Non-embedded Autonomy: The Political Economy of Mexico’s Rentier State, 1970 - 2010 Gabriel Farfan-Mares This dissertation is submitted for the degree of Doctor of Philosophy London School of Economics and Political Science Department of Government ---- October 2010 ---- 1 Declaration I declare that this dissertation is the result of my own work and includes nothing which is the outcome of work done in collaboration except where specifically indicated in the text. Gabriel Farfan-Mares Date: 27 October 2010 2 ___________________________________________________ I dedicate this research to the people of Mexico. To the memory of Berta Ulloa and Horacio Labastida. 3 “… people may go to the barricades to fight a tax increase, but will they shed blood over an increase in the marginal reserve ratio coupled with interest rate penalty provisions for excessive allocation of credit to retail trade? … ” (Koehler 1968: 60). “An anecdote by budget specialists, probably apocryphal but completely revealing, concerns Ortíz Mena’s practice of calculating budget parameters –income, expenditure by sectors, borrowing requirements– on an index card he kept in his jacket pocket and divulging the figures only at the annual budget presentation to congress. Another legend, exaggerated but based in fact, was the practice of preparing two budgets, one for presentation before congress (understating investment expenditure and debt requirements) and another (calling for higher levels of investment and debt) which was actually implemented at the outset of the fiscal year” (Bailey 1984: 78). “The young woman stood up to speak. ‘I’m really nervous’, she blurted out. Seated at her left was Carlos Salinas de Gortari, the presidential candidate of Mexico’s long-governing Institutional Revolutionary Party (PRI) … She focused on one of the community’s key problems. They had very little drinking water, she said, adding that they could go for several days without any drinking water at all: ‘And so, my neighbors and I turn to you, because we think you are like a god. And, like god, we want you to give us drinking water’ … Salinas rose to respond … He paused for an effect and then asserted, ‘El Arbolito demands water. El Arbolito shall have water’. Like the pre-Columbian Tláloc, Salinas had become the god of rain … Before the rally at El Arbolito he had learned that a water project had already been approved for that area. ‘I know how much it will cost, how long it will take, how much they will have to pay. Oh yes, I know the project’. Tláloc, alas, had had technical assistance” (Domínguez and McCann 1996: 1). 4 Non-embedded Autonomy: The Political Economy of Mexico’s Rentier State, 1970 – 2010 Abstract Due to its competitive political system and strong non-oil export capacity, Mexico is not considered an oil Rentier State. Yet, the consistent and intensive use of crude oil has fundamentally altered the trajectory of its political economy. State institutions, which had consistently relied on oil rents to finance their operations, tend to preserve social stability and political consensus rather than promote development. The central bureaucracy’s need to control oil rent strengthens and reinforces the role of budgetary institutions within politics and administration. Budget institutions provide the government with an inordinate degree of discretion to allocate the budget, a capacity that supports the State’s political legitimation and helps to overcome economic turmoil. Paradoxically, oil produces a policy curse that reinforces the State’s socio-political embeddedness at the expense of its economic leverage. Thus, undermining the incentives for public officials to tax and deliver expenditure quality, thereby deepening the State’s detachment from normal economic behaviour. Oil rent maximization serves to increase the size and cost of public employment and the magnitude of transfers and subsidies at the expense of gross fixed public investment, the maturation of a merit-based bureaucracy, and the Legislature’s role in controlling the Executive. In addition, rents short-term logic is inimical to the country’s long-term strategic planning because they do not provide public and sectoral policies with a sound financial basis. Rentier behaviour is enforced within the State apparatus by a structure of incentives where budgeteers and elected officials are largely exempted, given budgetary secrecy and discretion, to make enforceable and accountable commitments. In order to provide for valid causal inferences and increase explanatory leverage, research findings are supported by a comprehensive use of quantitative and qualitative primary sources (period 1970-2010) as well as pertinent comparative observations from other oil endowed States. Finally, by considering Mexico an outlier, this research refines some of the theoretical and methodological insights of the available literature on rentier States. I declare that this dissertation consists of 88,543 words (including footnotes/endnotes and excluding primary and secondary references) Gabriel Farfan-Mares. 