Political Struggles and the Forging of Autonomous Government Agencies (Public Sector Organizations)

Political Struggles and the Forging of Autonomous Government Agencies Public Sector Organizations Editors: B. Guy Pet...

Author: Cristopher Ballinas Valdés

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Political Struggles and the Forging of Autonomous Government Agencies

Public Sector Organizations Editors: B. Guy Peters, Maurice Falk Professor of Government, Pittsburgh University, USA, and Geert Bouckaert, Professor at the Public Management Institute, Katholieke Universiteit Leuven, Belgium Organizations are the building blocks of governments. The role of organizations, formal and informal, is most readily apparent in public bureaucracy, but all the institutions of the public sector are composed of organizations, or have some organizational characteristics that affect their performance. Therefore, if scholars want to understand how governments work, a very good place to start is at the level of the organizations involved in delivering services. Likewise, if practitioners want to understand how to be effective in the public sector, they would be well advised to consider examining the role of organizations and how to make the organizations more effective. This series will publish research-based books concerned with organizations in the public sector and will cover such issues as: the autonomy of public sector organizations, networks and network analysis, bureaucratic politics; organizational change and leadership and methodology for studying organizations. Titles include: Cristopher Ballinas Valdés POLITICAL STRUGGLES AND THE FORGING OF AUTONOMOUS GOVERNMENT AGENCIES Geert Bouckaert, B.Guy Peters and Koen Verhoest THE COORDINATION OF PUBLIC SECTOR ORGANIZATIONS Shifting Patterns of Public Management Amanda Smullen TRANSLATING AGENCY REFORM Rhetoric and Culture in Comparative Perspective Koen Verhoest, Paul G. Roness, Bram Verschuere, Kristin Rubecksen and Muiris MacCarthaigh AUTONOMY AND CONTROL OF STATE AGENCIES Comparing States and Agencies Public Sector Organizations Series Series Standing Order ISBN 978–0–230–22034–8 (Hardback) 978–0–230–22035–5 (Paperback) (outside North America only) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBNs quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

Political Struggles and the Forging of Autonomous Government Agencies Cristopher Ballinas Valdés Associate Professor in Public Policy, Instituto Tecnológico Autónomo de México, México

© Cristopher Ballinas Valdés 2011 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978–0–230–29648–0 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Ballinas Valdés, Cristopher, 1974– Political struggles and the forging of autonomous government agencies / Cristopher Ballinas Valdés. p. cm. Includes index. ISBN 978–0–230–29648–0 (alk. paper) 1. Mexico—Politics and government. 2. Administrative agencies— Mexico—Management. I. Title. JL1242.B35 2011 352.2 640972—dc22 2011011742 10 9 8 7 6 5 4 3 2 1 20 19 18 17 16 15 14 13 12 11 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

To my family Quienes con mis triunfos ven coronados sus esfuerzos

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Contents

List of Figures and Tables

ix

Acknowledgements

xi

Introduction The argument Political struggles and agency design The Mexican case The method The structure

1 3 4 5 7 8

1 A Power-Centred Framework for the Empirical Analysis Introduction 1 The changing character of the state and autonomous agencies 2 Delegation and agency design 3 Actors and the shape of autonomous agencies 4 Bureaucrats: the neglected side of the story

10 10

2 Zugzwang: Agency Creation and Bureaucratic Reaction Introduction 1 A typology of autonomy 2 Statutes and agency design 3 Three possible cases Final remarks: towards a more dynamic analysis of agentification

34 34 36 42 49

3 Institutions, Coalitions and Struggles in the Mexican Federal Bureaucracy Introduction: behind the curtain of hegemony 1 The institutional foundations of bureaucratic politics 2 Structural reforms and a shift in the patterns within the bureaucracy Final remarks vii

11 18 23 29

54

59 59 60 70 79

viii Contents

4 An Overview of Mexico’s Autonomous Agencies Constellation Introduction 1 The formal-legal/organisational autonomy of Mexican agencies 2 Creation and evolution of the Mexican autonomous agencies 3 Problems brewing: bureaucratic reaction to agency creation Final remarks

