 Thesis Appendices |
The modernization imperative argument ranks as one the most vital to improving the long-term economic growth in Mexico and Argentina. Especially in the case of Teléfonos de México, but also for other basic infrastructure industries in both countries, the lack of investment in training and technology became an enormous drag on economic growth. Equally, since an over-reliance on the debt imperative argument suggests a pandering to foreign interests, the modernization argument rapidly became the most popular public justifications for the large-scale sell-off of state-owned enterprises. Though no formal documents outlined the entire privatization program, public statements from the beginning of the process in 1982 early in the de la Madrid sexenio (presidential term) describe the program as aiming to "rationalize the size and operation of government enterprises, in order to achieve greater efficiency in pursuing objectives within strategic and priority sectors." (INAP 1983: 12) In other words, according to the modernization imperative argument, the entire privatization process should be about gains in efficiency. Had the leadership in Mexico and Argentina truly subscribed to this modernization imperative, then the privatization record should reflect, both over time and by industry privatized, a credible commitment to reform in infrastructure and other firms with a high potential impact on state modernization. This chapter will attempt to test the usefulness of the modernization imperative argument in explaining, first the privatization of Teléfonos de México, and then the privatizations of other similar infrastructure industries in Mexico and Argentina. I analyze the modernization-led approach to privatization two ways: a) identify those industries most vital to the functioning and improvement of the economy as a whole, and then determine what barriers were blocking further investment in improving those industries; and b) use a retrospective approach that measures gains in efficiency in privatized industries and then transforms these gains into an argument about the original privatization rationale. Given that the modernization imperative was valid, Luz y Fuerza should have led the privatization process along with Teléfonos de México—with other non-infrastructure industries taking a secondary role later in the privatization process. After a theoretical backing to the role of infrastructure industries in the modernization process, this chapter compares efficiency gains between Telmex and ENTel as a cross-national account of the modernization imperative. Finally, the trade-off between Telmex and Luz y Fuerza according to the modernization imperative is within Mexico is used to speculate about the broader role of modernization in explaining variation in the privatization process. Modernization Theory and Efficiency Gains Modernization through privatization has in recent years been hailed as an automatic cure-all for problems of efficiency within firms and economies, often to the extreme of privatizing without first properly regulating the industry or ignoring other structural issues that vitally affect the new industry. John Weiss, in an 1995 article comparing state and private corporations in Mexico, places first among the advantages of privatization the "greater efficiency in private as opposed to public enterprise, due, for example, to greater managerial autonomy and incentives." (Weiss 222) However, Weiss goes on to argue that in the Mexico case, there is little to no support for privatization on purely economic efficiency grounds. In sum, a regression of the 500 largest firms in Mexico—using growth in labor productivity, total factor productivity, and price-cost margins as indicators of performance—finds a considerable gap between performance of state-owned and private firms in all of these areas. (220) However, he cautions that there is still no statistical support for the view that privatization per se solves these problems, nor that state ownership implies poor performance. "Poor performance in labor productivity, total factor productivity, and price-cost margins can nearly always be explained by factors other than simply the level of state equity in the firm in question." (Weiss 220) Weiss’ study lays an important foundation for the modernization imperative argument, one that doesn’t assign automatic efficiency gains to firms once they have been privatized. Instead, Weiss echoes an argument by E. Bacha in 1992, that the recent economic problems in Mexico were not the result of simply large state ownership, but from the state’s creation of a ‘soft budget economic regime’ that used public investment towards the subsidy of sectional private groups. (Weiss 223) Instead of privatization adding direct efficiency effects, it by necessity leads to a hardening of the government budget constraint and a deregulation of the state sector as a whole. This chapter certainly does not argue that efficiency pushed policy, nor that policy directly and immediately affected efficiency. Instead, the gains in efficiency associated with privatization are generally closely correlated with the transition to the private sphere. Attempts to calculate potential gains in efficiency, productivity, and modernization—whether from estimates of gains after privatization or of inefficiencies before privatization—should be viewed from the light of correlative theory only. The impact of and necessity for modernization in Mexico and Argentina are difficult to quantify on an exact scale, yet for both measures of productivity in state-owned enterprise were quite low compared with many similar public and private firms around the world. One of the first objections to the modernization theory comes from those favoring the social objectives and subsidies that these inefficiencies provide. While public disgust with poor service may have played a small factor in inducing FOETRA to support the ENTel privatization, on the whole public enterprises in Mexico and Argentina have traditionally been seen in the role of providing employment and fulfilling social obligations like many of the large welfare states in Europe and around the world. (González Fraga 83) However, a 1991 speech by Pedro Aspe, formerly Mexico’s Minister of Finance, revealed his thoughts