 Thesis Appendices
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Apart from the role of domestic interest groups in slowing the pace of privatization, the debt imperative argument remains the strongest explanation behind the Mexican and Argentine privatization program. The debt imperative argument ranks debt concerns—and the drive to repay those debts to improve the public sector deficit and demonstrate fiscal responsibility to international lending organizations—as the primary motivation behind the privatization processes in Argentina and Mexico over the time frame from 1982 to 1992. Notably, a country’s external debt plays a significant role in a country’s bond market and on interest and exchange rates. These are all vital factors in attracting investment¾ by both domestic and international actors. Following the 1982 debt crisis, Mexico experienced severe capital flight as many domestic actors disinvested and took capital to the United States and other nations. Equally, this same period saw many international investors and large banks refuse to continue the easy financing that had occurred during the years of abundant petro-dollars and high oil prices. Finally, the drain on scarce government resources by state enterprise deficits was becoming increasingly unmanageable in the tight years of fiscal austerity. This internal debt problem works only to hide the full magnitude of the external debts the Mexican and Argentine governments were facing and adds greater support behind the relevance of the debt imperative argument in vitally influencing the privatization decisions of policy-makers in Mexico and Argentina in the late 1980’s and early 1990’s. This chapter acknowledges and tests the full impact of this debt imperative argument and the ways in which it may have played out in respect to labor union opposition in Mexico and Argentina. Using analytical trends from the case studies and sectoral data, this argument will attempt to clarify the cross-cutting nature of the role that external debt played in the privatization process. This will be done by ranking the industries privatized and order of privatization by fiscal revenue and debt transferred within each sale. Under a pure debt imperative argument, Pemex and to a lesser degree Luz y Fuerza should have ranked with Teléfonos de México in potential revenue to the state and accordingly been given first priority in the privatization process. However, since neither of these firms were sold at all under the Salinas administration, the true impact of the debt imperative argument in explaining variation in the privatization process remains to be seen. Analysis of the role of investment concerns, the impact each industry had on public sector debt and total GDP, the timeline of international events and correlation with privatization policy, and of the case study industries, will help to clarify the strength of the debt imperative in Mexico and Argentina. Deficit Reduction and Privatization The link between deficit/debt reduction and privatization is not as fully straightforward as would first appear. The World Bank and the IMF did not directly push for the privatization of large state enterprises like Teléfonos de México, but did place considerable pressure on policy makers to make noticeable and significant changes to its public deficit. (Ramamurti 1996: 73) Effecting this change leaves opens only a few options: raising taxes, issuing bonds, cutting spending, and privatizing large state-owned industries (both as short-term deficit reduction for sale of the industry itself, and as a means of eliminating the annual drain on public resources as a result of the operating deficit of most state-owned enterprises). Raising taxes by a degree significant enough to impact the public deficit, even to a broad and general public, would have met serious opposition from a population which saw real wages in 1989 fall 42.5% from the previous year. (Ramamurti 1996: 118) Moreover, in accord with the fiscal austerity agreements in place at the time, inflation was more than doing its share at eroding the wages of the working class and leaving little room for a heightened tax burden. Bonds were never seriously considered as a credible alternative, especially given the incidences of flight capital the government was fighting. Mexico and Argentina were already unable to raise additional credit, and further borrowing would have simply heightened the IMF and World Bank’s concern. Finally, the government could have slashed domestic spending, yet this option more than any would have raised a considerable response from a very concentrated set of domestic interest groups. In particular, the Mexican government’s PRONASOL program has increased domestic social spending in certain electorally vital states and districts in order to minimize the effects of austerity programs. In sum, a dramatic decrease in social spending would have been disastrous for the ruling PRI party, and may have contributed to its overthrow on the political level. Thus, as a condition for its continuing assistance, the World Bank and IMF emphasized deficit reduction—and accordingly privatization—as a means of improving internal economic conditions. Though the exact extent of the role of opposition groups and domestic actors is uncertain is influencing Mexico and Argentina’s decision, the debt imperative argument is certainly a powerful one behind the drive for privatization. What is ironic is that this argument is the one given least credence publicly by political actors within the government at the time of privatization—largely for fear of a perception of catering to foreign