93 103

5 The Central Bank Introduction 1 Approaches to central bank independence 2 The proliferation of central banks 3 The Mexican case Final remarks

105 105 105 108 110 132

6 The Federal Telecommunications Commission Introduction 1 Privatisation without regulation 2 The COFETEL and the new Federal Telecommunications Law 3 The Ley Televisa and the ‘new’ COFETEL Final remarks

135 135 138

7 The Energy Regulatory Commission Introduction 1 The Mexican energy sector’s governance structures 2 The CRE’s creation and the 1993 initiative 3 The 1995 initiative and the reform to the electricity sector 4 The 2008 reform Final remarks

164 164 166 170

Conclusions

187

Notes

196

References

221

Index

251

81 81 82 85

145 153 161

176 181 184


Figures 1.1 The diffusion of regulatory agencies in Latin America and Europe, number of agencies 2.1 Autonomy/control tradeoff 2.2 Statute preferences 2.3 Zone of negotiations 2.4 Possible variations 2.5 No agency or status quo 2.6 The extended game of agency creation 2.7 No agency creation 2.8 Co-operative agency creation 2.9 Non-co-operative agency creation 2.10 Decision tree and case studies 3.1 Promotion patterns within the Mexican central bureaucracy, 1942–82 3.2 Promotion patterns within the Mexican central bureaucracy, 1982–2000 4.1 The evolution of Mexican autonomous agencies, 1988–2010 4.2 Structural creation of autonomous regulatory agencies in Mexico 5.1 Central bank autonomy in 1993 5.2 The second Banxico reform and the finance sector cluster 6.1 COFETEL creation 6.2 COFETEL during 1995 6.3 COFETEL during the 2007 reforms 7.1 Energy Regulatory Commission in 1993 7.2 The CRE reform in 1995

13 42 45 45 47 47 50 51 53 54 57 66 75 94 101 124 130 145 150 157 175 180

Tables 2.1 Degree of formal-legal autonomy 2.2 Attributed organisational scores 3.1 Carlos Salinas de Gortari cabinet, 1988–94

ix

39 41 73

x


4.1 4.2 5.1 6.1 7.1

Autonomous agencies constellation in Mexico Basic structure of the Mexican regulatory agencies Strategy of independence Telecommunications sector timetable Reform to the CRE decree

83 90 111 152 179

Acknowledgements

This book started life during my time at the University of Oxford. I owe a tremendous debt to Laurence Whitehead and to Alan Angell, Francisco González, Kevin Middlebrook and Valpy Fitzgerald, for all their patience and critical remarks. I am also indebted to Professor Christopher Hood for his invaluable guidance, encouragement and his endless sympathy for this project. His seminars and workshops always provided me with a fertile ground to develop the ideas that I crystallised into this research. The Latin American Centre offered space, generous support and critical resources at my reach throughout my residence in Oxford. Especial thanks to Alan Angell, Allan Knight, Rosemary Thorp, Joe Foweraker, Tim Powell and Maria Elvira Ryan. I am also grateful to all in Hertford College, University of Oxford. Hertford College provided me with an exceptional environment for living. I am especially grateful to Anna Baskerville, Sarah Salter and Paul Dryden. Colleagues at different academic institutions suggested ways to improve parts of my argument on earlier versions of this research. John Bailey, Mark Thatcher, Javier Santiso, Peter Evans and Guillermo O’Donnell provided ideas, rich in deep insight. B. Guy Peters, Tom Christensen, Per Laegreid, Alasdair Roberts, Robert Cox, Jean-Michel Eymeri-Douzans, Jan Teorrell and Roger Van Noorden gave substantive remarks in the later stage of the research. Greg Bates patiently proofread early versions of the manuscript. B. Guy Peters gave me confidence that my project could soar beyond the means of my desk, and persuaded me to send my draft for publication. I also want to thank the federal government officials whom I interviewed for sharing their experience and their personal stories and who trusted my pledge of anonymity during the interviews. As originally promised, their names will remain undisclosed. My greatest debt of thanks goes to my family who have inspired and supported me during these years and without their intervention nothing of this could have been possible.

