MEXICO'S PARASTATALS: THE HIGH PRICE OF POLITICS

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• Document Release Date: December 12, 2011
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• Publication Date: January 1, 1987
• Content Type: MISC

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Mexico's Parastatals:
The High Price of Politics
An Intelligence Assessment
Per NICER L ` Gil / - 87
CAW M J K PAGE MVIBERS
'I YTAL NU4BER OF OOPIES 7o
DISSEM DATE EXTRA COPIES `-~ 9 40
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ALA 87-10002
January 1987
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Intelligence
Mexico's Parastatals:
The High Price of Politics
This paper was prepared b Office
of African and Latin American Analysis, with a
contribution from LA. It was
coordinated with the Directorate of Operations. F
Division, ALA,
Comments and queries are welcome and may be
directed to the Chief, Middle America-Caribbean
Reverse Blank Secret
ALA 87-10002
January 1987
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Mexico's Parastatals:
The High Price of Politics 25X1
Scope Note This assessment is part of a continuing effort within the Directorate of
Intelligence to analyze the dynamics of Mexico's economic and political
systems. It focuses on the country's state-owned enterprises, a sector which
causes economic problems for the Mexican leadership but at the same time
generates a great deal of political capital for the government and the
Institutional Revolutionary Party.
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Mexico's Parastatals:
The High Price of PoliticsF____1 25X1
Key Judgments The Mexican Government uses its system of state-owned enterprises, or
Information available parastatals, to great advantage to create jobs, administer subsidies, exert
as of 1 December 1986 leverage over private business and organized labor, and keep the political
was used in this report.
system functioning relatively smoothly. These political benefits, however,
come only at a substantial economic cost: excessive spending, massive debt,
unnecessary inventory accumulation, and higher inflation spurred by the
sector's generous labor contracts.
Although pressure to divest the largely inefficient parastatals has mounted
in the last year with the dramatic decline in oil prices and the burgeoning
of the federal deficit, President de la Madrid has for the most part
responded with only vague promises to open the sector to private control.
His lack of clarity, the onerous conditions attached to many sales, the
domestic liquidity crunch, and the poor state of most public-sector firms'
ledgers have choked off privatization efforts to date and will probably
continue to do so through the end of de la Madrid's administration in 1988.
In addition, new lenient foreign financing agreements have dulled much of
the fiscal incentive for reform. Any piecemeal progress de la Madrid is able
to make could provide limited opportunities for US business in the near
term, but at the same time Mexico City is likely to squeeze US banks for
further concessions on parastatal debt.
De la Madrid is now faced with a dilemma: financially, he finds it nearly
impossible to allow the parastatal sector to maintain its size; politically he
finds it equally difficult to scale it back. In recent years, the oil revenues
and heavy foreign borrowing that masked the losses incurred by most
parastatals have been harder to come by, and the subsequent strain on
government coffers has been intense. We believe the President recognizes
the need for a contraction of the state-run system, but he lacks the political
capital required to take decisive steps in that direction. As a result, he has
backed off on his promises to divest the sector and is now placing more em-
phasis on making "priority" state-owned firms more efficient.
We conclude that the de la Madrid administration is convinced that the po-
litical benefits the parastatals generate make them worth their economic
cost. Thus, despite the President's relatively conservative market-oriented
economic philosophy and his promises to Mexico's creditors to privatize the
sector, his hands are tied by a system that rests on the ruling party's
monopolistic control of economic resources. As the economy deteriorates,
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de la Madrid now depends more than ever on the state-run sector to buy
him time by delaying or softening the impact of austerity-driven economic
reforms.
Between now and the end of his term in 1988, we believe de la Madrid's
administration will enjoy a temporary respite from its immediate financial
problems as a result of the lenient IMF agreement signed in September
1986 and the $12 billion financial bailout from the country's creditors.
Rather than use this break to begin economic reform, however, we believe
the Mexican leadership will direct most of the money toward foreign
interest payments and, with an eye on national elections in 1988, domestic
spending that favors the ruling party's major constituencies. In our view,
the leverage for change does not exist now: domestic advocates of reform
are without strength, and foreign creditors have lost the influence they
once held by agreeing to new loans and new terms on old debt without
making them conditional on reform
Our longer term outlook is even more troubling because the resources the
sector has depended on-mainly oil-have probably permanently shrunk.
In our view, the parastatal sector is becoming economically and politically
obsolete; as oil prices remain depressed, Mexico's population balloons, and
rapid urbanization continues, the ruling party will find it increasingly
difficult to continue satisfying its constituencies by means of this mecha-
nism. Over the long term, we believe these pressures will force de la
Madrid's successors to search for new means to buffer the pain of austerity
policies. A number of alternatives may be pursued, but the easiest and most
likely scenario of a muddle-through approach carries risks: given the
mounting strains, the eventual trauma associated with economic reform
will be more pronounced the longer the adjustment is postponed.
Implications of these domestic economic and political strains for the
United States over the near term will be limited largely to adverse effects
on US firms doing business with Mexico's parastatals and to US commer-
cial creditors that have lent them money. Payment delays and declining
markets can be expected for US businessmen, but investors may find new
opportunities if Mexico puts some of the smaller, less politically sensitive
parastatals on the market. US bankers will increasingly be pushed to offer
concessions and creative solutions for their parastatal loan exposures, since
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Mexico City will be hard pressed to honor parastatal debt obligations once
the current financial rescue package expires. Banks are also concerned
about the status of outstanding debt to a parastatal that is sold. In most
cases, creditors view foreign governments as better risks than private firms
and fear that the new owners may shirk their responsibility to repay old
debts. Looking at the long term, the Mexican reluctance to reform, in our
view, will accelerate the erosion of the economy and contribute to broader
problems that will spill across the US border. For example, we expect
illegal migration to increase, since we do not believe that the public sector
can absorb the increments in the labor force. In addition, as long as the
parastatal sector fails to contract, US banks will face increasing pressure
for further loans or face payment suspensions.
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Key Judgments
Preserving a Patronage System
3
Controlling the Private Sector
5
Inefficiency and Economic Distortions
7
Implications for the United States
15
Key Parastata
ls
17
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State boundary
200 Kilometers
IT
D 200 Miles
United States
MEXI 1
6. Mexico
7, Distrito Federal
8. Morelos
Boundary representation is
not necessarily authoritative.
Eta
Guatemala /
Salvad Salvador
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Mexico's Parastatals:
The High Price of Politics
characterize all state-owned firms.
controlled enterprises that have budgets subject to
congressional approval. Nevertheless, we believe
many of the problems that plague these companies
The Mexican Government's vast network of state-
owned enterprises, or parastatals, is designed to
strengthen its control over the economy but also serves
other purposes, such as providing political favors and
co-opting various interest groups. The parastatal sec-
tor has expanded rapidly in recent years; although an
exact count is elusive, it appears these firms now
number between 750 and 950.' Detailed information
on the financial operations of the parastatals is largely
limited to the operations of the 26 largest so-called
During more prosperous times, Mexico City was able
to build political capital by subsidizing inefficient
parastatals with oil dollars and foreign borrowing.