interests. In particular, Jesus Silva Herzog, Minister of Finance under de la Madrid, was quoted in a recent interview as stating that the "focus shifted to reducing the deficit and administrative chaos after the fiscal crisis of 1985 … in order to restore business confidence and investment." (Schneider 1990: 31) An Overview John Waterbury and Judith A. Teichman argue that the pressing need to reduce the fiscal deficit¾ and the belief that public enterprises were the most important contributor to that deficit¾ appears to have been the primary motivating factor behind divestiture surrounding the Mexican decision to privatize in the 1980’s and 1990’s. (Waterbury 1993: 36) Waterbury, in attempting to find a common element behind state divestiture in Egypt, Mexico, India, and Turkey, comes to the conclusion that this public deficit reduction mindset is a common one in developing countries for whom international debt and monetary pressures are strong. (Waterbury 1992: 185) Notably, Tables 5.3 and 5.4 in the appendix demonstrate how public enterprise expenditures by the national goverment comprised 18.2% and 8.3% of the of the entire GDP in Mexico and Argentina respectively—helping to rationalize why privatization is often the answer for debt problem. With the criticism that the Mexican and Argentine governments likewise did not establish much of a regulatory framework for these new industries in their haste to finish the privatization process, it becomes possible that this short-term deficit correction¾ referred to here as the debt imperative argument¾ was such a vital factor in Mexico and Argentina as to make feasible the sacrifice of domestic labor interests along with efficiency, competition, and even a fair asking price for many segments of state industry. (Glade 1996: 16) Short-term deficit correction, as a means of signaling investors and other international lending and monetary actors, may indeed have been overemphasized by Mexico’s leadership. The Mexican SEMIP (Secretaría de Energía, Minas e Industria Parastatal / Ministry of Energy, Mines, and Para-state Industry) echoed these concerns throughout much of the privatization process—publicly supporting a much more slower-paced privatization program than that urged by the Mexican Ministry of Finance. From an anonymous interview by Judith A. Teichman, one senior SEMIP official described their [Finance Ministry] attitude as "very short term." (141) Though SEMIP admittedly saw its field of interest as including "insuring the survival of state enterprise," a slower paced process that would provide more time to improve productivity and plan the often-over-looked regulatory component of the industry was somewhat at odds with the debt imperative. Teichman points to the timing of the mid-1980’s IMF agreements and the influence of US ‘Reaganomics,’ the 1989 Brady Plan, and the desire to enter NAFTA in 1990 through 1992 as vital indicators of the importance of quickly reducing the budget deficit. (Teichman 8) Even though deficit reduction was of prime importance over this time period, Manuel Sánchez Gonzalez argues that the formative privatization period (1983-1988) only resulted in revenues of US$1.03 billion—only about 20% of the revenue collected in the Telmex sale alone and 10% of the privatization revenue collected from 1989-1991. (Sánchez Gonzalez 171) Sánchez Gonzalez’s conclusion is that as only 2.1 percent of the GDP of the total public sector, these early sales could have affected state capital only minimally. (172) Privatization over this six year period was more aimed at "seeking changes that would favor a new production structure for the country"—namely the modernization imperative argument. (171) This reasoning works well up until the actual sale of Teléfonos de México, which in itself brought in more money to the government than the previous sales of all other public firms in Latin America combined up to 1991. (Teichman 4) Sánchez Gonzalez responds that these funds were earmarked to repay the internal debt of the public sector, not the external one. (Teichman 4) Thus he concludes that deficit financing was certainly not the early influence behind privatization, and that it did not become so once larger firms with greater potential revenues hit the auction block. Argentina’s privatization record is not nearly as difficult to interpret as that of the Mexican government. Unlike Mexico, Argentina initially privatized relatively few and primarily very small industries over the course of the 1980’s—primarily due to combined opposition from labor unions and by the Peronist Party within Congress. (Petrazzini 64) By the time Carlos Menem took office in July 1989, Argentina simply did not have the strong early record of small-scale privatizations around which Sánchez Gonzalez bases his claim against the debt-imperative argument in Mexico. In fact, Pablo Gerchunoff and Guillermo Cánovas are quite straightforward in asserting that in Argentina, the "assets sale policy was a macroeconomic tool to stabilize the economy rather than a tool of structural reform policy aimed at increasing productivity in the long run." (Gerchunoff 1992: 187) Rodolfo Terragno, Minister of Public Works under Alfonsín, is quoted as saying that "without exception, we were interested in reducing the fiscal deficit." (Schneider 36) Gerchunoff and Cánovas make the strongest case for the debt imperative argument in the first two years of privatizations after Menem took office (1989-1990, which included ENTel and Aerolíneas Argentinas). They argue that in this period the rationale behind the process fit the debt imperative perfectly: privatizations helped cancel