Mexico: Reform Promises Boost in Energy

By Amy Ruddle

Photo credit: Wonderlane / Foter / CC BY

Photo credit: Wonderlane / Foter / CC BY

Landmark reforms passed by the Mexican Congress last month – amendments to three articles of the Constitution – allow private investment in the country’s energy industry for the first time in 75 years. They open the door for international companies to enter into joint ventures with Petróleos Mexicanos (PEMEX), with the first round of contract bidding slated for 2016 – and increased oil and gas production as soon as 2018. PEMEX will remain state-owned and all hydrocarbons in the ground will continue to belong to Mexico, but private companies will gain rights to oil at the wellhead and be permitted to participate in site exploration, gas and oil production, seismic analyses, and the transportation, marketing and refining of these resources. They will also be allowed to bid for rights to conduct offshore and shale exploration.

Although the oil industry is expected to attract billions of investment dollars – PEMEX signed a cooperation contract with Russia’s Lukoil last week for an undisclosed amount – Mexican officials say they’re not rushing into deals. Undersecretary of Hydrocarbons Enrique Ochoa Reza recently said that the government is proceeding carefully, taking cues from Brazil and Norway as examples of how energy reform can be executed successfully. “In order to do it right – and we are committed to doing this – we need to do it one step at a time,” he said. The Mexican government’s hope is to return oil production (roughly 3 million barrels per day in 2012) to its 2000 levels (3.5 million) by 2025, and possibly 4 million barrels in the distant future.  In addition to creating jobs, the government projects the reforms will increase GDP by 1 percent by 2018, and by 2 percent by 2025. Increased revenues should stabilize budgets, fund a long-term savings mechanism, and eventually support long-term projects including the universal pensions system, scholarships, and science and technology research.

The next hurdle in energy reform will be passage of secondary legislation over the next five months — and faithful implementation. The transparency mechanisms written into the constitutional reforms, including public bidding rounds, transparency clauses in energy contracts, external industry audits, and the full disclosure of all payments related to oil and gas contracts are essential to success, but overcoming the corruption and inefficiency that have plagued PEMEX will require sustained effort. In addition, President Peña Nieto still has to sell these changes to the Mexican people. Tens of thousands of citizens took to the streets to protest the changes in early December, and opinion polls show that many, if not most, Mexicans are not in favor of them. Polls conducted by Vianovo in September (still deemed to be among the most accurate) show that only 33 percent of respondents favor profit-sharing contracts between the government and private companies to explore and produce hydrocarbons, although 53 percent were at least somewhat in favor of the energy reforms overall. Unions are upset too, as the union representing PEMEX’s 140,000 employees has now been eliminated from the company’s board, and private firms benefiting from the reforms may create labor contracts without union involvement.

Mexico: Peña Nieto’s big push

By CLALS Staff

President Enrique Peña Nieto / Photo credit: Eneas / Foter / CC BY

President Enrique Peña Nieto / Photo credit: Eneas / Foter / CC BY

President Peña Nieto’s reformist agenda wins kudos from the business and financial class, but both a recalcitrant leftist opposition and mass organizations previously aligned with his party are taking to the streets in protest – raising serious doubts about its prospects.  In his first state of the nation speech, delivered last week, Peña Nieto pledged to plow ahead with “transformational” reforms, giving flesh to the PRI’s slogan that it is Transformando a México. In education, he’s proposed a more rigorous system for hiring, evaluating, promoting and firing teachers who have resisted change despite evidence that the current system is not equipping Mexican youth for employment.  In the energy sector, he wants to open up the oil and gas industry to foreign investment, an idea that was strictly off-limits in the past even though lagging investment has caused production in Mexico’s leading export industry to decline steadily.  He is also pursuing tax reforms that, although watered down when announced on Sunday, entail political risk and, tellingly, raise marginal rates by 2 percent for higher earners and impose a levy on capital gains.  In June, he picked a fight with powerful business leaders over control of the country’s telecommunications industry, an oligopolistic structure that imposes excess costs on consumers and producers alike, diminishing Mexico’s economic competitiveness.

The teachers unions, whose symbiosis with the PRI in the past ensured cooperation, mobilized huge protests in Mexico City, forcing Peña Nieto to delay his speech by a day and then causing monstrous traffic jams during it.  The President cloaked his announcement of the energy reform in nationalistic rhetoric, and PEMEX, the oil company, followed it up with predictions of positive results – huge increases in oil investment and production that purportedly would help to create 500,000 new oil-sector jobs by 2018 and 2.5 million by 2025. But opposition to the reform has been strident, and tens of thousands filled the Zócalo on Sunday to protest it as a “covert privatization.”  Opposition leaders are already pledging demonstrations to oppose taxes, though the likelihood of this may be diminished because the long rumored reform unexpectedly left untouched the value-added tax exemption for food and medicines, which would have been a major rallying point for the Left.

Some Mexican commentators say Peña Nieto’s leadership is already losing its shine and that his Pacto por México, the loose coalition he engineered in Congress, is at risk of falling apart.  He prevailed in his congressional showdown over the long overdue education reforms, but success in transforming the underperforming education sector appears uncertain, as the teachers are threatening more protests.  The arrest of narco bosses from the Gulf Cartel and the Zetas have not given him a bounce on the security front; indeed, Mexican press reports indicate that kidnapping, extortion and other crimes that more directly affect citizens’ lives continue to rise. Further complicating Peña Nieto’s life is news last month that the economy is slowing down.  The first contraction in four years has forced the government to cut its 2013 GDP growth forecast in half, to 1.8 percent.  The administration will undoubtedly point to data showing that PEMEX production has fallen by about a quarter in the past decade because of low investment, and will emphasize that this makes modernization of the oil sector all the more imperative.  But Mexicans have heard promises before, during NAFTA debates and since, that economic reforms and greater openness to trade and investment will massively improve their lives.  Whether there is any fuel left in that rhetorical tank remains to be seen.