on this form of social subsidy. "Part of the funding provided by the government to keep SIDERMEX [a large state steel enterprise] afloat would have been sufficient to bring drinkable water, sewerage, hospitals, and education to all the poor communities in southeastern Mexico." (World Bank 1995: 112) A 1995 World Bank policy report on the privatization process qualifies this social obligations explanation, arguing that the cost of using state enterprises to achieve these goals would still have to be compared against the use of direct subsidies or other instruments toward certain segments of the population. The Report thus argues that financial measures are an adequate means of measuring public enterprise performance and efficiency—regardless of any outside obligations which may be fulfilled through their operation. (World Bank 1995: 60) An Analysis of the Modernization Imperative Argument The argument for modernization and improvement of efficiency is one that was used in the rhetoric of state officials in Mexico and Argentina long before de la Madrid truly began to implement his privatization policy in 1985 with the sale of several smaller state firms. Oscar Humberto Vera Ferrer, in his article "The Political Economy of Privatization in Mexico," places great skepticism in the rhetoric behind modernization—regardless of its role in transforming the public sector—primarily because even de la Madrid waited nearly three years after his inaugural address regarding modernization of the state to begin the process. (Verra Ferrer 1991: 50) The Argentine and Mexican record diverges somewhat on this point. Mexico successfully implemented its privatization program much earlier in the 1980’s, but began with a series of small firms that taken individually had little dramatic impact on the modernization of the economic sector. Argentina’s early privatization program—largely due to labor and Congressional opposition—was basically non-existent. When privatization did begin in the early 1990’s, Argentina quickly began the process with the sale of Aerolíneas Argentinas and ENTel—both drastically affecting state outflows into public sector enterprises and accordingly the modernization coefficient. (World Bank 1995: 245) The World Bank attributes Mexico’s slower privatization program as helping it to avoid large-scale mistakes in restructuring firms before the sale, as with Argentina and Aerolíneas Argentinas, but in the long-run finds little statistical correlation between beginning with large vs. small firms and overall increases in efficiency. Most importantly in his critique against the modernization imperative argument, Vera Ferrer cites the "process’ slow pace and intermittent internal contradictions" of the privatization program—expressed through the regime’s lack of an attempt to reform the larger infrastructure industries—under the de la Madrid administration as strong enough to suggest that the modernization imperative holds little water in comparison to the other rationales for divestiture. (Verra Ferrer 51) Despite these ‘internal contradictions’ in the privatization record that occur in both Mexico and Argentina, this chapter argues that the modernization imperative argument remains a valid method of critique for government privatization decisions—primarily because of its predominance in government publications, speeches, and documents—both internal and external. Moreover, nearly all of the large state firms in both countries were perennial drains on the public budget while offering highly inefficient service. Even of the few firms that did not run a deficit—such as Telmex—the economic slowdown and inability to reinvest its profits in added infrastructure and training severely "decreased its growth rate and slowed its diversification strategy." (Cowhey 95) Finally, dramatic gains in efficiency are recorded as these enterprises were turned over to the private sector, providing a strong correlative link behind the modernization imperative argument and the privatization process. The Role of and Needs for Modernization in Mexico and Argentina Perhaps the strongest argument favoring the modernization imperative argument is an account of the infrastructure needs in Mexico, Argentina, and Latin America as a whole. José Luis Guasch cites that by the early 1990’s, an estimated 18% of the population in Latin America had no access to a viable water supply, 42% no access to health care, and 30% lacking electricity service. (Gausch 366) Whereas the average investment in infrastructure in developing countries is about 4% of GDP, Guasch estimates Latin American countries will need over US$60 billion annually—just over 5% of regional GDP—to meet basic infrastructure needs. Carlos Melconian and Enrique Bour in 1993 place Argentina at requiring 2% of 1992 GDP, US$4 billion annually, to meet its infrastructure needs. (Melconian 38) These percentages translate into rather large maintenance costs on a total Latin American capital stock of US$20 billion in the telecommunications sector, US$170 billion in the power and electricity industries, and US$100 billion in the transportation sector. (World Bank 1994: 367) Compounding these serious investment needs with inadequate spending over the 1970’s and 1980’s due to fluctuations in oil prices and the 1982 debt crisis, most Latin American countries—including Mexico and Argentina—experienced a further deterioration of the infrastructure capital stock that made providing these basic needs even more difficult. The question this chapter proposes to answer is whether policymakers in Argentina and Mexico truly believed that these inefficiencies and lack of investment in the infrastructure sector translated into true constraints on economic growth and modernization. Guasch argues that they did, and that by the beginning of the 1990’s the "economic and social consequences of such shortcomings were abundantly clear." (Gausch 366) In this view, without an increase of investment and better management of the basic infrastructure industries, these sectors would in themselves act as bottlenecks for further growth. Guasch later takes the more extreme view that the ‘urgency of infrastructure improvements’ acted as the "driving force behind privatization." (367) In fact, the overall privatization record in Mexico and