Loans and surpluses from PEMEX, the state oil
monopoly, masked massive losses generated by the
other enterprises, amounting to roughly $4 billion
annually. In the current lean times, however, the
de la Madrid administration is hard pressed to contin-
ue parastatal funding, especially as oil revenues from
PEMEX-which in recent years accounted for 45
percent of government income, 70 percent of export
revenues, and was virtually the only parastatal to
register a surplus in 1985-no longer can shoulder the
burden they once carried. Meanwhile, only a fraction
of Mexico's $12 billion in fresh financing is likely to
' Although Mexico City maintains that sales, mergers, and closings
have reduced the number of parastatals from their peak level at the
beginning of the decade, published data often contradict these
claims. The Mexican Federal Diary listed 849 parastatals as of
November 1982, yet Mexican press reports placed the figure at
1,155 that year, and 971 as recently as last July. The problem is
partly one of definitions. According to Mexican law, a parastatal is
a company either fully or partially owned by the government. The
government probably does not count companies in which its stake
has significantly fallen, even though technically they still are
parastatals. Similarly, some parastatals recently transferred to
various Mexican states are probably not counted, though they still
are government owned. For the purposes of this assessment, an
exact figure is irrelevant, since the impact of what would be 200
smaller state-owned firms on the Mexican economy probably is
filter through to the parastatal sector. Creditors will
be reluctant to lend additional money once the current
funds are exhausted unless Mexico has demonstrated
some progress in reforming the financially burden-
some sector. Finally, foreign governments, potential
foreign investors, and multilateral lenders continue to
urge Mexico toward privatization. Over the next 15
months, the pressure from external actors will be less
effective since the rescue package saps their leverage.
These pressures come at a politically difficult time for
de la Madrid since the country is in the midst of a
relatively deep recession and many Mexicans already
are highly critical of his economic policies. Whether
the parastatals are sold to the private sector or
liquidated, we doubt that many of the displaced
laborers would find jobs, since the beleaguered private
sector is unable to absorb new workers. Government
divestiture also could mean an end to price subsidies
on many politically sensitive basic necessities. At the
same time, the ruling Institutional Revolutionary
Party (PRI) would be forced to find alternative means
to gain the political capital it earns by awarding
generous contracts, placing influential Mexicans in
high-paying upper-management positions, and guar-
anteeing higher standards of living for parastatal
workers.
This assessment examines the current economic and
political role of state-owned enterprises, and the likely
evolution of that role given conflicting economic and
political demands and constraints. It analyzes the
dynamics of state-owned firms in terms of:
? The history and development of the sector.
? The political role of parastatals as they are used to
co-opt and coerce, to reward and punish and, more
generally, to "grease" the system.
? The economics of state ownership, particularly the
impact of these firms on consumers, the federal
budget, the private sector, and labor.
Finally, the paper assesses the outlook for privatiza-
tion in Mexico and the implications of its success or
failure for the United States.
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Government involvement in the Mexican economy has
a long and deep-rooted history. Most Mexicans see
the public sector as the engine of economic growth,
and state control as a key legacy of the revolution-
and hence of the PRI. Lower- and middle-class
Mexicans have long relied on the parastatal sector to
provide jobs and offer consumer goods at affordable
prices. At the same time, some private-sector firms
have depended on the parastatals to purchase their
goods or to supply them with subsidized inputs.
Nonetheless, the state-owned enterprise sector has
grown to its present size only in the last 15 years.
problem.
The tremendous surge in the parastatal sector began
under the leadership of President Luis Echeverria
(1970-76). Our analysis of Mexican budgets shows
that Echeverria achieved his goal of economic expan-
sion primarily by enlarging the role of the state. Over
the six-year period of his administration, public-sector
spending grew much faster than the overall economy.
The parastatal sector, in particular, ballooned from 84
firms to at least 850 as the government created new
firms and absorbed privately held, debt-ridden com-
panies. Because government revenues failed to com-
pensate for this massive increase in expenditures and
domestic sources of credit were insufficient; Mexico
City was forced to borrow heavily from abroad.
Consequently, public external debt skyrocketed from
$4.2 to $19.6 billion during the period. This policy of
public-sector expansion funded by foreign borrowing
has its legacy in Mexico's current external debt
When he became President in 1976, Jose Lopez
Portillo inherited an economic crisis-caused by
Echeverria's massive spending and foreign borrow-
ing-that forced him to adopt immediate austerity.
Although the number of parastatal firms continued to
grow, the expansion was at a much slower pace. By
the end of 1977, the unexpected success achieved
through economic belt-tightening caused a heated
debate within the Lopez Portillo administration be-
tween advocates and opponents of public-sector
growth. Such divisions are endemic to the Mexican
bureaucracy, since the Treasury Ministry is tasked
with generating revenues while the Budget Ministry
spends them. Academic observers labeled the two
distinct groups that emerged from this debate the
"nationalist-populists" and the "liberal-rationalists."
The first faction, led by the Budget Minister and
strongly supported by labor, favored a dominant
public sector, a subordinate private sector, and a
closed economy. It advocated large social-spending
programs and a rapid growth of subsidies, government
spending, and government-owned enterprises. The
second group, represented by the Finance Minister
and including most of the private sector, called for
financial conservatism, an open economy, and restruc-
turing along free market guidelines to achieve sus-
tained growth. In particular, according to scholars,
the role of the parastatal sector was openly and
bitterly discussed. As the debate raged on and became
increasingly strident, Budget Minister Tello and Fi-
nance Minister Moctezuma were asked to step down.'
Major oil discoveries in 1978 in Mexico's southeast
and Gulf coasts defused the conflict and, academics
argue, allowed Lopez Portillo to finish his term
without resolving the debate. As petrodollars began
pouring in, Lopez Portillo, in fact, seemed to abandon
all fiscal prudence-government expenditures
reached nearly 40 percent of GDP in 1981, jumping
nearly 200 percent in two years to 2.3 trillion pesos
from 816 billion pesos in 1979. Much of this expan-
sion was accounted for by the parastatals, according
to our analysis of published Mexican budgets, and
real spending in the sector grew 30 percent that year,
a large portion directed to the growth of PEMEX.
Except for 1979, the parastatal sector registered large
deficits in each year of the Lopez Portillo administra-
tion. High levels of economic growth were restored,
but only at a heavy cost: hefty foreign borrowing and
an overdependence on oil earnings caused Lopez
Portillo to leave to his successor, Miguel de la Ma-
drid, a much deeper economic crisis in 1982 than he
had inherited six years earlier. Although many related
economic ills drove the crisis, a public sector that had
expanded beyond its means was, in our judgment,
central to the problem.
' This fundamental difference is still evident today, as demonstrat-
ed by last summer's dismissal of Finance Minister Silva Herzog
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Today, the parastatal sector is a prominent and firmly
entrenched fixture of the Mexican economy. In recent
years, these firms have generated over 70 percent of
the public sector's massive input to the economy, and
we estimate that they now provide close to 1 million
jobs.' Mexican officials have justified the parastatal
sector on the grounds that it is necessary to:
? Meet the constitutional requirements for national
security and independence.
? Regulate large monopolies and oligopolies.
? Support essential economic activities.
? Preserve general productivity and employment.'
We believe most of the Mexican leadership is con-
vinced that, on balance, the political capital parasta-
tals generate makes them worth a high economic cost.