Central American Elites Are Evolving But Cling to Power

From left to right: Manuel Torres, Ricardo Barrientos, Hugo Noé Pino, Aaron Schneider and Elizabeth Oglesby participating in the project seminar in Costa Rica

From left to right: Manuel Torres, Ricardo Barrientos, Hugo Noé Pino, Aaron Schneider and Elizabeth Oglesby participating in the project seminar in Costa Rica

The sources of Central American elites’ wealth are evolving, as are their fundamental interests and the ways they wield political power.  Land‑intensive production – the focus of decades of insightful scholarship – continues to prevail in Guatemala and Honduras, but the economically powerful now maintain their position through a growing array of service-sector activities and by capturing rents from public coffers.  Changes in their economic foundations are but one of several transformative processes that swept the region beginning during the 1980s, making the past three decades a period of fundamental rupture with the past.

  • Civil wars in El Salvador, Guatemala and Nicaragua during the 1980s transformed the economies in all three countries and had spillover effects in Costa Rica and Honduras.  Most striking is the case of El Salvador, where elites abandoned the countryside upon which they had depended from time immemorial, never to return.
  • Structural adjustment programs, implemented throughout the region during the 1990s, changed the role of the state in Central American economies and thus the ways in which the public sector intersected with the elites’ wealth-accumulation strategies.  Hasty and corruption-ridden privatizations, in particular of energy and telecommunications and of an array of public services, created a reformist façade but gave private-sector groups a piñata that helped to ensure uninterrupted enrichment.
  • During that same decade, transitions to electoral democracy contributed to elite reliance – albeit with some important exceptions – on political parties, campaign strategies and legislative lobbying to protect their interests.  Ties to military and death squad enforcers are no longer the principal vehicles for the enforcement of elite imperatives, though Honduras today is increasingly reminiscent of the worst times in Guatemala and El Salvador.

Central America’s elites have yet to offer the region a vision of reform that will enable the isthmus to overcome misery, exploitation and predatory rule.  While dominant groups have embarked on aggressive state-building strategies, experts question whether these are producing the virtuous dynamics that advance the general welfare of the population and ensure effective governance. 

Scholars from across Central America have reached these conclusions through research and seminars under a multi-year AU program on Central American elites and power.  To foster better understanding of the shifting landscape in the region, and thus to illuminate plausible paths toward more equitable distribution of power and resources, the Ford Foundation is supporting this effort, undertaken in partnership with more than two dozen researchers from institutions throughout the isthmus and the United States.  The project was the focus of a recent workshop at FLACSO Costa Rica, and several publications will result over the course of 2013 and 2014.  Click here for more information.

Cuba: Change in the Wind

Three American University professors recently traveled to Cuba for research and discussions on Cuba’s reform process – called “Updating Socialism” – and the island’s relations with the United States.  Today’s entry looks at the economic changes.

Photo by: Globovisión | Flickr | Creative Commons

Photo by: Globovisión | Flickr | Creative Commons

In offices, shops and on the street in Havana, “change” seems to be one of the most commonly used words.  Billboards proclaim “The changes in Cuba are for more socialism” and “Updating socialism is the answer.”  But the words “reform” and – in some conversations – “privatization” pop up with significant frequency.  Party members previously reluctant to talk about change now speak of introducing “elements of capitalism” to make Cuba a “mixed economy” patterned closely after the “Vietnam model,” with its economic loosening but one-party rule.  Previous reforms have brought better, if sometimes expensive, food to many Cuban dinner tables, but the strong consensus in and outside the party is that a lot more needs to be done.

  • The law-decree on “non-agricultural cooperatives” provides a politically correct way ahead for the formation of small and medium private enterprises.  Cuentapropistas were given a prominent place in the May Day parade, and some are being nominated for office on the Communist Party slate.
  • The government is making another run at tearing down the barriers between hard-currency and peso purchases, with an eye to unifying the currency in the future.  Price tags at at least one major Havana store list prices in both convertible and national currency, at a 23-to-one conversion rate.
  • The law already allows Cubans to hire workers – a right previously given only to the state – and a draft labor law will further legalize private workers’ activities and integrate them into the economy.
  • Some 200-plus state enterprises are being put on a sink-or-swim program in which new management selected by the workers will be given a year to transform the firms into businesses closely resembling private cooperatives.
  • In January, the National Assembly will take up amendments to foreign investment laws.  Under consideration are direct foreign sales to non-state cooperatives and the direct hiring, firing, and paying of Cuban workers by foreign companies.
  • The travel reform law that goes into effect on January 14, ending the necessity for an exit visa and removing restraints on most Cubans from obtaining a passport, will also stimulate interaction with foreign countries.

The macro situation is still a mess, and the reforms have a long way to go to attain even the level of Vietnam’s prosperity.  Cuban stores sell Vietnamese cookies, not vice versa.  As the rhetoric indicates, the government – long expert at managing popular expectations – continues to emphasize continuity as the changes proceed.  But while no one is expecting a fast shift to capitalism, many middle-aged and elderly Cubans have a renewed sense of hope that life ahead will be better, which has political benefits and risks for the government.  One thing for sure is that the socialism that is being “updated” is a far cry from the communism that Cuba attempted in the 60s, 70s and 80s.