xi

‘Explain all that’ said the mock Turtle to Alice. ‘No, no! The adventure first’ said the gryphon in an impatient tone: ‘explanation takes such a dreadful time’. Alice’s Adventures in Wonderland Lewis Carroll

Introduction

Considerable research and policy actions have been expended trying to analyse autonomous agencies in both developed and developing countries over the last couple of decades. Much recent literature in this area has been dedicated to explaining the genesis of independent institutions in the context of state reform within the framework of delegation theory. Autonomous agencies are, in this vein, an expression of the expansion of the new state structure. At the beginning of the 1980s, government structures underwent profound change. According to the New Public Management approach then in vogue, public services could be delivered more effectively and efficiently if public sector organisations were granted more managerial autonomy and if they applied various management techniques from the private sector. Governments around the world then hived off departmental units from ministries creating highly specialised organisations. Hence new government agencies were created, delegating substantial degrees of autonomy to them. These autonomous agencies have special organisational features that make them unique. They were structurally disaggregated from the central ministries and placed in charge of particular tasks at the national level. This put them outside the line of hierarchical control traditionally exercised by the central government departments. Such bodies were then established by statute as independent administrative authorities in many different countries. Their labels differed: autonomous bodies, independent agencies, arm’s length bodies, non-majoritarian institutions, non-departmental public bodies or quangos (quasi nongovernmental organisations). It is commonly assumed that these agencies are insulated from political pressures. It is also a tenet of faith that this political insulation 1

2

Political Struggles and Agency Forging

maximises their efficiency. There is a wide repertoire of experience in insulating agencies from political pressures in the developed countries which crystallised the theoretical foundations into political-economic orthodoxy. Examples include a wide range of institutional bodies from varied types of political systems, such as the Interstate Commerce Commission and the Food and Drug Administration in the United States, the Office of Communications (Ofcom) in the United Kingdom and the Ordnance Survey Ireland in the Republic of Ireland. In the developing world, parallel examples sprang up, including the Energy Regulation Board in Zambia, the National Telecommunications Commission in Thailand and the General Tax Directorate in Argentina. Despite overarching similarities, the structure and degree of autonomy of these agencies are extremely diverse. In the literature on delegation many hypotheses explaining this variation have already been explored. The traditional explanations claim that different organisational forms are the result of deliberate decisions aimed at optimising design. Some affirm that governments create different agencies to credibly commit to particular policy choices. Others argue that diverse organisational forms arise from transaction costs, such as credible commitments. Other explanations offered point to more contextual factors; for instance, governments may be responding to a process of cross-national policy transfer. Although numerous, the studies analysing the proliferation of these agencies have not arrived at any concrete explanation for these variations. These studies are traditionally dominated by a uni-directional, disclosure-based model of analysis. The common ground of these studies is to try to find evidence for the reasons for the creation. What they miss is a focus on the process of creation. Social scientists studying autonomous agencies tend to emphasise the formal design of institutions and neglect the remaining institutional background forces affecting the process of creation. They ignore what happens after a law or constitutional reform that formed the agency has been passed, and also overlook reforms that follow later. The problem with such a formalistic approach is that it ignores the powerful role exerted by the players in the creation process in shaping these institutions. This massive impact, which takes place outside of the founding legislation, and which accounts for so much of the variation, remains virtually unexamined.1 Studies analysing how political struggles between bureaucrats and political reformers have shaped the level of political control of these

Introduction

3

newly created agencies are few. In studying this neglected yet crucial force, this book reveals how this process of bureaucratic infighting at the time of creation warps the resulting institutions. Contrary to the prevailing view in the literature, autonomous agencies are often the result of political reactions and pressures, rather than of careful design.2 The resulting agencies are, in fact, the consequence of political struggles between different actors, who try to shape them in their own interest. This research shows that the political struggles behind the design of autonomous agencies in developing countries account for many of the differences.

