fierro y Acero de
Monterrey, SA
Founded in 1900 by
a group of Mexicans
and Americans that
included
Antonio
Basagoiti,
León
Signoret,
and
Vicente Ferrara
Manufacturing
12
El
Puerto
de Private
Liverpool
Founded in 1847 and
owned partly by the
Suberville family
Retail
34
Ferrocarriles
Government
Nacionales
de
Mexico
Founded in 1908 and
taken over by the
government in 1937
Transportation
13
Telefonos
de Private
Mexico
Founded in 1909
Communications
12
Source: Roderic A. Camp, Los empresarios y la política en México: una visión contemporánea (Mexico:
FCE, 1995), 199–212.
The business models for privileged individuals did not change much during the golden age
of the PRI in Mexico (1940–1970) compared to the golden era of Porfirio Diaz, except that
there were new players to contend with that played fundamental roles in the new coalitions
of power. In particular, I mean organized industrial workers, farmers, and other
entrepreneurs and actors within the new government corporativist model.
After the Mexican Revolution, beginning with the administration of Lazaro Cardenas
(1934–1940), Mexico experienced a period of relative economic stability that it had not had
for many years. This was an important factor in the growth and development of the
economy, to the extent that the period between 1940 and the end of the sixties is identified
as the “Mexican miracle.” This situation of price stability and economic growth of 5% in
real terms on average was not unique to Mexico; the world in general benefited from
significant economic stability during this period. In Mexico, beginning with the
administration of Avila Camacho (1940–1946), the foundation was laid for the state to
strategically adopt import substitution. This was based on the notion that developing
countries should minimize their imports, often manufactured, for substitutes produced or
manufactured locally, promoting ingrowth. Mexico, like most countries in Latin America
and in much of the world, adopted this model, due, in part, to the influence of the Economic
Commission for Latin America and the Caribbean (CEPAL) as well as the ideas of
Prebisch and Singer regarding industrialization. Import substitution resulted in extensive
state involvement in the economy, which had the following characteristics:
•
An essentially closed economy with a high level of protectionism through special
taxes and duties
•
Building measures for industrial growth through tax incentives
•
The growth of the finance industry, mainly through Nacional Financiera
•
Central Bank actions regarding monetary policy to balance the economy
•
Expansion of state enterprises
Economic strategies were developed as general statements of national economic policy
during this period and adapted to each president’s administration. National economic policy
would transform its political discourse according to the situation. This flexibility was also
the case for public administration, as the impetus for industrialization required
governmental bodies to resolve the increasing complexity of a growing capitalist system,
which, through government involvement, would ensure the stability necessary for
development.
After the “Mexican miracle,” some economic variables began to deteriorate in the early
1980s, including price stability and the exchange rate, which were accompanied by deficits
in public finances as well as external indebtedness. The heads of developed countries, led
by Reagan and Thatcher, pressured the “developing” regions to change the economic model
and approach to liberal paradigms that were resurgent in the world. This pressure could be
exerted in part because Latin American countries, starting with Mexico, could not continue
to pay their huge foreign debts, ultimately declaring a moratorium. This situation allowed
for international support of the International Monetary Fund and the World Bank as it
initiated a series of economic adjustments of liberalizing the economy and reducing the
state’s role in it, as well as encouraging the payment of foreign debt, and implementing
fiscal deficit reductions and programs to control inflation. The adjustment plan, termed the
Immediate Economic Restructuring Program (PIRE) by President Miguel de la Madrid
(1982–1988), held an important role in the privatization of parastatals. By September 1985,
205 different entities had settled, transferred, sold, or merged, and 261 were in the process
of doing so, leaving around 700 of the 1,155 that had existed in 1982. The successor to De
la Madrid, Salinas de Gortari (1988–1994), accelerated the process of liberalizing the
economy, privatizing banks (which had been recently nationalized by Lopez Portillo in
1982) as well as other large public companies such as state-owned airlines, steel plants, and
the state telephone monopoly. The revenue generated from the sales of these companies
helped reduce the public debt of the country until it was able to generate a fiscal surplus in
1992.29
The trade liberalization measures and sale of public enterprises, particularly the banking
business, weakened the position of the traditional economic elite, who had still held
considerable economic power in the early 1980s.30 These measures had more impact on the
restructuring of the economic elite than any other event in the twentieth century, including
the 1910 Revolution.31
29
José Galindo, La CNDH: Una consecuencia de la política económica y social de México (1970–1990),
(México:Porrúa,2011),104–105.
30
ItisworthmentioningthecorporategovernmentthatwasestablishedinMexicointhesecondstageof
Mexicanindustrialization(ISI)hadtheeconomicandpoliticalpowerofbanksatitscenter.Throughcrosses
andthepredominanceoftheboardswithcompanies,ororganizationssuchastheCouncilofBusinessmen,
banks were the most influential players. The strong connection between bankers, industrial and political
groupsisevidentinthecaseofBanamexandtheCommerceBank(Bancomer)System.Banamex(Legorreta,
Deutz)participatedinabout300companies;thelargestinthecountry,withequity,controllingfullorpartial
corporations; Bancomer (Espinosa Yglesias) was the most important bank system, with a presence
throughoutalmostalloftherepublic,involvingthemajorindustrialistsandentrepreneursofmanyregions
of the country. Humberto Morales Moreno and Miguel Santiago Reyes, “La reconfiguración de los grupos
económicos en México a partir de la Nacionalización Bancaria de 1982” in Documentos de trabajo, 10,
Puebla:Ibero,2014,pp.9.
31
HumbertoMoralesMoreno,“LaOrganizaciónactualdelosgruposeconómicosdespuésdelaprivatización
delabancamexicana:1988–2014”(paperpresentedattheThirdSessionsofEconomicHistory,organizedby
theMexicanAssociationofEconomicHistoryandElColegiodeMexico,MexicoCity,Mexico,February17–
20,2015).