5 Table of Contents Acknowledgements…………………………………………………........................ 17 Chapter I. Introduction. A Theoretical and Methodological Assessment of Mexico’s Rentier State 1.1 Introduction………………………………........................................................... 23 1.2 The Mexican State’s Non-Embedded Autonomy.....…………………………… 30 1.3 State Autonomy and Rentier States…………………………………………….. 35 1.4 The Resource Curse Thesis and the Nature of the Rentier State……..………… 39 1.5 Enforcing Non-embedded Autonomy: the Role of Budget Institutions………… 45 1.6 Oil and the State Apparatus: Questions and Hypotheses……………………….. 48 1.7 Methodological Approach……………………………….................................... 59 1.8 Thesis Structure ………………………………................................................... 65 Chapter II. Mexico's Rentier State: Path Dependency and Structural Determinants 2.1 Introduction..……………………………………………………………………. 68 2.2 The State's Taxation Capacity: Path Dependency and Oil……………………… 72 2.3 Mexico's Rentier State: One-Party Hegemonic Rule and Presidential Power….. 76 2.4 Mexico's Rentier State Socio-political Embeddedness…………………………. 85 2.5 The Rentier State and Protracted Democratization……………………………... 90 Chapter III. Taxes and Expenditures: A Comparative Assessment of Mexico's Budgetary Outcomes 3.1 Introduction…………………………................................................................. 100 3.2 Revenues and Expenditures: the Fiscal Equation.…………………………….. 101 3.3 Mapping the Puzzle of Mexico's Fiscal Policy and De-petrolization…………. 104 3.4 Overcoming the Economic Effects of Rents: Mexico's Policy Success………. 111 3.5 Assessing the Mexican State's Policy Responses: the 2004-2009 Oil Bonanza. 116 3.6 Methodological Refinement: Delivering New Indicators on Rentier Activity…120 6 Chapter IV. Oil Rents and the State Apparatus: the Role of Budget Institutions 4.1 Crude Oil and the State's Political Economy………………………………….. 129 4.2 Processing Oil Rents: the Role of Budget Institutions………………………… 137 4.3 Centralization, Budgetary Discretion and Executive's Pre-eminence…………. 143 4.4 Delegation, Representation and Budgetary Legerdemain………….………….. 147 Chapter V. The Executive's Legislative Budgetary Discretion 5.1 Introduction……………………………………………………………………. 151 5.2 The Executive's Effective Budgetary Power and Centralization….…………... 153 5.3 The Logic of Executive-Legislature Relations within a Rentier State………… 160 5.4 The Budget Behaviour under the Rentier Era………………………………..... 167 5.5 Executive's Budget Proposal………………………………............................... 168 5.6 Legislature Budget Discussion and Approval………………………………..... 173 5.7 Executive Budget Management………………………………........................... 175 Chapter VI. State Growth and Public Employment 6.1 Introduction………………………………......................................................... 183 6.2 The Political Economy of Patronage………………………………................... 185 6.3 What drives public employment?……………………………............................ 186 6.4 Trends in public employment……………………………….............................. 193 6.5 From State Construction to State Withdrawal………………………………..... 196 6.6 Composition of Public Employment………………………………................... 199 6.7 Composition and distribution of "permanent" and "temporary" employees…... 205 Chapter VII. Rents, Patronage, and Civil Service 7.1 Introduction………………………………......................................................... 209 7.2 General and Central Government Wage Bill………………………………...... 215 7.3 Determinants, Effects, and Results of Wage Variation…….…………………. 220 7.4 The Political Economy of Downsizing………………………………............... 226 7.5 Response to the 1994 crisis………………………………................................. 231 7.6 Institutional Choice at the Public Sector: the President's view……..….….…... 234 7.7 Oil Rents, Job Uncertainty, and a Politicized Bureaucracy…………………… 236 7.8 The long road to Civil Service………………………………............................ 242 7.9 Institutional and Political Determinants of Public Employment: The SPC…… 247 7 Chapter VIII. Short-term vs Long-term View: the Perils of Policy Dispute 8.1 Introduction……………………………………………………………………. 254 8.2 Long-term vs Short-term considerations: the Perils of Policy Dispute……..… 255 8.3 Policy Sequencing and the Planning / Budgeting Cluster…………………….. 259 8.4 The End of Oil Bonanza and Economic Opening..…………………………… 265 8.5 State Spending and Investment Functions: The Appropriation of Pemex……. 269 8.6 The Rise and Demise of Public