The argument This book affirms that agencies take shape through political struggles that are rooted in, and mediated by, pre-existing governing arrangements. The final organisational designs of these autonomous agencies have come about as a result of conflicts that have played out within the constraints and opportunities provided by existing institutions and the interaction between diverse political and bureaucratic groups. This has resulted in a muddle of agencies with varying degrees of autonomy, lacking coherence and subject to different levels of political control. In country after country, as examples in this book show, the results often have little to do with the original formal design, little to do with the original claims of optimal efficiency. This research establishes the links between the political pressures and agency design, showing that even when politicians formally control the process of creating an agency, this still results in diffuse and diverse organisational forms across policy sectors. At the same time, and despite existing similar pressures, the institutional structures and operations vary widely across different domains. This in turn reveals that, contrary to conventional explanations, organisational design varies systematically across issue areas and over time. It further reveals that this is not always due to deliberate preferences of the creators, but rather to actions of other actors, including resistance to the formal designs that politicians are attempting to institute. This research therefore explains variations in organisational forms as well as in the degree of independence of different autonomous agencies, highlighting the role of often-neglected players, such as bureaucrats. The core finding is that autonomous agencies are not the result of a systematic design, but rather of a pluralistic chaos of political and bureaucratic forces. This research finds that agency design is

4


unavoidably political, a product of the interaction between several political actors operating within a country’s institutional context. The intervention of actors having multiple and diverse interests can result in diverse institutional disarray at different levels. Understanding this is crucial because the disarray of institutions can have negative consequences for economic efficiency. It can also challenge the stability of the whole regulatory framework and policy-related decisions. The warping of these institutions by these forces may also affect the government’s capacity to maintain such institutions over time, creating uncertainty in the economy and weakening democratic institutions. The research develops a simple model of analysis to reveal the role of perverse incentives that undermine the autonomy of independent agencies. I use an innovative toolkit comprising institutional economics, game theory and network bureaucratic analysis to explain the variations in newly created institutions for market governance. The resulting model goes beyond prevailing concepts to document a process in which institutional design ensues from the collision of different groups within the government. It uncovers some of the causes behind why some actions were undertaken while others were not, and the factors that determined the shape, breadth and scope of the agencies. The research indicates that the political and the policy-making processes are inseparable, and that failing to understand one risks misunderstanding the other. Only by taking into account these factors can we fully appreciate that so-called autonomous agencies are not the result of a systematic and optimal design, but rather of a pluralistic chaos forged by political and bureaucratic forces. In so doing, the study fills an important theoretical gap in the literature.

Political struggles and agency design This research highlights the critical role of bureaucrats as political actors that extends beyond their role as technocrats. In addition, it stresses the relevance of political institutions in shaping the incentives of the bureaucrats and other political actors, and how these impact organisational outcomes. Bureaucracies are usually treated as complicated entities or mysterious black boxes, and their members as simple technocrats focused on carrying out the will of the politicians who designed the agencies. By contrast, politicians are viewed as able to organise administrative structures to create organisations that can function precisely as intended. In addition, they are perceived as actors who can enforce their

Introduction

5

preferences through unlimited access to budgets, personnel decisions and oversight hearings, along with numerous other opportunities. This research then transcends the failures in both delegation theory and presidential approaches to understanding reforms in developing countries. The former school claims that politicians design governmental agencies and bureaucrats implement their ideas without alteration. The latter school believes implicitly that presidents are omnipotent actors capable of commanding all the pieces on the political chessboard in order to advance a modernisation agenda. Both schools implicitly perceive presidents and politicians as actors capable of successfully implementing their will. This study reveals an anomaly or lacuna in the existing literature: presidents and politicians are important, but they rarely determine final organisational outcomes. This research also suggests that the actions of political actors are embedded in institutions that are a product of a combination of historical legacies. Reforms to institutions, therefore, impact the incentives of the actors.3 Consequently, theories that predict political behaviour in stable institutional environments may not be particularly useful when applied to studying newly created institutions in transitional countries.