the public external debt to a large degree and make it possible to negotiate with the large lending agencies. (Gerchunoff 1996: 193) Only later, by 1992, had the debt situation resolved itself enough to consider the modernization imperative argument a logical explanation of the privatizations in the electricity, gas, and oil sectors. Investment Concerns External factors—most importantly Mexico's ongoing debt/currency crises and IMF negotiations—appear at first as the predominant component of the privatization decision: according to Gordon Davis, a Buenos Aires Stock Exchange broker, the Argentinean decision to privatize Telefonica was motivated primarily on political grounds surrounding the IMF. (Hawkins 2) Carlos Menem entered office in July 1989 and inherited an economy that had experienced a 1% annual decline in real GDP since 1981. (Fenster 2) Mexico’s pressures were tight but not quite on this level; even with its 1985 earthquake, October 1987 stock market crash, and painful Economic Solidarity Pact to fight inflation, Mexico was able to work out a new deal with the US Treasury and Morgan Trust and thus continue to meet its debt payments. (Shapiro 10) Yet external factors cannot easily be dismissed in either case. According to Helen Shapiro, the Mexican sale of 116 state firms in the first half of 1988 netted US $422 million, the second half of 1988 added another US$612 million with 21 additional firms, and the sale of Aeroméxico raised US$330 million. (12) In a country with a 1988 Gross Domestic Product of US $226.38 billion and external debt of US $76.68 billion, these sales provided much needed income to help the Mexican state meet its budget and make debt payments as well as further the fight against inflation. (Shapiro 25) Later privatizations dwarfed these figures—only 10% of that obtained between 1989-1991 (see table below), but these early sales did significantly impact the fiscal deficit. Ravi Ramamurti makes the further claim that the World Bank’s role in Mexico’s privatization¾ unlike that of many other Latin American countries¾ was more one of slowing down the planned pace of privatization rather than encouraging it. (Ramamurti 1996: 73) The World Bank had certainly been promoting privatization in developing countries seeking structural adjustment loans, but at the time ‘large, monopolistic firms like Telmex were not viewed as candidates for sale.’ When the IMF did later come to support the sale of Teléfonos de México, it was one of ‘follower rather than leader.’ Despite Ramamurti’s claims to the contrary, it should be noted that the IMF and the World Bank—even without explicitly pushing for the sale of Telmex or any of the other case industries studied in this thesis—did place considerable emphasis on budget deficits and investment signals within a given country and industry. (77) Especially in the Telmex case, Salinas’ prime concerns were not correcting the budget deficit for the sake of a balanced budget in itself, but rather to attract investors and the investment credit through the signal that the Telmex sale would provide. Pemex’s special status as the symbol of nationalist pride, coupled with years of large public sector deficits—helped excuse it from this role. Luz y Fuerza had more potential to fill this role, but did not offer investors nearly the same promise of growth potential or payoff as did Teléfonos de México. The IMF and World Bank may not have called for Telmex to be privatized, or even for the privatization of any large SOE’s, but they did push Mexico for a serious commitment to reform. This reform was demonstrated in the most visible way possible. Telmex’s privatization, exactly because it was a healthy firm with large potential for growth, paved the way for greater international aid and a return of flight and international capital to the country. (Ramamurti 76) A similar case existed in Argentina, except that the need for capital was considerably more pronounced. In the second quarter of 1989, GDP fell by over 9%, the public sector deficit rose to 10% of GDP, and real wages for industrial workers fell by 42.5% compared to the year before. (Petrazzini 1996: 119) Ben Petrazzini’s "Telephone Privatization in a Hurry" article claims that Argentina’s huge fiscal deficit had it strapped for foreign currency to the extent that many government officials supported a privatization plan accepting only cash for the sale of ENTel and other similarly large state firms. Luckily, the Ministry of Economy was able to successfully argue for a more reasonable debt-equity swap system in the privatization process and not alienate international investors. All in all, Argentina received nearly US$214 million in cash from the ENTel sale and US$5.029 billion in debt and interest payments, leading to a total price (estimating Argentine debt in the secondary market at only 19% of its face value) of nearly US$955 million. (Petrazzini 1996: 127) Perhaps Petrazzini’s most interesting observation from this ‘forced sale’ is that foreign investors, and not the Argentine government itself, were the true winners in this reform process—earning rates of return ranging from 24 to 33 percent. (135) These investment returns are telling of the role that the debt imperative played in this process. Timing and the Debt Imperative Dominique Hachette de la Fresnaye, a professor at the Institute of Economics of the Pontificia Universidad Católica de Chile, presents an alternate framework from within which it is possible to analyze the Mexican and Argentine privatization decisions. (Hachette 137) Hachette’s approach establishes a model of what an ideal privatization should bring a