PEMEX and the great stumbling block toward government accountability

One of the most significant dangers to Mexico, as I previously wrote, is its fixation on oil and its reliance on state-run Pemex. I should have pointed out that it is not so much a current problem but a challenge for future generations. Mexico’s profusion of hydrocarbons will continue to haunt the country. 

Back in the early 1980s, it was all about knowing how to manage oil abundance. As then President Jose Lopez Portillo said, Mexicans had to know how to manage abundance, or administrar la abundancia. Today, the basic issue again is how to manage oil abundance, which entails how to deal with laws and bylaws, norms and procedures, practices and customs. In one word: institutions. And institutions are not only buildings, public servants or government agencies. They are the rules of the game, where voters and taxpayers — and elected politicians — interact.

Yes, Mexico is in danger because of Pemex. But let’s look more deeply at the problem within the problem, or el problema del problema; that is, the role of Pemex in public finance and the government’s development policy and strategy. How did we get to this point? 

Crude oil started to be transformed into gasoline in the late 19th century. By the first two decades of the past century, crude peaked as it became many countries’ primary energy source. With world wars, state-led industrialization, and urbanization, crude oil was crucial for advanced economies. We could outline a more detailed timeline to describe how hydrocarbons were key to capitalism in the 20th century, but for now let us recall 1973, the year crude reached undeniable geopolitical levels when the Arab members of OPEC imposed an embargo on the United States, Japan and other Western nations that supported Israel in the Yom Kippur War that year. Since then, oil has become a source of real power, of physical coercion, both nationally and globally. More than an economic commodity, oil became a political commodity.

Let us return to Mexico. It was not difficult to see oil as an obvious way to create wealth in Mexico, given its state-led development, a subsidized private sector, a presidential and hegemonic party system and an autocratic political system. From 1938 to the mid-1970s, it was relatively easy to use crude oil and Pemex as a tool for development and, most importantly, economic and political stability. The golden age of stabilizing development, as it is known in Mexico, took place between 1954 and 1970. This was achieved through an alliance between the public and private sector, the government, and social movements — alliances that could not have been achieved without oil.

Oil forged the alliance — an agreement between a private sector unwilling to pay taxes and a government reluctant to raise them. The private sector was reluctant to pay taxes for economic reasons but also because it implied political support for an authoritarian regime. The government did not want to raise taxes because it was not willing to be held accountable. Oil, therefore, arrived at the perfect moment: It was a way to circumvent the government of Mexico’s financial structural problem of low taxation. It also became possible to support, with a cheap energy supply, private economic activities and to avoid financing the public sector through taxation. Resources were also used to build a sociopolitical coalition with a full spectrum of social classes, private and public enterprise unions. Cash was a tool to bribe or persuade present or potential political players. More specifically, voters.

When the 1973 oil crisis emerged and Mexico was turning into a net energy importer, the prospects of the “Mexican type of development” were radically altered. Discoveries of cheap oil were made in 1975 near the coast of the state of Campeche, in the Caribbean. The cost of extraction was low by global standards, and oil was abundant. Mexico became a new player, exporting crude oil, while Saudi Arabia, Iran and Kuwait had been in business for more than half a century. But, as often happens with adolescents, fools rush in. 

Mexico was already in need of fresh money as public debt substantially increased, mainly because of historically deficient capacities to raise revenue and the total absence of a political culture conducive to tax-paying and accountability practices. Lack of representation among emerging forces, particularly pro-democratic forces, required that a substantial amount of resources be dedicated to bribery, if the authoritarian regime were to have a chance of survival. It is not a surprise then that Mexico’s political leaders chose oil over voters and taxpayers who would demand returns.

With a plethora of dollars converted to Mexican pesos, the path to oil-led development was easy, spiced with a “sowing oil” narrative — the idea that oil was like an agricultural product, planted and sowed. Oil helped Mexico survive the 1980s, finance higher rates of debt (hidden in Pemex’s financial report figures through the years), and cultivate substantial resources to build an alliance with the private sector, this time to build a pro-privatization and free trade coalition and to realize the North American Free Trade Agreement. The government seemingly tried to trade oil for trade. Did it work? Yes, some of the state’s downsizing by transferring public enterprises to private hands gave some relief to debt coefficients. It also built a new liberal look for old authoritarian practices. And the alliance with the private sector deepened. But the state again refrained from building political support with taxes and public goods and services. When oil prices collapsed in 2014 and Mexico’s production significantly decreased, energy reform was needed. The task would fall to others.

It is a wise investment strategy. If you are unable to fund decent infrastructure and public services — like law enforcement, health and education — through taxation because you do not generate enough revenue, an alternative is to bribe voters. Mexico’s gamble today is in the belief that having more oil and a stronger Pemex is a matter of time. And that is why the president is reluctant to open a debate on fiscal reform that would place taxes center stage. Instead, he pretends to substitute taxes with oil and spend what can be spent, giving money to individuals with weak or nonexistent accountability, and targeting specific groups of people. It is also surprising that his draconian spending cuts punish public investment, even in the middle of a pandemic and economic depression. The oil rentier state never left the stage.

In the last five years, how often, in each case, has someone tried to bribe or offer a special favor to gain a vote in a national, regional or local election?