The Mexican case The reasons for selecting just one country to study are as follows. First, doing so controls important structural variables, such as legal frameworks, economic structure and political institutions. Secondly, Mexico has an illustrative character with broader theoretical implications. Mexico is more than just a case; it is a significant example highlighting the importance of political processes in the ‘transfer of models’ from developed countries and in their implementation. Mexico is no longer merely the territory of ethnologists and anthropologists. Its study has been shown to yield both empirical and theoretical implications for different social sciences. The Mexican bureaucracy had a powerful unbroken tradition that has made it difficult to assimilate any new organisational form that would break its structure and balance of power. High-level bureaucrats had access not only to resources and information, but to key parts of the decision-making process that was supposed to remain the exclusive domain of the designers, in addition to their responsibility for the implementation of the resulting policies.4 Bureaucrats developed a degree of specialisation that gave them the power of independent decision-making. Bureaucrats therefore controlled which

6


aspects of reforms would be taken into account and which would not. Their intervention during the process of designing autonomous agencies resulted in a struggle between bureaucrats and reform teams. Political struggles determined the final institutional outcomes – which the case studies reveal to be a multifarious disarray of unexpected organisational forms. The study then illustrates how the transfer of international models was affected by domestic political factors. This also reveals that a so-called ‘simple’ transfer of models is more likely to result in significant failures where the domestic bureaucratic structures are well established. Also, it is generally accepted that the characteristics of the Mexican political system during the late 1980s and early 1990s provided the ideal scenario for rapid and efficient implementation of the structural reforms. The literature concurs that the success of reforms was influenced profoundly by the ability of presidents to staff cohesive reform teams, delegating to their members the authority both to craft policies and execute them, while at the same time insulating them from countervailing pressures. Studies had confirmed a strong correlation between the strength of presidential power and successful reform. Consequently, the notion that presidents lead, delegate and protect, while technocrats formulate and implement policy, has obtained a prominent position in the reform literature, helping to hide the dynamics I am examining from deeper analysis. Most scholars therefore attribute the scope, pace and success of the Mexican reform programme to centralised presidential power, control over the ruling party, and the administration’s technocratic and political know-how.5 The impact of these factors on privatisation outcomes cannot be ignored, and perhaps account for why explanations have, in general, revolved around the actions of the president. This has led to largely overlooking the struggles between different groups within the central public administration. Most studies about the Mexican political system have been largely structuralist. There is also an extensive literature about pressure and well-organised groups. Nevertheless, I have chosen in my research to focus specifically on the political bargaining, which in turn affects the process of agency creation. In the cases examined here, understanding the work of the design teams was critical to explaining how and why the reforms took the shape that they did, and what conflicts they provoked when they were introduced by political leaders. Analysis of the case studies in this research argues for a careful study of how the pre-existing institution conditions and the existing informal

Introduction

7

constraints affect agency design, and what lasting impact they have on subsequent institutional evolution. History has proven to be full of unexpected outcomes and unsuccessful innovations. More importantly, the lessons of history are found not only by looking at successfully created institutions, but by examining those that have failed.6 In this sense, I have found it more challenging and illustrative to explain the reasons of imperfect institutional design.

The method This research examines the moments of legal founding and reform of each agency from 1990 through 2010. It analyses not only the genesis of these agencies, but also their political development between reforms, thereby addressing the question of whether any agency was able to expand or reduce its capacities between one reform and the next. At each one of these moments, policymakers made crucial decisions with regard to the form and content of delegation given to an autonomous agency. With this in mind, I analyse the strengths of the constitutional reforms that were passed at different moments.7 These are measured by the level of autonomy, capacity and internal dynamism they grant the respective agency, to see how well they correlate to the existence of bureaucratic groups that either support or block these reforms. I show that the final organisational forms were substantially determined by the reaction of bureaucratic groups, rather than being based on the original plans of the designers. I demonstrate the salience of this argument through a careful exploration of three case studies. The analysis is based upon two sets of empirical data. The first set is used to examine some of the informal institutions in the upper and middle-levels of the Mexican central public administration through network bureaucratic analysis. The empirical evidence presented here summarises previous fundamental research on the careers of mid- and high-level bureaucrats in the central public administration from 1946 to 2000. The data serve to illustrate the bureaucratic coalitions that developed during the long rule of the Partido Revolucionario Institucional (‘PRI’; ‘the Party’). This eventually created power niches within the central public administration. This information also helps to identify the emergence of reform teams, in opposition to institutionalised bureaucratic groups. The second set of data estimates an agency’s level of independence by coding the delegation variable. This degree of independence is based upon a careful coding of over forty existing pieces of legislation and

