London School of Economics and Political Science Department of Government The Political Economy of Mexico’s Financial Reform, 1988- 1994. Osvaldo Antonio Santin Quiroz Thesis submitted for the degree of PhD at the University of London London 1999 UMI Number: U615824 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615824 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 Abstract The global dimension of Mexico’s 1994 financial crisis brought a renewed interest in the institutional framework of international finance. The failure o f M exico’s financial reform raises important questions. At the level of policy­ making, the prescriptions based on the premise of less state intervention and a major role for the market have to be taken more cautiously. At the level o f analysis, the role of institutions has to be emphasised more in the explanations of the effects of policy decisions upon economic behaviour. The purpose of this thesis is twofold. First, it tries to explain President Salinas’s success in implementing a far-reaching programme of economic liberalisation, despite the fact that pro-market policies are not particularly popular in Mexico. Second, it tries to explain the apparent failure o f the financial reform, despite the fact that it conformed to the dominant orthodoxy and was implemented by a technically proficient technocracy. The favoured approach in this thesis says that M exico’s financial reform was the result of political entrepreneurship. The charismatic leadership o f President Salinas aligned a powerful coalition of support for economic reform. Salinas used extensively the organisational and institutional infrastructure of the quasi-authoritarian Mexican state to overcome the ‘legitimacy deficit’ of his government. Regarding Mexico’s 1994 financial crisis, the evidence points to the combination o f three sets o f interrelated factors. First, the financial reform stifled domestic savings and re-directed most of the capital inflows towards portfolio investment. Second, the end- of -sexenio political cycle that produced a great deal of political turmoil and economic uncertainty. Third, the policy mistakes that exacerbated the size and depth o f the crisis. The thesis is organised into three parts. The first part— chapters one to four— develops the framework, both theoretical and historical. The analysis addresses four main themes: state autonomy, external dependency of domestic states on international capital, political change under President Carlos Salinas and financial policy. The second part presents the analysis of three cases o f institutional change in the financial system— development banking reform, commercial banking privatisation and autonomy of the central bank. Each case study shows how the reforms conformed to the ideas of the dominant consensus on economic policy and how they delivered an inefficient incentive structure. The third part— chapter eight— brings together all the elements presented throughout the thesis to establish the relationship between the financial reform under President Salinas and the 1994 financial crisis. Table of Contents Abstract i Table of Contents ii List of Tables iv List of Figures vi Acronyms vii Acknowledgements x 1. State Autonomy and Policy Reform: A Theoretical Framework 1 1.1 Theoretical Debate: An Overview 2 1.2. Basic Concepts 8 1.3 The Politics of State Autonomy 13 1.4 State Autonomy and Policy Reform 20 1.5 Central Hypothesis and Structure of the Thesis 25 2. The Politics o f International Finance: Fostering Reform 33 2.1. International Capital Leverage 34 2.2. The Emergence of a New Consensus 45 2.3. International Policy Networks 52 Conclusions 60 3. Domestic Politics: Making the Reform Possible 63 3.1 The Politics of a Semi-authoritarian State, 1940-1982 65 3.2 Political Change under de la Madrid, 1982-1988 74 3.3 Political Change under Salinas, 1988-1994 78 Conclusions 90 4. Financial Policy in Mexico: A Historical Account 92 4.1 Setting up an Institutional Framework, 1925-1952 93 4.2 Financial Management, 1952-1982 100 4.3 Financial ‘Securitisation’, 1982-1988 108 4.4 Financial Liberalisation, 1988-1994 115 Conclusions 123 5. Development Banking Reform 127 5.1. The Ideas 128 5.2. An Overview 130 5.3. The Reform 139 5.4. The Outcomes 145 Summary 153 Ill 6. Commercial Banks Privatisation 156 6.1. The Ideas 157 6.2. The Context 160 6.3. The Reform 166 6.4. The Outcomes 174 Summary 187 7. Banco de M exico’s Autonomy 188 7.1 The Ideas 189 7.2 The Context 200 7.3 The