These firms play a key role in the Mexican political
system, helping provide the PRI with the resources
required to maintain its hold on power. As a result,
the importance of the public-sector enterprises goes
far beyond the economic objectives that successive
Mexican governments have used as justification for
supporting the parastatals. Mexico City now uses
these firms to create jobs, administer subsidies, exer-
cise leverage over the private sector, and grant politi-
cal and economic favors to key interest groups. In
short, through control of all aspects of their operation,
the government can effectively manipulate economic
activity and thereby reward, co-opt, or punish as it
sees fit. These firms also serve political purposes on an
even more fundamental level by providing Mexicans
with a sense of confidence and, in some cases, pride.
The symbolic importance of these firms and the safety
net they provide contribute, in our opinion, to keeping
the Mexican political fabric intact.
In our view, de la Madrid, contrary to his personal
economic philosophy, remains tied to a system sus-
tained to a large degree by the public sector's virtual
tals and firms using parastatal output in their production.
' For a closer look at four of Mexico's most prominent parastatals,
see the appendix.F__~
' The labor force in Mexico is about 26 million, with half unem-
ployed or underemployed. In addition to workers directly employed
in state-owned enterprises, many more jobs are indirectly created
by the sector, including those at firms supplying inputs to parasta-
monopoly on economic resources. As Mexicans' eco-
nomic well-being deteriorates, de la Madrid must rely
on the parastatals to soften the blow. Similarly, he
needs them to ward off political challenges. His recent
return to traditional statist rhetoric helped quiet his
more nationalist critics who charged that the Presi-
dent was too responsive to the demands of foreign
creditors and Washington.
Mexican officials and longtime political observers
believe that the most notable achievement of the PRI
National Council sessions in late May was de la
Madrid's success in mending fences with old-guard
PRI leaders-party bosses who clearly favor a return
to the days of Echeverria and rapid public-sector
growth.
Preserving a Patronage System
We believe the parastatals are effective political tools
because they provide flexibility to advance or con-
strain specific interest groups. Even though these
firms generate some benefits for the general popula-
tion-affordable goods and jobs, among others-they
channel power to selected constituencies. For exam-
ple, the President selects the directors of those paras-
tatals that are under congressional budgetary control.
Mexicans and many outside observers generally ac-
knowledge that the President uses these appointments
to reward members of the political elite who have
been useful to him or to pay off those who were
adversely affected by the government's policies. In
turn, these men can build virtual fiefdoms, since their
position affords them considerable influence with
local businessmen, labor, and municipal governments.
Although the appointees usually have excellent cre-
dentials and proven track records,
we agree with the US Embassy's assess-
to reward political loyalty (see table 1).
The parastatal sector also is politically important to
the various government ministries and respective Cab-
inet officials that administer them. Control of the
individual firms is exercised through the ministries,
and, just as a system of patronage exists for parastatal
directors, we believe state-owned firms provide clout
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Table 1
Key Parastatals and Their Directors
hard working, and discreet. Undersecretary of Finance, 1970-75; Minister of
Finance, 1975-76; Director of Banco Somex, 1975-82; rumored to be on his way out
of PEMEX.
DINA (truck
manufacturing)
Huberto Mosconi
43
Electrical engineer; former Director of Siderugia National; appointed Director of
DINA this year.
SIDERMEX
(steel)
Juan Becker
55
Economist. Minister of Economics, 1952-55; Subsecretary of Industry and Com-
merce; Director General of Industries, 1961-64; member of IEPES (prestigious PRI
think tank); Director of DINA, 1982; SIDERMEX Director since January 1986.
Considered bright, politically savvy, and confident; has confidence of private sector.
Mexicana
(airline)
Manuel Sosa
de la Vega
70
Mechanical/electrical engineer. Director of various precursors of Mexicana
since 1958.
CFE
(electricity)
Fernando Hiriart
71
Civil engineer; former professor and consultant. Secretary to the President, 1971-
76; A subsecretary of Mines and Energy, 1978-82; Director of CFE since 1982.
IMSS
(social security)
Ricardo Garcia
Saniz
56
President of Importers Association, 1957-66; Minister of Programing and Budget,
1977-79; Director of DINA, 1979-82; Director of IMSS since 1982.
CONASUPO
(agriculture)
Jose Costemalle
48
Technocrat; former professor and accountant, friend of de la Madrid. Member of
IEPES and of the Commission on Public Enterprises. Rose through ranks of
CONASUPO's financial management; various positions with CONASUPO since
1971; Director since 1982.
Subdirector of Budget for Programing and Budget, 1976-82; Director of FERTI-
MEX since 1982.
PPM (fish
products)
Fernando Estrada y
Servin
52
Various positions in Ministry of Finance, 1975-82; member of PRI since 1980.
Ferrocarriles
(railroads)
Andres Caso
Lombardo
62
Economist, worked in PEMEX and CFE. Director General of Productora Mexi-
cana de Tuberia, 1976-80; presidential adviser for administrative reform, 1977-82;
Director of Ferrocarriles since May 1986.
to the various federal offices that preside over them
(see table 2). For example, Energy Minister del Ma-
zo's stature is enhanced, in our view, by the control he
has over PEMEX and the many other parastatals
under his ministry's purview. We also suspect that a
great deal of vote buying and co-opting takes place in
the murky realm of the "noncontrolled" state enter-
prises, on which financial information is scarce. Even
though they are not under the jurisdiction of the
Mexican Congress, parastatals in this group have
close ties to individual ministries. For example,
the
Ministry of Interior "coordinates" various news agen-
control the media, and that the Finance Ministry
"administers" numerous funds and trusts designed to
provide credit to interest groups favored by the PRI.
Boon to Labor
Organized labor is another prime benefactor and, as a
group, one of the strongest supporters of the parasta-
tal system. This relationship was apparent last June,
when the powerful labor arm of the PRI publicly
denounced further budget cuts and called for a
strengthening of state industries. Mexican policymak-
ers do not take such pronouncements lightly, since the
cies as part of the government's overall effort to
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Table 2
Ministerial Oversight of Parastatals
Number of
Parastatals
Administered
Programing and Budget
22
Health and Public Assistance
19
Federal District
11
Note: The total number of parastatals shown here is higher than
totals cited elsewhere. According to the US Embassy, an authorita-
tive official list is unavailable. The latest official count on 15
November 1982 placed the total at 849. The figure reported above
could be higher simply because some parastatals are administered
dora Closing").
estimated 2.3 million unionized public-sector workers
formally affiliated with the PRI constitute the core of
the government's political base. According to Embas-
sy reporting, a significant number of ineffi-
cient parastatals remain in operation only because the
political cost of eliminating jobs is unacceptable. Even
when workers are laid off, they generally are given
handsome severance benefits (see inset "The Fundi-
In general, the parastatals provide the government
with the means to keep organized labor as one of the
pillars of the PRI. Since de la Madrid took office, we
believe the economic benefits of the parastatals have
helped to offset trends that otherwise might have
contributed to a deterioration of the crucial PRI-labor
relationship. Over this period, real wages have steadi-
ly fallen and are now 40 percent less than they were in
1982. In addition, according to press reports, an
estimated 1,500 jobs have been lost daily to the
economy's contraction since the beginning of 1986.