Table 2. Main Economic Industry Groups before the Bank Expropriation of 1982
Industrial Group
Family
Stock Participation
Alfa
Garza Sada
78%
VISA
Garza Lagüera
72%
Grupo Industrial Saltillo
López del Bosque
87%
Grupo Industrial Bimbo
Servitje Sendra
80%
Desc
Senderos Irigoyen
56%
Holding Fiasa
Rodríguez Ruíz
63%
Grupo Continental
Grossman y Grossman
60%
Industrias Syncro
Levin Podvilevich
56%
Grupo Celulosa de Chihuahua
Vallina
52%
Ponderosa Industrial
Vallina
89%
Loreto y Peña Pobre
Lenz
40%
Vitro y Cydsa
Sada González
53%
Hulero Euzkadi
Arocena-Urraza
34%
Sociedad Industrial Hermes
Hank González
70%
Consorcio Aristos
Kalchky Kaplan
63%
París-Londres
Lebrun Cuzin y Charpenel
67%
El Palacio de Hierro
Bailleres
58%
Cervecería Moctezuma
Bailleres
40%
Industrias Peñoles
Bailleres
71%
Banca y Casa de Bolsa Cremi
Bailleres
99%
Industrias Peñoles
Bailleres
38%
Tabacalera Mexicana (Cigatam)
Basagoti
26%
Moresa
Basagoti
28%
Cifra
Arango Arias
46%
Mexicana de Aviación
Ballesteros
36%
Source: Carlos Morena Camacho, El Capital Financiero en México y la Globalización (México: IIE-UNAM,
ERA, 1998).
The restructuring of business groups that followed bank nationalization meant the staying
of the industrial groups that were financially supported by the banks. However those whose
primary source of revenue was the banking system disappeared from the pinnacle of
business.32 Examples of this include Manuel Espinosa Yglesias, Pablo Deutz, Jose Maria
Basagoiti, and Agustin F. Legorreta.
At the beginning of privatization, deregulation and new rules to attract foreign direct
investment were beneficial, as they gave access to a variety of entrepreneurs who had no
access to the big leagues during the 1970s and 1980s, which seemed to move the Mexican
economic environment closer to a state of perfect competition than to one that facilitated
monopolies. For example, in the steel sector, the relative power of Grupo Alfa, a company
that emerged in northern Mexico, dropped dramatically, thus allowing new Mexican and
foreign investors to participate in the sector. By the end of the 1980s the Garza Sada, the
major shareholders of Alfa, was the only Mexican family that appeared on the list of
billionaires in Forbes magazine.
The problem is that the neoliberal reforms only changed the baton of the leading
businessmen in Mexico without changing any of the fundamental characteristics of the way
of doing business. Despite the economic changes that emerged in the twentieth century, the
economic groups have kept similar practices in their operations, inherited from the
Porfiriato. They can be identified by the following characteristics:
•
Ownership and operation are in the hands of a small number of major shareholders.
•
The links between the companies that form a network are long term, while they are
legally independent and share ownership through informal mechanisms such as
family or social relationships and the overlap of members in the boards of directors.
•
Their network architecture leads companies to be integrated vertically or with a
certain level of diversification (related, non-related or geographic).
•
For funding, companies are supported mainly by retained earnings that are
distributed through their domestic capital markets, or by the investment of securities
in international financial markets, and by credit extended by the financial wing of
their holdings (banks, brokerage firms, insurance companies).
32
Humberto Morales et al., La Nacionalización de la Banca como Mecanismo de Reconfiguración de los
GruposEconómicos,(México:CentrodeEstudiosEspinosaYglesias,2012).
•
There is some overlap between the majority shareholders, the boards of directors,
and senior executives of various companies.33
These features, which still persist, cast doubt that Mexico has experienced a managerial
revolution like the one that took place in the United States during the establishment of the
railroad, where because of the size of the companies and the multiple geographically
dispersed units whose operations had to be coordinated, job functions became well-defined
and organizational charts were created to show chains of command and lines of
communication.34 In that sense, skill management (salaried managers) became fundamental
to implement this managerial revolution.
In 1994, Forbes magazine showed 14 Mexican billionaires on the list of the world’s richest
men. This was because at the end of the Salinas administration, there had been an
exponential increase in the rich men of the country, which was possibly only achieved as a
result of monopoly profits. From that list, Carlos Slim, Roberto Gonzalez, and Ricardo
Salinas Pliego stand out in particular. Gonzalez developed the market for dry corn flour for
tortillas and the tortilla market itself in the United States. He also acquired Banorte, one of
the banks privatized by Salinas de Gortari. During the process of privatization of state
monopolies, Slim took control of Telefonos de Mexico, the only company providing
telephone service in the country. Salinas Pliego became the top Mexican retailer of
household appliances and also bought from the government TV Azteca, the only other
broadcaster in Mexico besides Televisa. In the late 1980s, none of these entrepreneurs were
among the richest in Mexico. This doesn’t mean that they had no links with members of the
old economic elite, but their historical roots in business do not come from the traditional
economic elite.
One cannot speak of a single economic elite any longer. In the same way that, during the
golden age of PRI, Porfirian entrepreneurs shared the productive apparatus of the country
with other economic groups that later emerged; the following have managed to survive:
Arango (Aurrera-Walmart), Baillères (Grupo BAL), Azcarraga (Televisa), and Michel
Suberville (Liverpool), the last two with Barcelonnette blood. In addition, there is a large
number of foreign investors who have entered key sectors of the Mexican economy.
Looking specifically at the banking sector, after an initial round of privatization of 18
banking institutions that began in 1991, another round of mergers with foreign banks took
place starting in the early 2000s, with Banamex-Citibank, BBVA-Bancomer, and
Santander-Serfin among the most notable.
33
Gonzalo Castañeda, “Evolución de los grupos económicos durante el periodo 1940–2008,” in Historia
económica general de México, de la Colonia a nuestros días, ed. Sandra Kuntz (Mexico City: Colegio de
Mexico,2010),604–605.
34
AlfredChandler,FromtheVisibleHand(Cambridge,Mass:HarvardUniversityPress,1977),2.