country, and then measures departures from this to evaluate the rapidity and haste of actual privatizations and correspondingly the level of urgency for foreign capital inspired by the debt imperative argument. She argues that in a country whereby fiscal income from privatization is not the overarching concern, more care will be given to efficiency and spreading wealth for economic and political objectives. (161) Price maximization is essentially a short-term consideration, but one that does send a strong signal to those external forces to whom many countries were looking to influence during this period. Maximizing selling price depends on confidence in the economic process, sale of controlling interests in enterprises, ‘transparency in the transfer of enterprises’ to the private sector, and competition among bidders. (158) Yet price is a double-edged sword; selling to institutions with high solvency rates and allowing considerable foreign access to insure competition will guarantee fair market values, but in a system of poorly developed capital markets will equally promote economic concentration and threaten the very social provisions the service is designed to provide. Moreover, simply maximizing the sale price often does not insure that the fiscal revenue over the long term—forgone gross earnings of the firm, expected taxes on the new firm, and privatization proceeds themselves—will give the state a solid return on its sale. (Hachette 160) Hachette’s study focuses on Chile’s economic reforms over a period covering the late 1970’s, but found that efficiency gains over the medium and long terms were generally of much greater consideration than in Argentina or Mexico. (Hachette 139) Using this model, Hachette concludes that in Argentina and Mexico efficiency was compromised for sale price in a majority of the privatizations, effectively highlighting the role that the debt imperative played. Another means of testing out this hypothesis formulates the welfare value of different privatized firms in the Mexican and Argentine contexts with timing and relation to external events. Using the timeline in Table 5.9 listing international events and domestic privatizations within Mexico and Argentina, this section will attempt to establish a pattern of correlation, between international pressures and domestic response.
This most obvious correlation between the data are that the great majority of large-scale privatizations that occurred after the March 1989 Brady Plan, which offered the reduction of debt in exchange for promised reforms that would encourage the return of flight capital and investment. According to Judith Teichman, this agreement effectively called for "new regulations facilitating foreign investment, privatization of public enterprises, increased reductions in public expenditures, and trade liberalization." (Teichman 90) The Brady Plan reduced Mexico’s net transfers abroad by $4 billion, but on the downside these ‘voluntary’ debt reductions that were backed by the IMF and World Bank gave domestic governments little choice but to privatize to minimize the public deficit. Earlier in the process, the May 1986 time frame surrounding the Baker Plan and crucial IMF negotiations also included the closing of Fundidora Monterrey and the sale of Mexico’s other principle airline, Compañía Mexicana de Aviación. (Middlebrook 92) Argentina successfully carried out few major privatizations before Menem took power in July 1989. Though both countries experienced debt crises in 1982, a credible alternative to ‘digging-out’ had not fully been formed. Because the 1987 Argentine telecommunications privatization attempt was stalled in Congress, Alfonsin’s failure to privatize its industry cannot be seen as a reflection on the debt imperative argument itself—but rather an interest-group related discussion that is better covered in chapter 4. Mexico’s privatization program picked up speed primarily after the May 1986 Baker Plan, which guaranteed new commercial and multilateral credit in exchange for cutting the fiscal deficit by 3 % from nearly 13% of GDP in 1986. (Teichman 85) Argentina’s next attempt at ENTel privatization in 1987 likewise matches Mexican scheme, though again concerted domestic interests—primarily through the Congress and public sector trade unions—were able to block this reform and cause the government to back down later that year. (Petrazzini 1995: 66) Not until Menem’s reelection and the favorable terms of the 1989 Brady Plan were both countries able to move forward on the privatization of large-scale state-owned enterprises. Testing the Debt-Imperative An analysis of the debt imperative argument relies on an intra-country comparison of the price each sector would be able to raise in the privatization process. A purely debt-led privatization process would disregard many of the benefits of more long term fiscal maximization and concentrate primarily on a) price maximization and b) giving priority to the sale of those industries most likely to produce large-scale revenue so as to rapidly reduce the size of the external and internal debt. A more thorough analysis of this theory would build on Dominique Hachette de la Fresnaye’s argument and calculate the statistical discrepancy between price maximization and fiscal maximization in each industry—finally using this as a base against the order and selection of industries privatized to estimate the importance of the debt. Because of natural limitations in data available for many of the state firms in Mexico and Argentina, this chapter will focus primarily on selling price of each state firm as being representative of some attempt