The resiliency of Mexican labor is being put to the
test by a series of natural and manmade disasters,
high inflation, low and volatile oil prices, and a
monstrous debt burden. To some extent, the govern-
ment has eased these blows by keeping parastatals
open and subsidizing the prices of their output. In the
past, government negotiators squeezed wage conces-
sions out of organized labor by guaranteeing increases
in key subsidies to offset income losses. Similarly,
Mexico City nationalized failing firms to save jobs,
assume their debts, and thus protect the positions of
influential businessmen who support the PRI. F__1
this ability financially to 25X1
compensate labor is being eroded by the constraints of
falling oil prices and a massive federal deficit. 25X1
Controlling the Private Sector
While the government has co-opted labor, it generally
employs quite different strategies to control the pri-
vate sector, with which it is often at odds. Private
business provides an economic alternative to the state-
dominated economy and is the largest constituency of
the major opposition party. While we believe there is
not a viable alternative to the PRI today, we judge
that PRI party leaders still feel a need to limit the
business sector's influence. Private-sector linkages to
Washington and the international financial communi-
ty, both real and imagined, also contribute to the
government's conviction that it must manipulate that
sector.
Although the government treats various private-sector
groups differently, few observers would dispute that
the parastatals have been a key to the PRI's success in
politically neutralizing private business. In essence,
Mexico's private sector has little political influence,
because the Mexican Government has successfully
divided it. In some cases, Mexico City has used
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The Fundidora Closing
debt to $380 million.
The closing in May of the Fundidora Steel Company
in Monterrey, the country's third-largest city, located
in the northern State of Nuevo Leon, almost certainly
strained the relationship between government and
labor. The company-one of the three largest state-
owned steel complexes that comprise the SIDER-
MEX conglomerate-clearly was a financial disaster.
In 1985 alone, according to press reports, Fundidora
lost $48 million and increased its total outstanding
days' salary for each year of service.
The decision to cease operations resulted in signifi-
cant political and economic costs in addition to
immediate financial losses. Workers responded angri-
ly with large-scale demonstrations to the closing,
which eliminated some 10,000 jobs directly and will
affect another 60,000 eventually. Layoffs are costly
to the government: under Mexican law, severance pay
covers three months' salary and an additional 20
Fundidora employees would receive
s4fficient severance pay to support their families for
six to eight months, but beyond that their prospects
as steelworkers look bleak. Because of inefficiency
and overcapacity, Mexican steel is uncompetitive in
private businessmen's dependence on the public sector
to hush criticism of government policies. For example,
even though most private-sector
leaders do not support the ruling party, few are willing
ing to the US Embassy.
to risk their businesses by openly supporting opposi-
tion parties. In other cases, the government lines the
pockets of influential businessmen who support the
PRI. Whatever the tactic used, the PRI sends a
message understood by all: if businessmen support
opposition parties, their businesses may be at stake.
As a result, most campaign donations to the opposi-
tion are handled covertly and few businessmen speak
out against government candidates. Those who can
afford openly to express their opposition-owners of
small companies and those associated with export-
oriented firms-have little political influence, accord-
international markets, while the slowdown in eco-
nomic activity has reduced domestic demand for
steel. Moreover, private business in the area is in no
position to absorb any of the newly unemployed,
according to US Consular officials in Monterrey.
For its part, Mexico City points to the decision to
close the steel plant as evidence that it is taking the
painful steps needed to reform the economy. We
believe there is some validity in drawing a parallel
between the closing of the plant and the decision in
1985 to allow IBM 100 percent ownership of a Mexi-
can subsidiary. In both cases, Mexico City acted
while intense negotiations with creditors were taking
place amidst increasing pressure to adopt economic
reform. Although financial realities were more press-
ing in the Fundidora decision than in the IBM case,
we believe that the timing of the decision was irjflu-
enced by the creditor negotiations. More important,
rather than signaling similar moves elsewhere, we
believe that the negative political fallout from the
closing dampened the administration's resolve to
eliminate other inefficient state firms.
In our view, Mexico City is giving the private sector
lower economic and political priorities than other
domestic interest groups. For example, following the
government announcement last March that parasta-
tals would have to delay payments to domestic suppli-
ers, numerous businessmen have been subjected to
lengthy payment delays, even though the country has
managed to remain current on its foreign obligations.
As a result, many private companies have been forced
to lay off workers and suffer deep losses, according to
the Embassy.
Some criticism of government economic policies is
voiced by chambers of commerce, but we see no sign
that they are effective. On a few occasions, de la
Madrid has agreed to discuss his policies with leaders
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of these groups. However, the PRI leadership has
frowned on giving private-sector leaders any input to
the policymaking process, so that plans to regularize
these meetings have not been realized. Business is
shut out at the polls as well. The ruling party is
particularly adept at arranging sweeping electoral
victories-often resorting to blatant fraud-to legiti-
mize the government's economic role. This power to
reward is complemented effectively by the power to
punish, and the PRI is not hesitant to use its influence
to quiet vocal private-sector opponents. For example,
according to reporting from the US Information
Service, earlier this year PIPSA, the monopoly news-
print parastatal, blocked imports of newsprint and
associated supplies by a rightwing Mexican newspa-
per critical of government economic policies.F_~
The annual convention of chambers of commerce
provides an insight into how Mexico City handles the
private sector. Business leaders long have been de-
manding the divestiture of CONASUPO (the Nation-
al Company for Popular Subsistence), the food supply
parastatal, and its retail outlets that compete with
private stores. As one would expect, Mexican politi-
cians are extremely reluctant to tamper with the
25X1 company because of its image as the state's guarantor
of affordable food for all classes of Mexicans (see
appendix).
de la Madrid decided to use the convention-
one of the few forums available to forge a private-
25X1 sector consensus-to reaffirm official policy on state-
owned enterprises. With the President in attendance,
and apparently at his direction, the Commerce Minis-
ter unequivocally reconfirmed "the government's poli-
25X1 cy to intervene in the market for the protection of the
people." the
speech was nearly drowned out by booing and whis-
tling, a spectacle unprecedented in the presence of a
Mexican President, according to the US Embassy.
ing business with chamber members.
because CONASUPO threatened to stop
do-
t was quickly delivered
Mexico City responded promptly by demanding a
public apology from the convention directors. The
From an economic perspective, state-owned enter-
prises provide Mexicans with goods that, in many
cases, might not be available under free market
conditions. Perhaps more important, these firms also
subsidize basic necessities that otherwise would be
unaffordable to some. Finally, although economists
argue that direct subsidies are superior to a system of
state-owned firms offering subsidized output, the par-
astatals give many Mexicans a sense of pride and
well-being.
Inefficiency and Economic Distortions
Despite these benefits, Mexico, in our judgment, pays
a high price to maintain its large parastatal sector.
Most state-owned firms are plagued by a host of
problems that place a severe drain on the Mexican
economy. Many of these difficulties can be traced to
the lack of the profit incentives that are found in a
free market. In addition, we believe that heavily
subsidized state-owned firms often stifle competition
by sending the wrong signals and providing misguided
incentives to the private sector and, in some cases,
knocking relatively more efficient competitors out of
the market. Moreover, the monopoly position Mexi-
can parastatals often maintain-especially in natural
resources, banking, petrochemicals, electricity, trans-
portation, and communications-in many cases prob-
ably causes a misallocation of private-sector invest-
ment and stunts entrepreneurial ability and
innovation.