Argentina does support this claim to a large degree. In both cases privatization began rather suddenly and was carried out at a rapid pace, with the telecommunications, power generation, ports, roads, water supply, and airline transportation sectors being privatized in both countries by 1994. Also, infrastructure privatization (predominantly telecommunications and energy) makes up just over 25% of the total revenue from privatization from 1990-1995. (IADB 1996: 174) Though 25% of privatization revenue could be interpreted as not that significant a proportion in the grand scheme of the privatization process, the multiplier effects from the sale of infrastructure industries leads to a significantly higher impact on the economy of the whole than revenue proceeds would indicate. Using Guasch’s theory about the vital importance of infrastructure to privatization, this analysis will first compare efficiency gains in the telecommunications industries (ENTel v. Telmex) in Argentina and Mexico. Though a purely economic consideration about efficiency gains leaves out much of the often more-relevant political considerations for each industry, it does provide a basis for the modernization needs by industry and sector. Next, this chapter will compare the modernization needs of the telecommunications and electricity sectors in Mexico, and finally determine the timing and relative importance of infrastructure industries within the overall privatization record within both countries to establish the truth behind the modernization imperative argument. Modernization Imperative and the Telecommunications Sector Carlos Salinas de Gortari, the President of Mexico, explained in the public announcement of his decision to privatize Telmex that it would "be the means for realizing the commitment to modernize Teléfonos de México." (Ramamurti 72) Though it ranked at the top of telecommunications firms in the developing world in most indicators of efficiency, Telmex still had a waiting period of two to three years for a new line to be installed—compared to the 22 years for a new line in Argentina. Using the World Bank model of efficiency through financial indicators, Teléfonos de México in 1985 fell behind only Chile in Latin American telephone systems. Ravi Ramamurti tracks Telmex’s returns from 1985 to 1989, averaging nearly 23.6% return on sales and 12.8% return on equity. (Ramamurti 75) Peter Cowhey’s work on telecommunication enterprises in the public sector leads to the development of the cash cow model, in which profits from well-run state firms are diverted into other less profitable industries—in effect draining the profitable firm from the means to improve and modernize itself to remain competitive and profitable in the long run. (Cowhey 95) This is exactly what was happening in the Telmex case, as over 30% of Telmex revenues in 1989 went to the Mexican treasury for general expenses. Despite these drains on the finances of Teléfonos de México, Ramamurti concludes his analysis of the firm by arguing that other state enterprises "might easily have been found that were in greater need of performance improvement." (Ramamurti 78) In addition, Ramamurti makes the claim that improving Telmex’s performance was at points at odds with a successful sale, and the factors surrounding the sale itself generally won out. (Ramamurti 1996: 101) However, in terms of overall performance, Telmex surged upward in all categories except for operator service, primarily in the Mexico City region. (91) Likewise, in its announcement decree for ENTel, Carlos Menem called for the deregulation and privatization of telecommunication services to "make them more efficient for the benefit of the users." (Petrazzini 1996: 118) While Menem could certainly make a credible case for ENTel’s role in holding back the development of the national economy—with near public disgust over poor service and enormous inefficiencies—Ben Petrazzini (like Ramamurti for TELMEX) makes the argument that macroeconomic forces were the most fundamental in the ENTel sale. This claim is difficult to refute, for though ENTel marked considerable productivity losses on the Argentine economy as a whole, some indicators did not improve all that much even after privatization. The chart below displays performance indicators for the firm, but for 1991-93, the numbers given are only predictions by the federal government. In fact, Telefónica added 343,000 and Telecom 273,000 new lines in the year following privatization, compared to a five year average of 98,000 lines per year by ENTel. (Petrazzini 1996: 134) On the flip side, service did not improve considerably, with a six month delay in 1991 for faulty lines and 30% more telephones out of operation than the year before privatization. Telecommunications versus Electricity The telecommunications and electricity sectors within Mexico provide a useful means of looking at the same choices that policymakers made in a given country—choosing among a variety of infrastructure industries to determine those that would best help the nation modernize its infrastructure stock. Yet since Luz y Fuerza was never actually privatized, a before and after analysis of potential welfare gains is quite difficult to come by—even though such an analysis was likely performed within the Ministry of Finance and used as a tool in evaluating the privatization order and process. Instead, this thesis will substitute Chile’s 1987 privatization of CHILGENER and ENERSIS—electricity generation and distribution firms that were privatized several years before Salinas began his large infrastructure privatizations, and CTC (Chile’s telecommunications firm privatized in 1988) as an analysis of the welfare change in these industries, and a likely model for the privatization decisions within the Mexican government. Asset requirements per dollar of annual revenue are around $3 for both telephone companies and electric utilities, so on a purely modernization imperative viewpoint both industries would seem vital components of an improved infrastructure package. (Wade Miller 1987: 370) Telmex certainly contained much more potential for growth than did Luz y Fuerza, and while a public firm one of the primary concerns was the modernization and improvement of existing technology, service, and switching capabilities.