Table 3. The Richest Mexicans in the World
Rank
Name
Net Worth
Age
Source
#2
Carlos Slim Helu
$77.1 B
75
Telecom
#77
German Larrea Mota $13.9 B
Velasco
62
Mining
#121
Alberto
Gonzalez
Bailleres $10.4 B
84
Mining
#168
Ricardo
Pliego
Salinas $8 B
60
Retail, Media
#201
Eva Gonda de Rivera
-
Beverages
#265
Maria
Asuncion $5.6 B
Aramburuzabala
52
Beer,
Investments
#381
Jeronimo Arango
$4.3 B
89
Retail
#462
Antonio
Ruiz
Valle $3.7 B
77
Chemicals
#577
Emilio
Jean
Azcarraga $3.1 B
47
Media
#782
Carlos Hank Rhon
$2.4 B
67
Banking
#894
Jose and Francisco $2.1 B
Jose Calderon Rojas
61
Beverages
#1054
Roberto
Ramirez
73
Banking
#1312
Max
Suberville
83
Beverages
#1324
Alfredo Harp Helu
$1.4 B
71
Banking
#1500
Rufino Gil Gonzalez
$1.25 B
67
Steel
#1533
David
Alanis
41
Toll Roads
del
$6.7 B
Hernandez $1.8 B
Michel $1.45 B
Penaloza $1.2 B
Source:
“The
World’s
Billionaires,”
Forbes,
accessed
on
December
2,
2015,
http://www.forbes.com/billionaires/list/#version:static_country:Mexico
*Roberto González died in 2012, but his interests are represented in the survey by Carlos Hank Rhon, the
father of Carlos Hank Gonzalez, who is the grandson of Roberto Gonzalez, who took control of Banorte.
This growth data for Mexican billionaires would be worth celebrating if the income growth
of the general population had increased proportionately. Hovever, Mexico is in the top 25%
of the countries with the greatest economic inequality in the world and the Global Wealth
Report for 2014 indicates that the 64.4% of all the income in Mexico was held by the top
10%. 35 This highlights another problem with this newly created millionaire class in
Mexico: most wealth creation has not come as a result of innovation. That is, this wealth is
generated by the Mexican political business system, which is based on cronyism and new
forms of corruption.
The Legorreta family provides an example of an entrepreneurial family that played a key
role in the elite during the ISI period but were excluded from the reprivatization that
followed the process of bank nationalization. Legorreta stood at the helm of Banamex until
1982, when it was expropriated. In 1991, it was reprivatized and, by not allowing the group
led by Legorreta to buy back the bank, it was acquired by the group of shareholders of the
Casa de Bolsa Acciones y Valores de México (ACCIVAL), which was founded twenty
years before. Among the shareholders were Alfredo Harp Helu, a CPA that had started with
the business in 1970, and Roberto Hernandez Ramirez, a business manager who had headed
the bank for several years. Both names can be found in the table above that lists current
billionaires. In 2001, Banamex was sold to Citigroup. Agustin F. Legorreta was allowed to
participate in the reprivatization of banks, but at a very marginal extent and with a bank that
was far from the importance and economic clout he possessed before nationalization.36
The privatization that occurred in some countries, like Mexico, was equivalent to the
process of deregulation that took place in countries including the United States, especially
between 1970 and 2000, on the grounds that simpler and fewer regulations will lead to a
raised level of competitiveness, therefore higher productivity, lower prices and more
efficiency overall. This consequently led to corruption, crony capitalism, and changes to the
economic status of particular groups that were similar to the effects that privatization had in
Mexico and Russia.37 A clear example is the famous case of Enron in the United States.
35
“Cantidad de millonarios creció 32% en México en cinco años: estudio,” Revista Proceso, November 28,
2015.
36
Ibid.
37
Russia resembles Mexico on the weight that the privatizations had in the process of enriching new
entrepreneurs closed to politicians. It also resembles on the way politicians have favored their closest
friends and how the latter have increased their wealth exponentially. In an article published in the British
newspaper,TheTimes,entitled,"Theroadtopower:asthegroupofbrothersPutinbecamemillionaires",
reporters, Roger Boyes and David Taylor, show how the best friends of Putin, many of them born in St
Petersburg, were very small businessmen during the decade of the 1990s, but between 2004 and the
invasion of Crimea, in 2014, they increased their wealth to the extent that today they are the richest
Russiansintheworld.Infact,severalofthemappearinhighpositionsintheForbesMagazinemillionaires
statistics.(BoyesandKravtsova,2015)
Corruption and the myth of transparency and accountability in Mexican public
institutions: A new form of crony capitalism following the laws
In this section I will answer to the questions: How business networks currently operate in
this country and how corruption is related to crony capitalism?
Corruption38 is a problem that has historically been present all over the world. In 1993, the
NGO Transparency International was created, which, since 1995, has published an annual
report on the state of corruption in the world, with the aim of putting the issue on the
international agenda and finding ways to fight it. The following map shows this index of
the perception of corruption in 2014:39
Map 1. Index of the Perception of Corruption in 2014
Source: Transparency International, “Corruption Perceptions Index 2014: Results”, accesed December 7,
2015.
38
Corruptionisthephenomenonbywhichapublicofficialisincentivizedtoactdifferentlyfromregulatory
standards of a system to favor individual interests. Corruption erodes the governmental authority, affects
the credibility of the instruments of power, and becomes a threat to the democratic governance of a
country because it corrodes the ethical values on which the community organization is founded. José
Galindo and Pablo Escudero, Transparencia y Rendición de Cuentas en la CNDH, así como su función
transversaldecontrolenlaadministraciónpública(México:CNDH,2007),13–14.
39
According to Transparency International, “Behind these numbers is the daily reality for people living in
thesecountries.Theindexcannotcapturetheindividualfrustrationofthisreality,butitdoescapturethe
informedviewsofanalysts,businesspeopleandexpertsincountriesaroundtheworld.”AccessedDecember
7,2015,http://www.transparency.org/research/cpi/overview.