US Embassy reporting indicates that, in the absence
of key market forces, operational inefficiencies are
rampant in many parastatals, quality control often is
lacking, and modern management techniques are
sometimes ignored by supervisors and midlevel man-
agers who owe their positions to political factors
rather than business acumen.
unnecessary inventory accumulation as
well a where rundown equipment-lacking
replacement parts and proper maintenance-often
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result in high costs and an inability to respond to
has restricted output and caused unnecessary produc-
tion delays. Finally, overly generous labor contracts
changing conditions by reducing employment.
Among examples reflected in press reporting
are the following:
workers often are overpaid, that unpro-
ductive workers usually manage to keep their jobs,
and that employment levels are excessively high.
? A source close to DINA, the state-owned truck
manufacturer, has reported that the company's di-
rector is trying to persuade Mexico City to allow a
US firm 100-percent control of a DINA plant as
part of his overall effort to restructure the parastatal
and bring an end to heavy annual losses.
? Engineers at the electric power parastatal, CFE,
reportedly fear that the country faces brownouts or
blackouts unless various spare parts are received
soon. For example, many turbines already have been
shut down and cannibalized for spare parts to keep
other units running. Given the high economic and
political costs associated with power outages, we
view this as a misallocation of government resources
rather than austerity.
? Various press accounts reported that massive over-
capacity and excessive wage demands were among
the problems that led Mexico City to close the
Fundidora steel complex in Monterrey.
? Industry experts estimate that inefficiency and over-
staffing in Mexico's steel sector allows the public
sector to produce only 70 metric tons per worker as
compared to the 170 tons that workers produce in
Mexico's private steel firms.
? The state-owned sugar company, Azucar, has an-
nounced that it has no plans to scale back its
operations or work force even though there is a
massive surplus of sugar in the country.
? Despite heavy subsidization,
government food stores (CONASUPO) sell their
goods at prices only slightly lower than their
private-sector competitors. In addition, press reports
indicate that CONASUPO store managers employ
high degrees of discretionary pricing with little
regard to market conditions.
? Generous labor agreements at AeroMexico and
Mexicana, Mexico's state-owned airlines, reportedly
were scaring off potential private-sector investors,
although there are rumors that Mexicana will soon
be sold. Meanwhile, Mexican pilots publicly blamed
poor maintenance for recent airline disasters.
The distortions caused by Mexican parastatals have
varying effects on businesses, labor, consumers, and
investors as they permeate the economy. For example,
chronic overcapacity ties up resources-in the form of
capital and labor-that could be used more produc-
tively in other areas. Another problem arises from the
well-documented reliance of government-favored pri-
vate businesses on state-owned firms to supply them
inputs at below-market prices. This dependency alters
normal business incentives and, we suspect, in turn
causes many private firms to become inefficient by
placing a lower priority on cost-consciousness. When
Mexico City reduces subsidies on products produced
by the parastatals, the ability of private companies to
compete internationally is often jeopardized, as their
costs rise. At the same time, some firms are driven
from the international market because they depend on
poor-quality inputs from the parastatals. In many of
these cases, the private firm cannot turn elsewhere for
higher quality goods because the state-owned firm is a
monopoly.
Similarly, many Mexican private businesses depend
heavily on the parastatals to purchase their output.
Indeed, in some cases the state-owned enterprise is a
private firm's only customer, occupying a monopsony
position. Because public-sector firms can decide
where to purchase their inputs, they are positioned to
drive out of business any entrepreneurs who do not
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support government policies or the ruling party. Such
a relationship also creates an environment conducive
to corruption. We are convinced that preferential
contracting and kickbacks contribute to the sector's
overall inefficiency by inflating the cost of inputs and
fostering the production of inferior goods.
Yet another problem arises out of the generous labor
contracts characteristic of public enterprises. The
high level of wages and benefits contained in these
agreements naturally bids up wages throughout the
economy and is a major force behind inflation in
Mexico. Even though the effect has been dampened in
recent years as wages have failed to keep up with
price increases, producers' increased labor costs are
still pushed onto consumers in the form of higher
retail prices.
Finally, we believe that the public sector's dominance
over the economy has contributed to the gradual
erosion of the private sector, as demonstrated by high
levels of capital flight, low private-sector confidence
in the economy, and middle-class emigration.
businessmen have moved large amounts of pesos out
of Mexico over the last several years. Indeed, a major
US investment bank has estimated in a widely quoted
study that capital flight from Mexico during the
10-year period preceding 1985 amounted to
$53 billion. We believe the parastatals have stifled the
many potential investment opportunities that might
have attracted domestic investors whose funds now
have left Mexico for good.
some capital has trickled back in recent months, but
our analysis leads us to conclude that the turnaround
has largely been in response to the credit squeeze
caused by high government domestic borrowing and
that it is not an indication of renewed confidence.
Moreover, most of these repatriated funds have been
used to meet operating costs and have not been
directed toward much-needed investment. Over the
longer term, continued high levels of capital flight and
low levels of investment will threaten any prospect for
sustained economic growth.
In a trend with even more ominous implications for
Mexico's future, some private businessmen now are
"voting with their feet" and leaving Mexico for good.
In our view, Mexico's parastatal sector has contribut-
ed to this exodus by closing off entrepreneurial oppor-
tunities and, in some cases, limiting middle- and
upper-level management jobs to employees supportive
of the PRI. Indeed, profiles of immigrants-both
legal and illegal-show an increase in the number of
educated middle-class Mexicans looking for a better
life or an opportunity to capitalize on entrepreneurial
talent. In our view, this brain drain and subsequent
loss of human capital is potentially more serious than
the loss of financial capital.
Drain on Government Coffers
The parastatal sector places a direct burden on the
economy by draining the Finance Ministry of funds.
US Embassy reporting and official government data
show that the 10 largest firms-excluding PEMEX-
generated only 48 percent of their own revenues last
year; the remaining 52 percent was financed by
government transfers and borrowing. Among the
worst offenders were:
? The public steel conglomerate (SIDERMEX), which
earned only 34 percent of its income.
? The state electric company (CFE), which generated
less than 35 percent of its income.
? The state fertilizer company (FERTIMEX), whose
sales amounted to only 39 percent of total revenues.
? CONASUPO, the food marketing firm, which also
generated less than half of its revenues.
On the basis of available information, we conclude
that the poor performances we have detailed charac-
terize the entire sector, although the worst offenders
appear to be concentrated in the 10 largest firms,
excluding PEMEX, which accounted for over half of
the massive public-sector deficit in 1985. Indeed, from
a financial perspective, the combined fiscal burden of
the hundreds of remaining parastatals, reflected in
transfers from the federal government, is only slightly
lower than that of these larger firms.