at short-term price maximization. The infrastructure sector provides the ideal model for this analysis; infrastructure privatizations—when defined to include the telecommunications and transport industries—account for 35% of the revenue from privatizations in developing countries in the late 1980’s and early 1990’s. (Cook 13) Using selling price as a base, this chapter then analyzes the ranking among industries that a pure debt-led privatization process would entail in each country, and gauge the departure from this theory as an indication of the usefulness of the debt-imperative argument as a whole in explaining variation in the divestiture process. Mexico’s privatization record under de la Madrid admittedly does not follow the patterns behind the purist debt imperative explanation to privatization. However, once Salinas took office in 1989 and began the process of privatizing large-scale state firms, his motivations become less clear. This analysis starts in 1988 with the privatization of Aeroméxico and a number of state-owned sugar refineries, and then proceed up through 1992 to cover the majority of infrastructure privatizations within the Salinas and Menem administrations. Table 5.12 in the appendix demonstrates the attractiveness of Telmex to the Salinas administration; by market value it led developing countries in potential revenue excluding Pemex. (Petrazzini 1995: 4) Within Mexico, apart from the financial sector, the telecommunications and energy sectors promised the greatest return in the privatization process. Table 5.15 breaks down the non-financial public enterprises in Mexico sold from 1988-1992 and ranks them by purchase price. The table lists Teléfonos de México as representing the greatest potential source of revenue for the nation, but it was not sold until 1990—after Aeroméxico, DINA (diesel engines), Cananea (copper mines) and Companía Mexicana de Cobre (copper mines). These firms were certainly not small revenue producers by any means; the smallest, Aeroméxico brought in US$230million, while the largest, DINA, brought US$810 million. However, all pale in comparison to the potential revenue that could have come from the sale of Pemex, Mexico’s state oil industry. Its worth is difficult to estimate due to its vast oil reserves, but the sale would have brought in at least many times the market value of Teléfonos de México. Additionally, none of the electricity companies were sold in Mexico—even as an industrial sector that in Chile’s program experienced moderately strong rates of return.
Argentina holds more closely with the debt imperative argument; after Menem took office his first actions were the release of large scale state firms. The Inter-American Development Bank cites as the prime example of this the ENTel sale, which brought in US$3.2 billion over a two year period. (IADB 1996: 175) Table 5.16 demonstrates the predominance of the Argentine telecommunications sector even in the international spectrum—it ranks behind only Telmex and a few other large state enterprises primarily based in the developing economies of Asia. Unlike Mexico, however, Argentina was able to liquidate much of its oil and gas company (YPF) and its electricity conglomerate—bringing in US$3 billion and US$2.1 billion respectively. (IADB 1996: 177) Argentina has no high-value state industries which escaped the privatization process altogether, but in terms of order of privatization the sale of SEGBA and YPF came somewhat late according to the predictions of the debt imperative argument.
Overall Trends The privatization process in Mexico and Argentina is highly representative of the debt-imperative argument; even if the debt imperative was not the sole motivating factor, it was most certainly an important one. Table 5.17 in the appendix demonstrates the impact privatizations—primarily of the infrastructure sectors in both countries—had on the over-all government surplus as a percentage of GDP. In both Mexico and Argentina this number fell from large deficits in the mid-1980’s to small surpluses by 1992. (IADB 1996: 371) Tables 5.15 and 5.16 compare this process in two different countries and across slightly different economic needs—Argentina’s deeper fiscal crisis in 1989 likewise corresponds to a divestiture order based more solidly around potential sale revenue by industry. The debt imperative argument argues for a privatization program based almost entirely on debt concerns. Many of the industries that were privatized in Mexico did bring in larger revenues than their sister-firms in Argentina. This fact should elicit an even stronger revenue-based approach in choosing industries for privatization, but in fact the opposite occurred. On the whole, however, Mexico’s divestiture program does reflect the bulk of the debt imperative argument; in 1990 alone total sales of state firms totaled 8.7% of GDP, and the choice of Teléfonos de México to lead off the sale of large infrastructure sectors was undoubtedly a reflection of its predominant position within the market value rankings of state sector firms. (World Bank 1996: 69) Yet what the debt-imperative argument is able to explain the case of Argentina but fails for Mexico is the explanation for continued state ownership of Petróleos Mexicanos, and perhaps more importantly Luz y Fuerza—especially since these two firms collectively comprised half of public enterprise debt within the state and promised revenues beyond other state firms except for Telmex. This chapter argues that this variation points to the importance of an alternative explanation within domestic interest group politics as a possible answer to this question. |