The previous map shows that approximately two-thirds of countries in the world have
serious corruption problems. In the case of the Americas, the following countries occupy
the top 20 places in corruption, according to the 2014 report: Venezuela, Haiti, Paraguay,
Nicaragua, Honduras, Guyana, Guatemala, Dominican Republic, Ecuador, Argentina,
Mexico, Bolivia, Suriname, Panama, Colombia, Trinidad and Tobago, Peru, Jamaica, El
Salvador, and Brazil. All of these are Latin American countries. But, broadly speaking,
Mexico is ranked 72nd out of 175 countries and territories included in the IT index for
corruption in 2014. Much has been recently written about corruption in Mexico. It is readily
apparent that corruption and impunity are currently the biggest problems that Mexico faces.
In the past year, cases of corruption have come to light at every level of government
(federal, state, and municipal). The most apparent one was the case of the “white house” of
president Peña Nieto, with a value of 7 million dollars, mostly because of the cloudiness of
the origin of the resources with which the house was acquired—which was undoubtedly
related to Grupo Higa, a company favored by local and federal governments for the
construction of public works.
However, this is just the most notorious case, for its having involved the president. In fact,
corruption has permeated all administrative areas of the federal government and most of the
Mexican states. In one single day in February 2015, journalist Carlos Loret de Mola told
the story of a series of corruption cases that occurred on that date alone. To mention a few:
the houses owned by Jose Murat, ex-governor of Oaxaca; the millions of pesos stolen by
the family of former governor of Guerrero, Angel Aguirre; arrests for suspected fraud in the
Congress of Jalisco; and other types of fraud, such as simulating a Melate game, which is a
contest created by Pronosticos Deportivos, a Mexican government institution created to
raise funds through gambling to supposedly be distributed to public assistance programs.40
Corruption has not changed in Mexico—and some might say it has even increased—despite
the change of ruling political parties in the government. Take, for example, the very famous
case of Oceanografia, which was linked to the two periods of the PAN federal government
(2000–2012). The investigation of the Attorney General of the Republic revealed that
Oceanografia was part of a web of officials and former officials of PAN during the
presidential terms of Vicente Fox Quesada and Felipe Calderon Hinojosa, which involved
Jorge Alberto and Manuel Bribiesca Sahagun, the sons of Marta Sahagun, the wife of
former president Vicente Fox. Pemex executives would have benefited illegally by
awarding Oceanografia 321 contracts for 8,000,744 million pesos between 2010 and 2012,
40
“Loret de Mola claims to be fed up with the corruption in Mexico,” YouTube video,
https://www.youtube.com/watch?v=SkIQplg8Z_Y.
casting doubt on how the contracts of Pemex were granted during PAN’s governments.41
Moreover, related to the PRD, the party that has governed Mexico City since 1997, is the
case of Line 12 of the Mexico City metro, a multimillion dollar project that, besides being
tainted by corruption, initially did not work for several months, and for it to proceed more
than twice the resources initially outlaid for the project had to be committed to correct its
flaws. These are some of the most notorious recent instances of corruption in Mexico.
One aspect of corruption in Mexico that has not been addressed with the depth required in
academic circles, and one where there is currently a strong drain on public resources, comes
from the theater of purchases, services, and public works contracts by Mexican institutions
that operate with these funds, which are intended to be subject to a comprehensive system
of controls to prevent corruption, including a series of regulations for transparency42 and
accountability. 43 Politicians, responsible for governmental acquisitions, colluded with
senior government officials, in each of the units that operate with public funds, and with
entrepreneurs, have found how to get around the entire anti-corruption legal structure. This
type of corruption, according to the classification presented in the table below, is mainly
collusive and enters the bureaucratic and political arena. That is, these are acts of public
servants in low and high ranks with connections with companies.44
41
“10casosdecorrupciónmuy,peromuycercanosalpoderpolítico,”SinEmbargo,November12,2015.
Transparencyisaconceptthatindicatestheclarityofgovernmentproceduresandpublicadministration,
i.e.,thepossibilitythattheymaybeviewedwithcompleteclaritybythecommunityinitshistory,execution,
andpurposesasameansofensuringtheiraccuracyandhonesty.Forabroaderdefinition,see:J.Galindo
andP.Escudero(2007),10.
43
Accountabilityherereferstotheobligationacquiredbypersonsactingonbehalforinterestofothers,and
whohaveperformedactsofadministrationormanagementinrelationtogoodsthatdonotbelongtothem
exclusively. Accountability is an obligation that has to be presented when anybody requests information
considered as publc. The detail report shall be submitted within a reasonable period of time. Applied to
publicissues,weunderstanditasasystemthatontheonehand,forcesthepublicservanttoreportindetail
their actions and the results thereof, and on the other hand, provides the citizens with mechanisms to
monitortheperformanceofpublicservants.
44
Bureaucraticcorruptionoccursintheloweradministrativelevelsandinsituationsinwhichanauthority
hastheabilitytoextractincomethroughextortionormanipulationofthelaw.
42
Table 4. Types of Corruption
Bureaucratic Corruption
Political Corruption
Extortive Corruption
Presentation of services Licenses,
property,
(health, education, licenses, expropriation, court rulings
police)
Collusive Corruption
Arrangements to avoid or
deviate
from
standards
(taxes,
quality
control,
permits), public procurement
“Close
links”
between
companies and politicians
(regulation of public utilities,
public works), collection of
high taxation
Source: OECD. (2015), Consequences of Corruption at the Sector Level and Implications for Economic
Growth and Development, OECD Publishing, Paris.
This is where the biggest area of crony capitalism exists in Mexico today. Privatization
processes45 such as those highlighted in the previous section do not occur every day, but
there are constantly other tenders for government procurement, services, and public works
of all kinds that allow favoring the friends of politicians, who, in return, deposit a
percentage of the income from the business into the politicians’ bank accounts. The
problem with this kind of corruption is that it is almost impossible to trace if carried out
meticulously.