An assessment of data for the first trimester of 1986
reveals far deeper financial problems for the parasta-
tal sector as a whole. According to press reports, the
sector had registered a total deficit of $2.2 billion by
the end of April-more than twice the total autho-
rized overrun. Historically, large surpluses from
PEMEX have kept the sector afloat by masking the
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Figure 2
Controlled Parastatals' Operating
Balances, 1981-86
Figure 3
Combined Parastatal Sector Operating
Balances, 1981-86a
? Pemex surplus
Deficit of others
a Projetd.
other parastatals' deficits (see figure 2). A close look
at the other state-owned enterprises revealed waste
and inefficiency that was tolerable only as long as oil
dollars continued to flow. Thus, we were predicting
economic trouble for Mexico even before petroleum
prices plummeted because, over the longer term, a
system that depends on one firm to support the losses
of some 700 others is likely to run into problems,
given the limits to expansion of Mexico's oil markets.
This year, the oil monopoly's surpluses will be insuffi-
cient to compensate for the heavy losses incurred by
the other companies because PEMEX's surplus has
been far below levels projected before petroleum
prices and export volumes tumbled dramatically. As a
result, we expect the parastatal sector as a whole to
register an operational deficit in 1986 (see figure 3).
The revenue shortfall problem appears to exist as well
where it is least visible-the hundreds of parastatal
firms whose budgets are not subjected to congressio-
nal control, the "noncontrolled enterprises." Although
information on the financial operations of these firms
is scant, they 25X1
have continuously run operating deficits (see figure 4).
To offset deep losses, these firms have drawn heavily
on government transfers. Last year, for example,
transfers to the noncontrolled sector matched those to
the controlled sector.
The inability of parastatal firms-except PEMEX-
to generate more revenues than they spend will force
the Mexican Government to reach even deeper into its
pockets to help meet the sector's debt obligations.
According to press reports, more than 60 percent of
the parastatals' expenditures goes toward external
debt payments. We calculate that debt owed by state-
owned firms now accounts for more than 40 percent of
the public sector's total external debt of some $74
billion (see figure 5). Prior to the debt rescheduling
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Figure 4
Noncontrolled Parastatals' Operating
Deficits, 1976-86
sector.
agreement with banks, state-owned firms were sched-
uled to pay foreign lenders about $5.2 billion in
interest and principal, 57 percent of the Mexican
Government's total obligation to these sources. Even
though principal payments have been postponed,
Mexican parastatals seem destined to depend on
Mexico City to honor their steadily increasing obliga-
tions through the 1990s. In total, the parastatals owed
foreign banks $29.2 billion as of March 1986-a debt
larger than that of most countries and 50 percent
larger than the debt contracted by Mexico's private
We expect Mexico City to find it difficult to retire a
significant portion of these external loans. Repayment
through less conventional means-such as debt-for-
equity swaps, zero coupon bonds, or interest capital-
ization-is complicated by the fact that the foreign
creditors generally are less willing to accept creative
solutions, partly because of the regulatory environ-
ment in which they operate. In addition, while Mexico
Figure 5
Mexican Debt Profile, 1986
Nationalized banks
5.0 (5.2)
Private sector / Federal
18.5 (19) government
Parastatals
29.5 (30.4)
City can take an inflationary course and print pesos to
repay its domestic creditors, it must find dollars or
other foreign currencies to meet international obliga-
tions. This has become increasingly costly as the peso
has fallen rapidly relative to the dollar in recent
months and currency reserves have been depleted.
Further, Mexico's own laws hinder creative solutions
by prohibiting majority foreign ownership and dictat-
ing that certain industries remain under complete
government control. For example, debt-equity swaps
resulting in majority foreign ownership would require
a constitutional amendment
The government, in our view, will also have to help
the parastatals repay their domestic debts. Recent
reschedulings of the country's external debt will not
have bought time on these internal obligations, and
this year state-owned firms are scheduled to repay
Mexican investors some $3.2 billion, about one-fifth
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of the public sector's total obligation to domestic
creditors. Moreover, as inflation continues to acceler-
ate and drives domestic interest rates higher, the
burden will increase.
In light of their inefficiency and the economic distor-
tions they cause, pressure to divest many of Mexico's
parastatals has been mounting for a number of years
(see inset "Shedding the Burden"). In his inaugural
speech on 1 December 1982, de la Madrid alluded to
a program in which the government would sell "non-
priority" companies. However, the first move in this
direction did not come until April 1984, when the
nonfinancial assets of the banks expropriated by
Lopez Portillo-mainly brokerage houses and insur-
ance companies-were returned to the private sector.
In February 1985, the administration promised to
publish a list of 236 parastatals that would be put up
for sale. Nearly two years later, such a listing has yet
to emerge, although occasionally the government
hints that a specific parastatal could be sold, given the
25X1 proper conditions.
believe will not be honored.
On the basis of US Embassy reporting and our
assessments, we believe that de la Madrid originally
fully intended to proceed with his privatization plan
but that his efforts were halted by political realities
sharpened by the July 1985 midterm elections. Mexi-
co's lack of progress in this direction subsequently
emerged as a major stumblingblock in negotiations
that began in early 1986 with the IMF and other
foreign creditors. Typically, the deadlock was over-
come by a Mexican promise to privatize, which we
In his 1 September 1986 annual address to the nation,
de la Madrid finally identified those parastatals that
he deemed "strategic and priority enterprises" and,
therefore, constitutionally mandated to government
control. Rather than naming specific parastatals that
could be sold, the President vaguely characterized
those that could not (see inset "Divestiture: Commit-
ment or Rhetoric?"). As a result, de la Madrid almost
certainly failed to encourage investors and character-
istically left himself room to backslide. According to
There are a number of mechanisms governments can
employ to divest themselves of state-owned firms:
? Private-sector sale allows the government to divest
itself of control and ownership of parastatal enter-
prises. To the extent these firms are unattractive
investments, the government may be required to
create demand by "sweetening the pot" through
such means as tax breaks or favorable financing. In
addition, either there must be adequate means for
the private sector to finance such purchases or the
country's foreign investment laws must be condu-
cive to foreign ownership.
? Partial divestiture occurs when the government
relinquishes only some ownership in the enterprise.
By selling less than half of the company, the
government maintains formal control over
operations.
? Leasing transfers the responsibility and cost of
operation but does not diminish the value of the
government's holdings.
? Liquidation is the extreme step, in which the
government closes down the firm. This option is
feasible only if the product or service provided is
deemed nonessential or an alternative supplier can
be developed.
the US Embassy, the President's announcement was
overshadowed by Mexican press reports that buyers
had been found for only eight of the 53 firms offered
for sale since 1983.
Although de la Madrid and members of his adminis-
tration appear to agree that a key to closing the gap
between government expenditures and income lies in
the sale of parastatals, Embassy reporting
reveals that they remain far apart on the pace of
adjustment. Some past and present Mexican policy-
makers-most notably former Finance Minister Silva
Herzog-have risked political backlash by publicly
maintaining that the state's economic dominance
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In his 1 September 1986 State of the Nation speech,
de la Madrid announced that his government would
take steps to save the strategic and priority enter-
prises by preventing nonstrategic and lower priority
enterprises from depleting the Mexican budget. This
formulation apparently was intended to indicate that
his government would continue to operate some firms
but was willing to divest itself of others. The list of
sacrosanct firms was divided into the following
categories:
? Exclusive state jurisdiction, per Article 28 of the
Constitution:
- Petroleum and hydrocarbons.