Given the experiences of Chile in 1987, it would have been rational for the Salinas administration to expect greater returns in the privatization of electricity distribution over generation, and for the improvements in the telecommunications sector to dwarf electricity altogether. In fact, as the privatization of Chile’s CTC in 1988 resulted in a net domestic welfare change 21.96 times that of what Telmex presented. Such a representation could account for an over-estimation of the effects that a Telmex privatization could bring—leading to an increased emphasis for its privatization under the modernization imperative argument. Yet when taking annual growth rates of each sector into account, the differences between the communication and electricity sectors becomes quite small. In Mexico, the electricity sector grew slightly faster than the transport and communication sector from 1970-1995, while in Argentina electricity grew significantly more rapidly—especially in the 1970’s and 1980’s—as illustrated in Table 6.4. Overall, however, information about the net welfare change through privatization more directly impacts the efficiency gains desired via the modernization imperative theory than do simply growth rates by each sector. Accordingly, the modernization imperative argument does support the privatization record giving Telmex added status over Luz y Fuerza, as with ENTel over SEGBA.
Overall Modernization and Infrastructure Trends The impact of the infrastructure sector on the privatization process was certainly a considerably one; over 24 developing countries made infrastructure their priority—to the sum of 25% of total revenue—in the privatization and modernization process. (Gausch 369) Of this figure, Table 6.5 in the appendix demonstrates how telecommunications and power generation and distribution rank as the most popular and vital to the process as a whole, bringing in nearly US$17 trillion in Latin America as a whole. (369) The broader privatization record speaks less clearly on the actual impact the modernization imperative argument played in Mexico and Argentina. José Luis Guasch, in his work on infrastructure financing issues in Latin America, cites the problems in estimating efficiency and a modernization imperative-like argument for this sector. However, the privatization record for Argentina and Mexico does show a commitment first to airline and then telecommunications modernization, followed a few years later by electricity and finally the sale of the oil infrastructure sectors. Given the expectations on net welfare and productivity changes outlined above, this pattern does show a reasonable commitment to privatization of the infrastructure by areas with the greatest expected gains first. However, an interpretation of the modernization imperative argument that would expect an emphasis on the infrastructure areas most in need of investment does not follow the privatization pattern; Teléfonos de México was in fact one of the strongest infrastructure industries prior to its 1990 sale. Expected gains may have been higher, but in terms of absolute need of performance improvement it ranked quite low on the state-owned enterprise list. (Ramamurti 1996: 78) ENTel was not nearly as strong as Telmex, but it too showed more promise in expected gains than in absolute need compared to other firms. Given that World Bank estimates in 1994 still place Latin American power losses just over 20% and 50% of water produced unaccounted for or thought to be leakage, an absolute scale interpretation of the modernization imperative argument would minimize the importance of all four of the case study sectors. (Gausch 366) An estimate based on expected performance improvement explains the general record in Argentina and Mexico, but still leaves considerable holes in the explanation of why Luz y Fuerza, and PEMEX, were left untouched in Mexico. These cases go beyond the bounds of the modernization argument and are best explained in the interest group chapters of this thesis. Otherwise, regardless of the relevance of the debt imperative argument, the modernization imperative theory does adequately predict the pattern and timing behind the privatization decisions of the Mexican and Argentine governments in the late 1980’s and early 1990’s. |