- The procurement process
Acquisitions, leases of personal property and services of any nature (procurement), and
public works contracts, as well as services related to them (hiring), are governed primarily
by Article 134 of the Constitution and are subject to both the FTAs, as this contains a
chapter on government procurement and a series of special laws, regulations and
administrative documents of specific agencies of public administration. Among the laws
that the procurement processes are subject to include specific laws on the subject, such as
the Law of Acquisitions, Leases and Services of the Public Sector and the Law on Public
Works and Related-Services, which are of federal character and apply for any type of
resource that exercises public administration. Therefore, these laws are subject to all
government agencies engaged in these public resources, including autonomous agencies
45
Thisdoesnotmeanthattherearenonewsectorsbeingprivatized;somelikelyincludetheenergysector
andprobablythewatersupply,whichwillsurelyenricholdandnewentrepreneursandpoliticiansofboth
theoldandnewguard.Thefollowingarticle,“Energíadecuatesparacuates:la‘puertagiratoria’arrasaen
2015,”documentsthe"friends"whowillenjoythefruitsofthefirstroundofpublictendersmadeavailable
following the energy reform that started in 2015: http://www.sinembargo.mx/18-12-2015/1574193.
NotablepeoplethatareeitherdirectlyorindirectlyrelatedtotheseprocessesincludeformerpresidentsFox
andSalinasandbusinessmanAlbertoBailleres.
such as the Bank of Mexico, Federal Electoral Institute, and the National Commission of
Human Rights, among others.
The exercise of public resources is subject to the laws of acquisitions and public works
stated above and the whole system of transparency and accountability. As such, the public
servants of all departments and agencies of government have found a way to turn the
system and favor their entrepreneur friends. In two of the public acquisitions modalities:
direct adquisition and invitation to three suppliers, there are virtually no restrictions on
buying from whichever suppliers (entrepreneurs) that the public servant wants.
Consequently, with an invitation to three, a corrupt public servant simply must put together
a proper theater inviting three suppliers, often in collusion between them, to profit from
anyone who is sought to win.
Once the acquisition is procured, the business employs various modes deliver part of the
proceeds to public server or servers. This can range from money (called tithe, representing
at least 10% of the profit) in cash, bank deposits in strawmen accounts, or some luxury
holiday, or provide a personal service to the public server, if it is a company of services. In
the case of public tenders, payments may include luxury homes at a discount (as with the
white house of Peña Nieto), or the financing of political campaigns. The problem for
corrupt public officials is that the sum of the operations conducted by direct awards and
invitation to three may not exceed twenty percent of the budget for acquisitions, leasing,
and services authorized by the agency or entity in each annual budget exercise.
With open bids, the process is a little more complex because there are often disagreements
with suppliers who did not win the contest or very powerful competitors, but the secret is to
determine product features that only their close suppliers can offer. Additionally, the
requirements that may be made of bidders are limitless, so institutions can order any
requirement, disqualifying unwanted participants.
Today there are senior officials and staff from the units who, with previous orders from
their superiors or on their own initiatives, make acquisitions with expert management who
fulfill the law fully, making it virtually impossible to detect corruption unless there is
negligence on the part of public servants or businessmen (for example, when their calls are
tapped or when they are photographed in public places).
Several cases of this type have recently come to light. For example, in late November 2015
an illegal recording was made in which the CEO of Petroleos Mexicanos (Pemex) allegedly
manipulated bids to enable the construction company OHL Mexico to win a contract from
the Federal Electricity Commission (CFE) to construct an electric power plant for 477
million.46 In addition, it is said that OHL had never contracted with Pemex, but in the first
three years of the Peña Nieto presidency, the company has been granted approximately 10
billion pesos in contracts.47
Before we get into the analisys of in which ways these grey areas have an impact on foreign
direct investment, I will make a summary of the variables that teorethically are most take
into account by foreing investors.
International Investing
Some of the most common ways to invest internationally are: either through mutual funds,
depositary receipts, exchange-traded funds, foreign stocks, or direct investments in foreign
markets (FDI). The first four types are known as portfolio investments, and their main
difference with foreign direct investment (FDI) is that in these four types of investments,
foreign investors are not willing to increase management control over local companies, but
to build an investment portfolio. The type of investment and market selected is directly
related to the amount of risk and involment foreign investors are willing to take in a
specific market. Investors take into account sudden changes in market values and changes
in foreign currency rates, among other risks. For example, international mutual funds can
be less risky than direct investments in foreign markets; and risk can also be avoided by
investing in the developed economies. In addition, something that is usually not studied or
recognized is that crony capitalism may limit the risk of investing directly in developing
economies, if a specific foreign investor is connected with key politicians in a local
government to guarantee his investments.
Why do many investors invest in foreign markets?
The main reasons why people invest abroad are: diversification and growth. In the first
case, they spread their investment risk among foreign companies and markets that differ
from that in their own economy; and, in the second case, they can exploit the potential for
growth that some foreign economies have, especially in emerging markets.
By including exposure to both domestic and foreign stocks in a portfolio, the portfolio's
overall investment returns will be more secure. That is because international investment
returns sometimes move in an opposite direction than investors’ local market returns. Even
when markets move in the same direction, the degree of change may be different. In the
46
“DestapannuevoescándalodeOHL;Lozoyahabríamediadoafavordelconsorcio,acusan,”NoticiasMVS,
November27,2015.
47
“OHL nunca obtuvo contratos en Pemex, pero llegó Lozoya y hoy suman casi 10 mil millones,” Sin
Embargo,November27,2015.
particular case of U.S. markets, when the returns from emerging markets are compared with
U.S. market returns wider swings in value may be observed. Investors usually balance these
considerations against the possibility of higher costs, sudden changes in value, and the
special risks of international investing.48
As mentioned above, an additional variable that determines why people invest abroad
should be added in this analysis: the special conditions and guarantees given by the local
government to invest in a country. When this country can offer preferential terms arbitrarily
and guarantee investment, the entrepreneur, whose ultimate goal is to maximize profits,
will seaze it.
Although anyone takes risks when investing in any stock, international investing has some
special risks:49
Changes in currency exchange rates. When the foreign currency is strong compared to the
local currency, this strength increases an investment return because foreign earnings
translate into more earnings in local currency. If the foreign currency weakens compared to
the local currency, this weakness reduces investment return because earnings translate into
fewer earning when transformed into local currency. In addition, some countries impose
foreign currency controls that restrict or delay investors from moving currency out of a
country.
Political, social and economic events. Usually these factors equilibrate portfolio
diversification, but they also contribute to the risk of international investing.
Considerable and sudden changes in market value. Like all markets, foreign markets can
experience dramatic changes in market value.