Reform 209 7.4 The Outcomes 216 Summary 223 8. The Political Economy of Mexico’s 1994 Financial Crisis 226 8.1 Financial Reform 227 8.2 End-of-Sexenio Politics 236 8.3 Policy Mistakes 242 8.4 Outcomes 249 Conclusions 255 Conclusions 258 Appendix: Methodology and Sources of Information 275 References 281 iv List of Tables Table 2.1 Mexican Eurobond and Equity Issues, 1992-1993 37 Table 2.2 Conditionality Contents of IMF and World Bank Programmes 55 Table 2.3 President Carlos Salinas’s Economic Team 59 Table 3.1 Policy Coalitions 73 Table 3.2 Presidential Election Results, 1952-1988 78 Table 4.1 Reserve Requirements, 1972-1976 106 Table 4.2 State securities Issues, 1978-1988 111 Table 4.3 Securities Market Development, 1982-1987 113 Table 4.4 Securities vs. Banks’ Deposits, 1980-1989 114 Table 4.5 Financial Stability, 1980-1989 115 Table 4.6 Profile of Major Financial Reformers 118 Table 4.7 Summary of Mexico’s Financial Policy, 1925-1994 124 Table 5.1 Large Development Banks 131 Table 5.2 Main Funds and Trust Funds 148 Table 5.3 Development Banks Profitability 151 Table 6.1 Financial Indicators of the Nationalised Banking System: 1982-1993 165 Table 6.2 Banking Divestiture Committee 170 Table 6.3 Privatisation by Sale Mechanism 171 Table 6.4 Shares Valuation of Selected Mexican Banks: 1990 173 Table 6.5 Revenues and Prices from the Banks’ Privatisation 174 Table 6.6 New Industrial-financial groups 179 Table 7.1 Central Bank Autonomy and Inflation in the 1980s Table 7.2 Statistics for Central Bank Autonomy and Inflation Table 7.3 Stabilisation Programmes in Latin America Table 7.4 Macroeconomic Policy, 1982-1994 Table 7.5 Public Finances, 1987-1993 Table 7.6 External Indicators, 1985-1995 Table 8.1 Total Savings, 1970-1994 Table 8.2 National Accounts, 1988-1994 Table 8.3 Ratio of Non-performing Loans to Total Loans Table 8.4 Foreign Financial Finns Entering Mexico Table 8.5 Mergers and Acquisitions Table 8.6 The Cost of Banking Bailouts Table C.l Outcomes from the Financial Reform vi List of Figures Figure 1.1 Levels of Political Organisation 14 Figure 2.1 Public Deficit, 1950-1994 40 Figure 2.2 Current Account Deficit, 1970-1994 42 Figure 5.1 Assets of the Mexican Financial System, 1935-1989 132 Figure 5.2 Development Banks’ second-floor Operations 140 Figure 5.3 Public vs. Private Sector Financing, 1985-1995 144 Figure 5.4 Assets of the Mexican Financial System, 1985-1995 149 Figure 7.1 Capital Inflows 222 Figure 8.1 Public Indebtedness 245 Vll Acronyms ABM Asociacion de Banqueros de Mexico / Mexican Bankers Association ADR American Depository Receipt AEROMEXICO Aerovias de Mexico / Airlines of Mexico AMCB Asociacion Mexicana de Casas de Bolsa / Mexican Association of Brokerage Houses AMIS Asociacion Mexicana de Instituciones de Seguros / Mexican Association Insurance Institutions ASEMEX Aseguradora Mexicana / Mexican Insurance Company BANACCI Grupo Financiero BANAMEX-ACCIVAL BANAMEX Banco Nacional de Mexico / National Bank of Mexico BANCOMER Banco de Comer do / Bank of Commerce BANCOMEXT Banco Nacional de Comercio Exterior / National Bank for External Trade BANJIDAL Banco de Credito Ejidal / Ejido Credit BANOBRAS Banco Nacional de Obras Publicas / National Bank for Public Works BANRURAL Banco Nacional de Credito Rural / National Bank for Rural Credit BBV Banco Bilbao Vizcaya BdeM Banco de Mexico / Bank o f Mexico (M exico’s Central Bank) BIS Bank for International Settlements BMV Bolsa Mexicana de Valores / Mexican Stock Exchange BNCI Banco Nacional de Comercio Interior / National Bank o f Internal Trade BONDES Bonos para el Desarrollo / Bonds for Development CANACINTRA Camara Nacional de la Industrial de la Transformacion / National Chamber of the Transformation Industry CBA Central Bank Autonomy CCE Consejo Coordinador Empresarial / Entrepreneurial Co-ordinating Council CDB Comite de Desincorporacion Bancaria / Banking Divestiture Committee CEESP Centro de Estudios Economicos del Sector Privado /Centre o f Economic Studies of the Private Sector CEMAI Consejo de Empresarios Mexicanos para Asuntos Internacionales / Mexican Entrepreneurs Council for International Affairs CES Centro de Estudios Sociales / Centre of Social Studies CETES Certijicados de la Tesoreria / Treasury Bills CMHN Consejo Mexicano de Hombres de Negocios / Mexican Council of Businessmen CNC Confederacion Nacional Campesina / Peasants National Confederation CNBV Comision Nacional Bancaria y de Valores / National Commission for Banking and Securities CNSF Comision Nacional de