- Basic petrochemicals.
- Radioactive minerals and nuclear power
generators.
- Electricity.
- Railroads.
- Issuance of currency.
- Coining of money.
- Postal services.
- Telegraph and satellite communications.
- Public banking and credit services.
must be scaled back. Others argue, more forcefully
and effectively, that wholesale divestiture would be
tantamount to dismantling the system that has provid-
ed 50 years of political stability. They claim that the
widespread plant closings and layoffs that would be
associated with these measures simply are politically
unacceptable. As a result of this latter group's
strength and popularity, no major parastatal so far
has been completely sold, although 80 percent of
Mexicana Airlines is close to being sold to a group of
? Other strategic entities, essential for protecting the
national interest (mainly social programs):
- Mexican Social Security Institute.
- Social Security and Services Institute for Gov-
ernment Workers.
- National Fund for Workers' Housing.
- CONASUPO.
? Enterprises, among others, with priority status:
- Steel.
- Fertilizer.
- Sugar.
- Shipbuilding.
The President also stated that 205 parastatals have
been transferred, liquidated, merged, or sold and that
some 261 others are in the process of being divested.
According to de la Madrid, there are now about 700
parastatals, compared to 1,155 in 1982. The US
Embassy reports that it has been unable to confirm
the numbers cited by the President and points out
that the inclusion of the caveat "among others" in the
last category is a typical Mexican Government
loophole.
Mexico's present severe economic downturn is a major
obstacle to privatization. From a political standpoint,
de la Madrid lacks the capital required to proceed,
even though the need is greater now than before.
Moreover, Mexican businessmen have little incentive
to purchase parastatals: predominantly unattractive
firms are offered for sale, and high inflation and the
relatively steep fall in GDP expected this year makes
investments risky. In addition,
Mexico City has made the conditions for
sale too onerous. Some stipulations require purchasers
to agree to existing labor contracts, even though these
contracts have contributed to the parastatals' ineffi-
ciency. In other cases, firms are sold only in packages,
grouping one attractive company with several losers.
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Even if the private sector wanted to buy state-owned
companies, however, the necessary resources currently
are hard to come by:
? The Federal government is monopolizing all avail-
able domestic capital to finance its burgeoning
budget deficit. Indeed, Mexican bank reserve re-
quirements in recent months have exceeded 95
percent.
? Foreign creditors) are reluctant to
lend money to Mexicans to purchase shares of state-
owned enterprises.
? Foreign investors who find parastatals appealing are
constrained by Mexican laws and discouraged by
the country's economic performance and the govern-
ment's lack of commitment to much-needed reform.
skepticism that de la Madrid has any intention to
engage in large-scale divestiture, a commitment to
improve efficiency appears to us a positive move.
Nevertheless, in our view, a key to achieving an
economic recovery that can produce long-term, sus-
tainable growth lies in the divestiture of some of the
In the last two months, de la Madrid has appeared
once again to be backing away from his promises to
divest the sector and now is placing emphasis on
making the "priority" firms more efficient. Given our
larger firms.
constitute less of a burden.
little would be gained even if Mexico were to sell most
of the so-called nonpriority firms. A look at govern-
ment balance sheets confirms this: financially, the
majority of Mexico City's problems in this area are
generated only by the eight or 10 largest parastatals;
the hundreds of remaining firms in the aggregate
De la Madrid is challenged to deal with the bloated
parastatal sector at a time when such moves would be
economically and politically most costly. Given pre-
sent hard times, we doubt he will pursue significant
privatization or find other means to divest state-
owned enterprises, especially when the PRI's presi-
dential candidate will be named in a year and elec-
tions will be held in less than two years. The President
is unlikely to force Mexicans to undergo the addition-
al sacrifices large-scale divestiture would bring as
subsidies are cut and unemployment surges. In short,
de la Madrid probably believes it would be political
suicide to demand immediate pain to realize longer
term relief only after he has left office. Likewise,
efforts to make the larger firms more efficient require
measures that are politically unpopular. Consequent-
ly, similar to those before him, this President can be
expected to leave the burden of adjustment to the next
administration.
Until then, we believe the de la Madrid administra-
tion will enjoy a temporary respite from some of its
immediate economic problems as a result of the
lenient IMF agreement signed in September and the
financial bailout from commercial banks. Rather than
use this breathing space to begin economic reform,
however, we believe the Mexican leadership will
direct most of the money to foreign interest payments.
The remainder will be used to fund politically sensi-
tive domestic programs and build reserves, while a
good portion will be lost to capital flight.' Moreover,
even if funds from the multilateral lenders are ear-
marked for structural adjustment, they are more
likely to be used in the politically less sensitive area of
trade liberalization than privatization.
To demonstrate some progress on divestiture, how-
ever, the government is likely to shed some smaller
companies with much fanfare, but in the end the
measures are unlikely to go far enough to alleviate
much of the problem. The impetus for change is
unlikely to come from within, because those business
leaders willing to push for privatization are without
leverage: they are politically ineffective, lack support,
resources, and, most important, a viable alternative to
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the current system, given present conditions. Mean-
while, Mexico's foreign creditors will continue to push
for divestiture and privatization, but, for the time
being, they will be ineffective since they have conced-
ed much of their leverage by agreeing to lend new
money and reschedule old debt.
De la Madrid almost certainly will work hard to
soften the blows from any moves, however minor, to
reform the parastatal sector. The government will lose
some economic influence and political good will as it
sells even smaller state-owned enterprises and workers
are laid off at some of the larger companies. Never-
theless, we expect the Mexican leadership to deal with
the resulting problems by promising higher wages,
unemployment compensation, or political favors to
labor leaders. By selling some firms and making
others more efficient, Mexico City is likely to mend
some fences with segments of the private sector not
directly benefiting from a large parastatal sector. For
those whose allegiance to the PRI has been "purcha-
sed" by favors channeled through the sector, other
mechanisms of co-optation will be found. In the end,
some political capital may be sacrificed by the mini-
mal reforms, but certainly not enough to disrupt the
political system or substantially handicap the PRI.
the question, in our judgment.
Unless circumstances change significantly, Mexico
will have to wean itself from dependence on the public
sector over the longer term. The level of resources to
sustain the parastatals will no longer be available,
since oil revenues are unlikely to return to the levels
enjoyed before 1986, and foreign lenders cannot be
counted on to continue massive lending. Some alter-
native sources of financing exist-much higher taxes
or a deep cut in imports, for example-but, in our
view, their costs are economically and politically
prohibitive. Therefore, whether the increasing politi-
cal and demographic pressures push future Mexican
policy makers to abandon their traditional reliance on
the parastatals or, conversely, corner them into a
greater dependence, economic constraints almost cer-
tainly will force the sector to shrink. Under any
scenario, expanding the state-owned enterprise system
to meet the demands of a growing labor force is out of
Given the ballooning growth in population and in-
creasing urbanization, the PRI leadership will proba-
bly have to seek alternatives to replace the economic
and political capital that parastatals generate for the
government. The easiest and most likely course, in our
view, would be to adopt a muddle-through approach
designed to adapt to the economic realities while
minimizing the political fallout. Such an approach
would be characterized by a vigorous effort to reduce
waste and increase efficiency; the sale, merger, or
divestiture of smaller and politically less sensitive
parastatals; heavy foreign borrowing facilitated by
threats of a debt payment suspension; and an escala-
tion of the federal deficit and inflation. While this
approach may be the most palatable from the Mexi-
can policymakers' perspective, it carries great risks.