Lack of liquidity. Foreign markets may have lower trading volumes and fewer listed
companies. Some countries even restrict the amount and/or type of stocks that foreign
investors may purchase. Investors may also have to pay premium prices to buy foreign
securities and have difficulty finding a buyer when they want to sell.
Lack of information. Many foreign companies do not provide investors with the same type
of information as developed countries public companies. It may be difficult to locate up-todate information, and the information the company publishes may not be in English.
48
OfficeofInvestorEducationandAdvocacy,“InternationalInvesting”,InvestorPublications.(Washington,
D.C.:U.S.SecuritiesandExchangeCommision.)
49
Ibíd.
Differing market operations. Foreign markets may operate differently from local trading
markets: there may be different periods for clearance and settlement of securities
transactions. Some foreign markets may not report stock trades at the same speed as local
markets.
Reliance on external legal remedies. If investors have a problem with their investment, they
may not be able to apply legal means in their home country. They may have to rely on
whatever legal remedies are available in the company's home country.
About FDI
There are numerous indexes of socio-political risk that present a negative correlation
between socio-political risk and FDI. For example, “Business Environment Risk
Intelligence has developed an index that ranks countries according to their degree of
political risk. In doing so it looks at internal causes of political risk-a fractionalized political
spectrum; how far the people are divided by language, ethnicity, and religion; and coercive
political risk, that is, dependence on (or importance to) a hostile power, or both. It also
takes into account symptoms of political risk-mass demonstrations and politically motivated street violence. This qualitative index rates countries from 0 (complete instability) to
100 (complete stability).” The study concludes that: “Broadly, and not surprisingly, the
index rating is higher for countries with a high net share of FDI in GDP.” “For all countries
the perception of sociopolitical stabilityplays an important part in determining the
destination of FDI. For countries with low FDI flows, instability is a significant deterrent to
FDI.”50
However, here one can derive an important question, what is it that makes that, despite a
terrible socio-political risk and other risks, investors keep investing in certain countries? In
other words, why in MexicoFDI persists despite the high social and political risks, such as
drug trafficking, which has even questioned the viability of the state? In which side should
corruption play in social and political risk indexes?
Even though there are other many variables that are considered important in attracting FDI
to countries, such as the relative size of exports, but there is a variable of special interest to
us that has to do with the indexes that measure hospitality:
50
Kwan W. Jun, “What determines foreign direct investment?” From DEC notes- Research Findings (The
DevelopmentofEconomicsVicePresidencyoftheWorldBank,number16,August,1996.)
Operations risk index
Again, this interesting index was developed by Business Environment Risk Intelligence.
“Broadly, each country is ranked according to the preferential treatment, if any, given to
native business people and to the general quality of the business climate. Within those
ratings a wide range of factors are evaluated, including political continuity, attitude toward
foreign investors, balance of payments, economic growth, enforceability of contracts,
currency convertibility, and infrastructure and its management. Ratings range from 0
(totally unacceptable conditions) to 100 (superior business climate). As expected, a
qualitative index for general business conditions is found to be a significant factor for FDI
flows.” “A similar rationale can be applied for favorable business conditions. Rankings in
the operations risk index seem to be a more significant determinant of direct investment in
the high FDI group. This is consistent with the general notion that some developing
countries are not seriously considered as candidates for FDI by foreign transnational firms
until the climate for corporations becomes more hospitable.”51
However, some studies claim that “investors (investing abroad) generally avoid corruption
because it is considered bad and can create inefficiencies in operations”52 But, actually
some of the same variables that theoretically could discourage FDI, such as political risks
and social instability,53 or lack of institutional transparency, which conceals corruption, that
can also attract it indirectly. For example, the lack of transparency allows foreign
companies to obtain certain conditions that favor them and meet their objective of
maximizing profits. It is a reality that in a situation of low corruption, a country can perhaps
attract more foreign direct investment at the aggregate level, such as Shang-Jin Wei affirms
in his article on China and Corruption.54 However, as he points out, the idea to write this
article came from how surprised he was to see high levels of corruption in China and high
levels of foreign investment at the same time.
The intention of this article is not to analyze each and every one of the factors that allow
corruption to be an impediment to foreign direct investment, but rather analyze a scenario
in which businessmen agree to invest in a country despite the issue of corruption. This has
to do with the guarantee of their earnings, no matter whether it is under a corrupt scenario;
taking care, of course, of not harming the reputation of their companies. In this sense,
51
Ibid.
Mohsin Habid and León Zurawicki, “Corruption and Foreign Direct Investment” Journal of International
BusinessStudies,33,2(SecondQuarter2002),291.
53
There are numerous indexes of socio-political risk that propose a negative correlation between socialpoliticalriskandFDI.
54
Shang-JinWei,“LocalCorruptionandCapitalFlows”BrookingsPapersonEconomicActivity,2,pp.347-351
(BrookingsInstitutionPress,2000).
52
without questioning the assertion that in the aggregate an economy free of corruption
attracts more FDI, here we analyze the qualitative aspects that can even make corruption an
incentive.
In conversation with a promoter of foreign investment from Canada in Mexico, Carlos
Solórzano, he notes that extraterritorial laws affect Canadians in Canada, if they get into
corrupt business outside the country. In this sense, they will be very careful on how they
proceed doing business abroad. However, if after a “legal” procurement process to
undertake a business project in Mexico, the Mexican government suggest these foreign
investors to associate with a national company to do the business, and if that national
company is legally constituted in Mexico, they will do it, even if they are aware of the bad
reputation that the national company may have. Solorzano mentioned some examples. One
of them related to a procurement process that recently took place in PEMEX, where the
winning Canadian company was “forced” privately to associate with a private company
owned by a member of the Hank family.55
The Kia Motors case:
The Ministry of Economic Development of the Government of Nuevo León, in their
Facebook account (SEDEC Nuevo León), published the "investment agreement" between
the governments of Nuevo León and the municipality of Pesquería with the Korean
company Kia. The first two were obliged to give the third a benefits package in exchange
for the development and construction of an automobile plant. According to Alejandro Faya,
a specialist in economic competition, there’s no doubt that is worth supporting the draft of a
billion dollars in nine years, but that does not justify granting discretionary and excessive
privileges, some clearly overextended.
