political economy analysis of averting the resource...
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Political Economy Analysis ofAverting the Resource Curse:
Mexico Case Study
Alberto Diaz CayerosCenter for US - Mexico Studies
IR/PS, University of California, San Diego
Prepared for the Workshop “Myths and Realities of CommodityDependence”, Washington, DC, September 16-17 2009
Four Interrelated Findings
• Mexican proven oil reserves not fixed: – international price of oil– availability of extraction technologies– skills of engineers and technicians– managerial culture of PEMEX– relationship with the oil workers union– fiscal regime and regulatory framework
Interrelated findings cont’d
• Value chain– Bilateral bargaining in royalties– Soft budget constraint– Investment shortfalls
• Role of oil rents– relationship between state governors and the
federal executive– redistributive role of federal expenditure
• Counterfactual in mining
Mexican commodity booms
• Highly diversified national economy• Highly diversified export platform, especially since
NAFTA• Commodity dependence only in specific regions• Monopolistic structures in both private and public
sector enterprises in extractive industries– PEMEX– Grupo Mexico– Peñoles– CEMEX
• Tax revenue: high oil dependence
Commodity production is not simplya natural endowment
• Wright (1990) asks “whether resource abundance reflectedgeological endowment or greater exploitation of geologicalpotential”
• Sachs and Warner (1995) argue that “economies withabundant natural resources have tended to grow less rapidlythan natural-resource-scarce economies.”
• US Economic History:– Geological surveys and public knowledge (USGS founded in
1879)– University training in management– “Ethos of exploration”– Endogenous incentives and tax lobbying
• Link to political regime: Karl (1987, 1997), Ross (2001), Haberand Menaldo (2008), Dunning (2008)
Potential oil and gas production inMexico (statistical expected values)
14.7 billion barrels proven oil reserves in 2008The Chicontepec Basin has been certified to have 17.7 billion barrels
Known since 1913, but technological hurdle: requires drilling 16,000wells, due to low permeability (PEMEX has 5000 wells in operation)
Geologic Regions Oil Gas Natural Gas
(Mill Barrels) (Billion Cubic ft) (Mill Barrels)
Tampico-Misantla Basin 893 2,051 119
Veracruz Basin 955 5,832 288
Saline-Comalcalco Basin 7,018 16,423 895
Villahermosa Uplift 7,436 15,623 918
Campeche-Sigsbe Salt Basin 2,478 5,565 309
Yucatan Platform 754 1,496 89
Sierra Madre de Chipas-Peten Foldbelt 890 1,846 110
Industrial structure of Mexicanextractive industry firms
Share of TotalCapacity
Main Firm EffectiveNumber ofCompaniesCement 62.6% CEMEX 2.21
Copper 80.5% Grupo Mexico 1.45Coal 30.6% AHMSA 3.32Gold 64.1% Peñoles 2.25Iron Ore 40.5% ALFA 3.45Lead 33.7% Peñoles 2.43Silver 73.9% Peñoles 1.72
Current royalty regime perhectare
ARTÍCULO 263. Los titulares de concesiones y asignaciones mineras pagaránsemestralmente por cada hectárea o fracción concesionada o asignada, elderecho sobre minería, de acuerdo con las siguientes cuotas:
Concesiones y asignaciones mineras Cuota por hectáreaI. Durante el primer y segundo año de vigencia. $ 4.42II. Durante el tercero y cuarto año de vigencia. $ 6.61III. Durante el quinto y sexto año de vigencia. $ 13.68IV. Durante el séptimo y octavo año de vigencia. $ 27.51V. Durante el noveno y décimo año de vigencia. $ 55.01VI. A partir del décimo primer año de vigencia. $ 96.83
Political economy• Patronage networks financed by oil
revenue (excedentes petroleros captureby governors)
• Labor union strength and ducts ashostages
• Public opinion dynamics and thenationalization – privatization cycle
• Subnational authoritarian enclaves– but this depends on the transfer system
(revenue sharing rules and discretionarytransfers)
Estimating rent extraction andappropriation in oil
• Union and Management as residualclaimants
• Bargain between Federal Government andPEMEX management to determine Royalties
• Windfall revenue for Stabilization Fund and tobuy off support of governors
• No longer subsidy to consumers, energysector or energy intensive firms (perhapsCFE in fact provides an inverse subsidy)
Estimating rent extraction andappropriation in minerals
• Capital intensive investments with highrisk
• Windfall gains during booms are not tied toroyalties
• Obscure process of adjudication of bids• Employees are mostly unionized in large
firms, but small producers are lessprotected
• Ejido land for mineral exploitation not tiedto productive projects
Billionaires counterfactual:add oil tycons
Name Forbes RankAge Net Worth (Bil)Main Sector
Carlos Slim Helu & family 3 69 35 Telecommunications
Alberto Bailleres & family 83 76 5.7 Metals and Mining
Ricardo Salinas Pliego & family 124 53 4.2 Retail and Media
Jeronimo Arango & family 178 83 3.4 Retail
German Larrea Mota Velasco & family246 55 2.6 Mining and Transport
Roberto Hernandez Ramirez 601 67 1.2 Finance
Joaquin Guzman Loera 701 54 1 Shipping (Drug Trafficking)
Emilio Azcarraga Jean 701 41 1 Media
Alfredo Harp Helu & family 701 65 1 Finance