8


a variety of proposed laws at the time of the agencies’ creation. The Mexican Constitution (and its amendments), the Ley Orgánica de la Administración Pública Federal, the Diario Oficial, bills introduced, the Diario de Debates and the Organic Law of each agency are all analysed. As the organisational literature emphasises, administrative procedures and how their controls are implemented are important. The criteria I focus on are appointment power, time and spending limits, executive and legislative vetoes or direct oversight, appeals procedures, exemptions and compensation payouts. I use these provisions, faculties and controls for coding the delegation variable. This analysis of the formal processes embodied in the official documents is complemented by extensive information obtained from the scholarly literature. Also included are contributions from more than a dozen interviews I conducted with political actors who had been involved in the process of designing these regulatory agencies, as well as academics and newspaper reports. The interviews helped to place the actors and their choices in the context of the institutions and political forces that constrained them.8 The empirical section of the book analyses this information as consistently as possible in order to illustrate the overarching process.

The structure The book is divided into seven chapters followed by Conclusions. Chapter 1 discusses that economic and administrative narratives that explain regulatory agencies have been extremely influential in convincing academics to characterise them as purely technical institutions. This may in fact explain why such an unsurprising topic such as the political struggles on agency design has in fact avoided study. It analyses how the actions of different actors involved in the design of regulatory agencies can result in a completely unintended structure, resulting from their evolution through conflict over the allocation of political resources rather than from a rational and efficient decision about delegation. This chapter also stresses that the role of bureaucrats in agency design has been largely overlooked. Chapter 2 develops a framework for the empirical analysis. The central puzzle to be explained here is why differing degrees of political control are given to different autonomous agencies. The chapter develops a methodology to explain inefficient and suboptimal agency design resulting from the interaction between political and bureaucratic actors. When analysing this phenomenon I have found that in designing

Introduction

9

agencies, creators face limited options towards the end of the process. Equally important, the chapter develops an autonomy index that can be used to help track down political conflict.9 Chapter 3 examines some of the formal and informal institutions in the upper and middle levels of the Mexican central public administration. It also reviews the consequences of changing them. This analysis shows that, although policymakers’ strategic behaviour helped to ensure implementation of large-scale deregulation and privatisation programmes, bureaucrats looked for short-term rather than long-term gains with regard to institutional design. Therefore, after a long tenure of several decades by one political party and a looming possibility of electoral defeat, thanks to the ongoing democratisation process, officials sought to gain more power by manipulating the new institutional setting. Chapter 4 describes the creation process of the Mexican autonomous agencies. It examines three key elements that affected the process of design: an organisational problem, a legal problem and a strategic problem. A clear distinction is made between the strategies followed by political agencies, on the one hand, and economic ones, on the other. Chapters 5 through 7 describe the process of creation and development of specific autonomous agencies, namely independent regulatory agencies. Three paramount cases are reviewed to reveal contrasting dynamics in agency creation. The chapters analyse the dilemmas faced in setting up these agencies. A reconstruction of the regulatory framework in greater detail is also presented, portraying an overview of the resulting institutional design. The final chapter lays out the conclusions. It stresses the importance of the argument and the theoretical importance of the research beyond the Mexican cases.

1 A Power-Centred Framework for the Empirical Analysis

Introduction The phenomenon of bureaucratic autonomy is a fascinating means to illuminate how political decisions are taken within the modern state. Autonomous agencies are indisputably essential elements of this modern liberal state. These agencies, once only present in the United States and select European countries, have now spread around the globe. The study of autonomous agencies has been characterised by a theoretical pluralism involving a wide range of disciplines, including economics, political science, sociology, public administration and organisational studies.1 In these studies, the proliferation of government agencies is often seen as a global reform component of the new management wave spreading around the world that emphasises efficiency, managerialism and market orientation, making public sectors in different countries appear more similar. Nevertheless, it is necessary to step back and give a more abstract consideration to some ambiguities that seem to plague the study of autonomous agencies. It is necessary to think about power as a rigorous and systematic element in agency design. This chapter therefore analyses different approaches to autonomous and regulatory agencies. Broadly speaking, three different kinds of literature are reviewed in this chapter. The first is drawn partly from economically oriented regulatory theory and maintains a rational-economic perspective, represented by interest group theory. A second perspective, the institutional approach, encompasses the isomorphism point of view that focuses on studying the similarity in structures. A third, based mainly on delegation theory, focuses on explaining the incentives of both politicians and agents 10