“While it might be within the practice to donate the land, enable basic services and
provide certain tax advantages, it is questionable that have forced the signatory
authorities, among other things, to: (i) ensure that the local Congress approved
reforms to local laws; (ii) granting exemptions (100 percent) of virtually all taxes
and state/municipal rights (payroll, for 20 years, and the property taxes by 5;
acquisition of property, property registration, land use, etc., including vehicle
ownership of senior management); (iii) give an irrevocable right to acquire the land
adjacent properties; (iv) build special infrastructure, such as roads, water tank, a
training center or a fire station. Many of these promises are extended to suppliers.
Even the "Mexican parties" have to manage tasks which should correspond to the
55
CarlosS.Ibarrolainterview20dejunio2016.
investor, such as negotiating services or telecommunications and rail fares.”56
Behind all these incentives and investment guarantees it is virtually impossible for a foreign
company to reject the invest offer, because, without taking into account ethical
considerations, as any rational agent, most companies seek to maximize profits. In fact, in
the administration of the current governor of Nuevo León, it has been confirmed, using
information from declassified official documents, that there existed irregularities at the time
of negotiation and consolidation of contracts and agreements between the previous
government of Nuevo León and the company KIA. “What is most striking is the full
willingness of more than one public official in the goal of bringing in the Korean company,
despite breaking (or changing) the law; practically giving away the state, indebting it, and
making high-risk contracts”, as was stated at the time by the law firm Santos Elizondo.
Months before the signing of the Memorandum of Understanding for Investment and
Construction (MOU),57 “Santos Elizondo warned the Medina administration about the high
risk that this MOU represented for the government, because KIA had no obligation to the
Nuevo León government. In addition, Santos Elizondo mentioned that the Koreans could
withdrawn from the state at any time, and, even, KIA could take action against Nuevo León
through an arbitration procedure based in London. The contract signed by Medina left
Nuevo León at the mercy of (KIA).”58
There is also evidence that the federal government supported negotiations with KIA in
Nuevo León. In the same process of declassification of documents by the current
government of Nuevo León, a letter was found that the Secretary of Economy of the Peña
Government, Idelfonso Guajardo, sent to directors of KIA, “where he claims to know in
depth the KIA-Medina contracts, and backing them up.” In the same letter “he promised to
obtain, through the Congress, the federal funds needed to guarantee the gifts to KIA.” Nor
Medina locally, or Guajardo at the federal level, respected the constitutional separation of
powers, in order to please a foreign power.59
This brings us to the question of what the politicians involved in this business were earning.
First of all, for high-ranking politicians there was a political ambition. In fact, most of the
negotiations with KIA were made in 2014, a year before the elections of 2015, where the
favorite to occupy the PRI candidacy for the governorship of Nuevo León was Guajardo.60
56
AlejandroFaya,“Kia,NuevoLeóneincentivos”,DiarioReforma,November23,2015.
The KIA representatives did not sign the contract presented to them, approving instead as contract a
simplememorandum.
58
InspectorPolítico,“CasoKia:Medinanoactuósolo”,AltavozMéxico,June4,2016.
59
Ibíd.
60
Ibíd.
57
In second place, the land donated to KIA came from a person close to the governor Rodrigo
Medina, who purchased some land for 56 million pesos and sold it to the government for
186.61 Then, the government of Nuevo León hired a person close to the father of Medina to
level the land and leave it ready to be donated to KIA. Land leveling cost 1,600 million
pesos.62
Finally, there is a current research by the Anti-Corruption Prosecutor of Nuevo León63 that
has to do with the future profits that politicians would get from direct sales of KIA in the
domestic market.64 It is still premature to make conclusions on this issue, since tracking
such transactions is complicated, because they are often verbal agreements involving covert
operations. In this sense, it is difficult to affirm with the information we have, that Koreans
would share profits with politicians directly; however indirectly yes, for all the investments
of public resources in the plant and land that benefited people close to the previous Nuevo
León government. In addition, it is very possible that any other Mexican company hired for
the establishment and operation of the project had ties with the government, as discussed
above for the Canadian case.
After KIA threatened to leave Nuevo León in January 2016, the current government of that
state renegotiated the irregularities with the company. This allowed coming to a new
agreement by mid-year, which involves reducing incentives for KIA. With the new
61
Thelawconditionsthedonationoflandto50%ofitsvalue,andKIAwasgranted100%.
AccordingtotheAnti-CorruptionAttorneyofNuevoLeón,thereisevidencethatfortheestablishmentof
thisbusinessacomplexnetworkofofficials,realestatedevelopers,builders,friendsandfamilywasbuilt,to
whichtheGovernmentofRodrigoMedinadiverted3thousand600millionpesos.DanielReyesandMirna
Ramos,“Desvían3600mdpenNuevoLeón”,DiarioReforma,June4,2016.
63
Currently, the Anti-Corruption Prosecutor of Nuevo León investigates the alleged anomalies detected at
thepreviousadministrationinitsnegotiationswithKiaMotorsfortheconstructionofaplantinPesquería,
following a complaint lodged by the Ministry of Economic Development in conjunction with the State
Comptroller. The negotiation of excessive incentives not permitted by law, the purchase of land for the
installationoftheplant,includinglandownedbytwofriendsofformerGovernorRodrigoMedina,theworks
oflevelingtheland,andtheintroductionofinfrastructure,arepartoftheinvestigation.Theresearchbodyis
determining whether the agencies that negotiated agreements with KIA had the authority to do so; if the
levelofincentivesgrantedwaslegalornot;andwhethertheoriginoftheresourcestoprovidesuchsupport
was correct. It also studies if there were anomalies in tenders for contracting works and if there was
overpricingandfavoritismtowardcertaincontractors,includingafriendofHumbertoMedinaAinslie,father
oftheformergovernor.InthecaseoftheacquisitionoflandfortheinstallationoftheplantinPesquería,
thisbodyisinvestigatingwhetherthepricespaidtoindividualswereaccordingtothelawandwhetheror
not there was influence peddling and insider trading, especially taking into account that among the
beneficiariesthereweretwoclosefriendsofMedina.
