The Time Is Now for Full Privatization of PEMEX

By Russell, J. Keith | Houston Journal of International Law, Fall 1997 | Go to article overview

The Time Is Now for Full Privatization of PEMEX


Russell, J. Keith, Houston Journal of International Law


I. INTRODUCTION

II. PRIVATIZATION HAS BEEN SUCCESSFUL ELSEWHERE IN LATIN AMERICA

A. Overview of Other Latin American Privatizations

B. Argentina' Successful Privatization Experience

C. Why Privatization Is a Preferred Economic Policy

III. THE CASE FOR FULL PRIVATIZATION OF PEMEX

A. Historical Context

B. Mexican Privatization Efforts in Non-Petroleum Sectors

C. Why Pemex Should Be Privatized

IV. CONCLUSION

I. INTRODUCTION

During the administration of former President Carlos Salinas, a series of far-reaching free market reforms were implemented throughout the Mexican economy.(1) However, the Mexican oil industry has been largely excluded from privatization efforts.(2) Petroleos Mexicanos, or Pemex, was formed in 1938(3) when then President Lazaro Cardenas expropriated and nationalized the foreign-dominated oil fields, consolidating all petroleum operations into one state-owned enterprise.(4)

An oft-advanced explanation for the failure to include Pemex in privatization efforts is Article 27 of the Mexican Constitution which grants control over the petroleum industry to the state.(5) Some efforts have been made recently to achieve a measure of privatization of Pemex; for example, the Mexican government has recently agreed to sell up to 49% ownership in Mexico's 61 petrochemical plants with the state retaining 51% ownership.(6) But the Mexican government has continued to resist completely relinquishing control over this politically profitable,(7) but economically volatile industry.(8)

II. PRIVATIZATION HAs BEEN SUCCESSFuL ELSEWHERE IN LATIN AMERICA

A. Overview of Other Latin American Privatizations

Several definitions have been advanced for the concept of privatization.(9) A good, general definition is "the transfer of asset ownership from the government to the private sector" in an attempt to remove from political considerations "the commercial, financial, and strategic decisions of the business."(10) The worldwide pace of privatization, especially in developing countries, is rapidly increasing.(11) In Latin America alone, 694 divestitures have resulted in over US$59 billion in revenue for these developing countries, a figure that represents more than half of the total revenue from such transactions in all developing countries world-wide.(12) Privatization in the developing world has been praised as a means of establishing a government's commitment to liberalization,(13) as well as promoting economic development and modernization.(14)

The scope of privatization, however, has not always extended to state-owned petroleum enterprises.(15) While several countries have formulated pre-privatization policies for state-owned petroleum enterprises, this sector has remained largely immune from the privatization trend.(16) However, the benefits of privatization are themselves creating pressures to complete the privatization movement by freeing the state-owned petroleum enterprises.(17) For example, international investors demanding the break-up of state monopolies before engaging in business have developed a major natural gas project in Brazil and Bolivia.(18) By selling off their often dilapidated oil refineries and gas plants, these governments hope to attract much needed private investment capital to improve the quality of services.(19)

Another example of Latin American success with privatization is found in the policies of Chile.(20) In addition to privatizing many of its state-owned enterprises, the Chilean government implemented free market economic principles through reduced import tariffs and the elimination of both subsidies and price controls.(21) As a result, the average rate of growth for the national gross domestic product was 7.1% from 1975 to 1981,(22) and with a government committed to the continuance of free market reforms, the average has continued at over 5% from 1985-1996. …

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