A Power-Centred Framework for Empirical Analysis

11

in the creation and control of autonomous agencies and how different controls shape organisational forms. The chapter extensively analyses these approaches and stresses how the role of both bureaucrats and political conflict has been systematically neglected. I argue that there is a tendency to omit from analysis the roles played by bureaucrats and political conflict in agentification. This sets the ground for our argument, which explores more precisely the role that political actors and political struggles could play in shaping the degree of autonomy of diverse government bodies.

1. The changing character of the state and autonomous agencies In the last 30 years, we have witnessed an extensive reform in the organisation and role of the state. Delegation to autonomous agencies and non-majoritarian institutions has reconfigured the architecture of states around the world.2 The proliferation of government agencies (also called agentification) and the creation of autonomous public bodies (also called autonomisation) have become a hallmark of the modern state. These new kinds of organisational bodies are a consequence of new types of state capacity and are strongly related to the emergence of the regulatory state.3 Regulation depends on agentification.4 Modern governmental organisations require delegation to autonomous bodies in order to tackle both technical and legitimacy problems. Such bodies have been prominent in developed and developing countries alike. This new model of governance began to emerge in the late 1970s through a process of state reform that included privatisation, liberalisation, welfare reform and, more broadly, greater competition in the market. This is completely different from the traditional state model it often replaced which had a command-and-control policy style, public ownership and nationalisation. Consequently, it is commonly taken for granted that regulation is an inherent characteristic of the modern regulatory state.5 By giving some regulatory powers to separate agencies, governments can commit themselves to credible regulatory strategies that would be impossible in the absence of such delegation. Consequently, the new state organisation produces a larger number of autonomous formal organisations, most of the time to complete regulatory tasks necessary to a new process of privatisation, liberalisation and deregulation. This process has produced a larger number of autonomous organisations to support it. The consequence of the whole process of

12


de-incorporation, liberalisation and privatisation resulted in a delegation of important policy-making powers to technocratic bodies given considerable political leeway. This stands in opposition to the traditional Weberian hierarchical, integrated, bureaucratic model that broke down along with the Welfare State (Jordana and Levi-Faur, 2003).

1.1. Agentification as institutional innovation The popularity of these organisations has attracted the sustained interest of researchers from several disciplines since the early 1980s. Many studies have been conducted to explain these newly created bodies and their consequences (Baldwin and Cave, 1999; Carpenter, 2001; Ceaser, 2006; Christensen and Lægreid, 2001, 2004; Gilardi, 2004; Hood, 1995; Irwin, 1996; Jordana and Levi-Faur, 2003; Majone, 1994, 1999, 2001b; Nordström, 2004; Peters and Pierre, 2001; Pollitt, 2004; Pollitt and Talbot, 2004; Scott, 1972; Skocpol, 1996; Skowronek, 1982). Early studies highlighted agentification as a core element of the incoming New Public Management paradigm.6 The research found its theoretical underpinning in economic neo-institutionalism, agency theory (Jensen and Meckling, 1976; Moe, 1984; Pratt and Zeckhauser, 1991) and property rights theory (Furubotn and Pejovich, 1972; Furubotn and Richter, 1991). Autonomous or independent agencies have resulted in a broad category that embraces both a wide variety of operating means and a wide range of relationships with parent ministries or Congress committees. However, some of the main features of this structural form are supplemented by other characteristics, economic and political-administrative traditions, culture and ideology. Such features constrain the scope for managerial strategies, as well as the political choices and design by executive political leaders (Christensen and Lægreid, 2001; Pollitt and Bouckaert, 2004). These agencies have variously been described as ‘non-departmental public bodies’, ‘quasi-autonomous public organisations’ and ‘distributed public governance’. Autonomous agencies are a sub-group, bodies structurally disaggregated from the central ministries, or even formally separated from the ministry, and permanently in charge of particular tasks at the national level, financed mainly by the state budget, and subject to public legal regulations, and staffed by public servants (Pollitt, 2004; Pollitt and Bouckaert, 2004; Pollitt and Talbot, 2004). Some authors have stressed that the independence of these bodies cannot be typified purely by the degree of hierarchical control or the