Mirna Ramos and Juan Carlos Rodríguez, “Investigan en NL corrupción con Kia”, Diario Reforma, February
29,2016.
64
Interview with Eduardo Alonso Mendivil, Legal Director of the Ministry of Economic Development of
NuevoLeón,June20,2016.
62
agreement, the state of Nuevo León will save 7,500 million pesos.6566 The case of KIA in
Nuevo León is not an exception, but the rule in Mexico. The difference here is that the new
governor, “el bronco” won the election as an independent candidate, and this has allowed
him to exhibit and combat corruption more directly.
Conclusions:
My main argument is that crony capitalism and corruption do not necessarily imply
negative consequences for international business activities if other variables are controlled
at the domestic level. However, this does not justify the existence of those grey areas in
countries. Crony capitalism and corruption terribly affect other local aspects, such as social
mobility, market competition, social stability and domestic security, among others. In other
words, although crony capitalism may not impede international economic transactions, this
does not imply that it has no negative social and economic consequences. In addition, there
is evidence that the cleanest countries attract more FDI at the macro level tan those that
have more corruption. So, eventhough corruption may not affect operations of some
international businesses at the local level, in general investors prefer to invest in a non
corrupt countries unless they obtain ceirtan specific guarantees that play in the direction of
maximizing profits with less risk. The process of investing in a foreing country could
include accepting things like associating with local entrepreneurs of less reputation is that
does not affect utilities. In that sense, in my work I assume that generally ethical
considerations do not play a role in business, althought this could vary from entrepreneur to
entrepreneur.
My paper contributed to two specific debates. One is about the degree of crony capitalism
present in Mexico historically. Some historians, such as Stephen Haber, argue that, during
the porfirian period (1876-1911), Mexico represented a clear example of weak institutions
and crony capitalism; while other authors mention that the Porfiriato was a period of
construction of institutions that were not present in Mexico between 1821 and 1876, and
that the Mexican economic activity was more heavily regulated during that period than
what Haber and his followers recognize. In this author's opinion, the reality is in the middle
of what Haber and his followers have argued about crony capitalism in Mexico, and what
the others have claimed. That is, crony capitalism was not as prevalent as the neoinstitutionalists say, but more prevalent than what the other authors acknowledge. In fact, if
as mentioned by most of the others, federal law required that, under certain conditions,
some companies had at least one public official on their boards, these officials must have
65
ElFinanciero,“NuevoLeónahorra7mil500mdpconnuevoconvenioconKia”,June8,2016.
DanielReyesandAlfredoGonzalez,“ConcretandisminucióndeestímulosaKia”,ElNorte,June8,2016.
66
obtained economic benefits; thus, the economic incentives in these sectors may have been
distorted under these conditions. In addition, whether or not the effects of the Porfiriato in
Mexico had more weight than what neo-institutionalists recognize, the formulation of laws
and policies in this period was often the product of the mixed interests of political and
business elites, which is an important differentiation between cronyism and crony
capitalism. A clear example of this is found in the construction of the General Law of
Credit Institutions of 1897 by the federal government in conjunction with the few banks
that existed. This law contributed to a highly concentrated banking sector that, as
mentioned in the previous section, led to a highly concentrated industrial structure. The
construction of laws favoring certain power groups has not varied considerably over time in
Mexico. In fact, in these days we can observe that in the creation of the new “anticorruption
system”.
The other debate is about the variables that are taken into account when investing in a
foreign country. Country risk indexes are just one of the variables considered by investors,
and they are much more important for speculators, who usually play with volatility around
the world. In other words, country risk indexes only play a fundamental role in speculative
transactions. In addition, local corruption and crony capitalism do not necessarily elevate
the risk if, regardless of the legal system, they are under the control of local power
groups, including government officials, who sometimes negotiate directly with foreign
investors. How foreign companies invest in Mexico has been exemplified in this paper by
the case of the South Korean company KIA Motors.
The title of a recent article that was published in the periodical electronic publication, Sin
Embargo, summarizes very clearly what is happening today in Mexico: “Corruption Steals
Covers, but Nobody Goes to Jail,”67 referring to all the books and articles being published
today in various media without the crime being prosecuted. The clearest case is illustrated
by the publication in 2015 of the book of the research team led by journalist Carmen
Aristegui, La Casa Blanca de Peña Nieto, whose research details all the dirty operations
behind this property. The work has even obtained national and international awards, while
Carmen Aristegui has received awards in several countries, including Germany and France,
which acknowledge the merit of denouncing the corruption uncovered in Mexico.
However, despite all this, no legal changes have been made in Mexico.
This speaks of the cynicism in contemporary Mexican politics. Why is Enrique Peña Nieto
still president of Mexico after a scandal like this? A few days after the publication of the
book, and a few months after the terrible scandal that created the news of the white house,
Layda Sansores, Labour Party Senator, personally delivered the book to Peña Nieto and
67
“2015:Lacorrupciónrobaportadas,peronadievaalacárcel,”SinEmbargo,December17,2015.
suggested in a letter: “If you still have a shred of integrity, resign.” Given this note, Peña
Nieto simply smiled discreetly and nothing else happened.68
This does not mean that scholars should stop writing. In fact, I am here doing my bit for the
cause. However, the problem is deep, especially now that the profits of organized crime
favor the system. In this sense, without going into details, society must continue promoting
a number of aspects that play to weaken corruption in the long term, from education, free
expression and the strengthening of social movements with genuine and noble objectives.
Finally, it is noteworthy that some of the recent conclusions reached regarding crony
capitalism in general are that countries with the lowest level of this condition usually have
better bureaucracies in terms of efficiency and stronger institutions, as has been affirmed by
the World Economic Forum. However, efficient governments are not guarantee that crony
capitalism is less. Hong Kong and Singapore are saturated with millionaires in “crony”
industries, in addition that Hong Kong got the worst rating in the Index of crony capitalism
of The Economist magazine, beating Russia, who got second. Meanwhile, Singapore
ranked fifth place, beating countries like the Philippines and Mexico.69
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