The longer the adjustment is postponed, we believe,
the more pronounced the eventual trauma associated
with reform will be.
The direct implications of the Mexican parastatal
conundrum for the United States will be, in the near
term, largely limited to adverse effects on US firms
supplying the parastatals and to commercial banks
that have lent them money. As Mexico City waits for
fresh credits, some US suppliers may experience
payment delays. Looking farther ahead, until the
Mexican economy rebounds, demand for US imports
certainly will remain depressed. US firms that have
grown dependent on Mexico's parastatal market may
be driven to look elsewhere when the Mexican compa-
nies are forced to cut back on imports. On the positive
side, some of the smaller parastatals that may be put
up for sale could offer US investors an opportunity to
expand markets. To the extent that US technological
and managerial expertise is exported to Mexico, both
sides stand to benefit.
US banks face a similarly uncertain future. For
example, it is unclear what will happen to the status
of a loan to a parastatal if the company is sold.
Creditors would almost certainly demand repayment
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of the loan from the proceeds of such a sale, but
Mexico City would probably attempt to reschedule
this debt along with the bulk of the country's out-
standing obligations. A proliferation of debt-equity
swaps involving US banks-which has only limited
potential-could give rise to other areas of contention
regarding the independence of US management oper-
ating in Mexico. In general, foreign banks will contin-
ue lending to some parastatals-PEMEX is still
considered a good risk, for example-but others will
not receive credit. Banks may have to write off the
debt of those that fold if Mexico City is unwilling or
unable to assume the obligation.
Over the longer term, the continued reluctance of the
Mexican Government to reform the parastatal system
will, in our judgment, accelerate the erosion of the
Mexican economic system and generate problems that
will almost certainly spill across the border. At a
minimum, a bloated Mexican public sector threatens
to strain the US financial system as banks are forced
to either lend additional money or face payment
suspensions. Moreover, Mexico's state-owned enter-
prises, even if they are not pared down, are unlikely to
grow sufficiently to create enough jobs to satisfy the
country's rapidly growing labor force. Consequently,
illegal immigration-already at record levels-is like-
ly to accelerate.
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Appendix
Key Parastatals
PEMEX, Managing the National Patrimony
PEMEX (Petroleos Mexicanos) is responsible for all
petroleum-related activities in the country including
exploration and production of crude oil and gas,
refining, transportation, marketing, and the produc-
tion of petrochemicals. It is by far the dominant
company among the state-owned enterprises.
Since the discovery of major oilfields in the mid-
1970s, PEMEX has generated large operating sur-
pluses, which have helped to offset growing operating
deficits among the other parastatals. Between 1979
and 1983 transfers from the federal government to
PEMEX averaged the equivalent of nearly 3.7 per-
cent of GDP. Furthermore, since the late 1970s
PEMEX has accounted for about half the investment
undertaken by the state enterprises, totaling
$35 billion between 1977 and 1983.
PEMEX revenues are heavily taxed, providing about
39 percent of all tax revenues collected by the federal
government. The combination of PEMEX's large
investment requirements and the high rate of taxation
resulted in a large overall deficit in the early 1980s,
much of which was financed by foreign commercial
borrowing. In 1981 alone PEMEX borrowed
$10 billion abroad, and by the end of 1984 the
company's external debt totaled $17.5 billion. F_
-PEMEX is also plagued by widespread criticism of
management practices. Workers have accused manag-
ers of being preoccupied with financial savings at the
cost of other programs such as maintenance and
replacement. Recently, more accidents have been
reported than in previous years, most of which result-
ed from poor maintenance or improper use of equip-
ment, according to the US Embassy.
sets its prices well below cost. Heavy investments in
the sector have been effective but expensive, accord-
ing to the Embassy. In 1985, the operating deficit for
CFE and the Central Light and Power Company was
equal to nearly 1.1 percent of GDP, forcing a
59-percent increase in transfers from the federal
government. CFE alone relied on these transfers and
borrowing for 65 percent of total revenues.
CFE lacks resources to meet the current increase in
the demand for electrical power because of the cancel-
lation of investments. The parastatal is stagnant and
has had to curtail programs and reschedule projects,
all indications that there are no funds. Like
CONASUPO, CFE overspent its first-quarter 1986
budget, In order to
put government spending back within approved tar-
gets, CFE, along with PEMEX, SIDERMEX, and
other parastatals, was forced to suspend payments in
February 1985. Moreover, the 1986 Mexican budget
called for 48 percent of direct pricing subsidies to go
to CFE alone.
SIDERMEX, the Beleaguered Steel Complex
SIDERMEX, the government steel complex com-
posed of Altos Hornos de Mexico and Siderurgica
Lazaro Cardenas-Las Truchas, produces 60 percent
of Mexico's steel. It is faced with high financial costs,
stagnant domestic demand, a limited export market,
price controls, and management and labor problems,
according to the US Embassy. Moreover, it is
CFE, the Troubled Electric Company
Together with the Central Light and Power Compa-
ny, the Federal Electricity Commission (CFE) domi-
nates the electric power sector. CFE is responsible for
producing and selling all commercial electricity, and
strapped with a $3.5 billion debt.
SIDERMEX in 1985 faced a serious setback when
the US reduced its imports of Mexican steel by 30
percent. Combined with an acute shortage of capital
and a reduction of income, this move caused the
parastatal to fail to meet its 1985 production target
and to accumulate huge financial losses. The most
drastic example was Fundidora Monterrey, which lost
$48 million in 1985, and in May 1986 was the first
major parastatal to be closed.
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In mid-January, SIDERMEX director Miguel Ales-
sio Robles was removed from office for failing to
address the problems facing the parastatal and re-
placed by former DINA director Juan Guillermo
Becker. SIDERMEX still faces serious financial
problems. Although privatization remains a possible
solution, the private sector probably does not have the
financial resources to buy SIDERMEX's large firms
at the present time, according to the US Embassy.
The situation would be considerably improved by a
recovery in domestic demand and a reopening of the
US market, neither of which appears likel in the
near future, however.
CONASUPO, Feeding Mexico
CONASUPO supplies basic agricultural products to
Mexican consumers, administers official support
prices, imports agricultural products to supplement
domestic production, and manages storage facilities.
Through transfers from the federal government it also
subsidizes the prices of basic food products. In recent
years it has branched out into other activities such as
the sale of light manufactured products.
CONASUPO has incurred large operating losses in
recent years. In 1983 these losses were equivalent to
about 1.3 percent of GDP. In 1985, CONASUPO
relied on federal transfers and borrowing for 50
percent of total revenues. In 1986, the parastatal
overspent its first-quarter budget, and the situation
does not show signs of improving. CONASUPO also
suffers from widespread corruption and inefficiency,
lthough a re-
form program was established to combat corruption,
it was later abolished as part of a cut in government
spending.
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