13

number of responsibilities. Independence should, rather, be measured by factors that more directly correlate with effective autonomy in decision-making. The complex nature of regulatory policy makes measuring autonomy complicated, since it involves a great number of tasks (such as the issue of concession licences and sanctions), rules (a complex legal framework) and actors (see also Chang, 1997). For instance, in Europe both executive and parliamentary branches share certain powers over regulatory decisions (Baldwin and Cave, 1999; Baldwin et al., 1998a, 1998b). As in most cases, the different tasks are not necessarily undertaken by the same institution and can even be fragmented and divided among different institutions and governmental branches.7 For some scholars, the growing number and significance of the agencies in charge of much governmental action is the clearest indication of the transition from the interventionist state of the past to the regulatory state of the future (Gilardi et al., 2006). Figure 1.1 shows the increasing number of agencies in the last 3 decades. Scholars such as Rhodes (1997a, 1997b), Laffont and Tirole (2000) and Majone (1990, 1994, 1996a, 1997b, 1997c, 1999, 2001b, 2001c) have emphasised a different direction of these new regulatory bodies in Europe. In this case, European Union (EU) members delegate authority not to national

160

120

80

40

0 1980

1985

1990 Europe

1995

2000

2005

Latin America

Figure 1.1 The diffusion of regulatory agencies in Latin America and Europe, number of agencies Source: Gilardi et al. (2006).

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agencies, but to supra-national European commissions for the purpose of continent-wide regulation.8 European agencies remain slightly different to their American counterparts, corresponding to the separate European administrative tradition (Coen and Doyle, 1999; Vogel, 1986). In the United States, functions are also delegated to regulatory agencies, generally divided among different public organisations at different levels (Scott, 2003). Agentification is shaped to serve as an answer to the particular and different concerns of each country (Meyer and Rowan, 1977). In Great Britain, agencies were created under the umbrella of its parliamentary tradition, resulting in autonomous bodies under the control of directorgenerals appointed by the ministry of their given economic field. More recently, after the Next Step reforms of the 1980s, the creation of these bodies reduced staff and resources characteristically used by the ministries, though it also resulted in greater independence from political games and more transparency and accountability (McLean, 2002; Moran, 2001). In other European countries, the creation of these bodies was justified by the lack of suitable government specialisation for controlling a given economic sector. Autonomy was given as a means for maintaining expertise and professional autonomy, as well as avoiding conflicts of interest with politicians. In the case of the United States, these specialised bodies were created first as a means for service delivery, and secondly to regulate the market. On a deeper analysis, agency forms are rooted in the American administrative tradition. Problems with credibility led to the creation of autonomous bodies, removing the responsibilities and structures from classical ministerial structures.9 Yet, in the end, although such agencies were autonomous from the rest of the governmental hierarchy, regulatory powers were not transferred completely, since specialised legislative commissions maintain control of regulatory policy.10 Further complicating the analysis of autonomy is the extremely heterogeneous nature of autonomous bodies. Autonomous agencies present different organisational formats, responsibilities and degrees of independence across countries.11 Agency autonomy is a multi-dimensional concept and is not necessarily linked to agencies’ formal or legal status (Verhoest et al., 2004). Agencies with the same formal status may vary substantially in their degree of autonomy, and similar agencies can vary in different institutional settings, or from country to country (Pollitt and Bouckaert, 2004; Pollitt and Talbot, 2004). Furthermore, service delivery and regulation can be carried out through a variety of bodies and institutional constellations, such as an office in a ministry,


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a legislative committee, the courts and, more recently, international organisations.12 There are different kinds of autonomous government agencies making comprehensive study yet more difficult. For instance, they can be single- or multi-headed and may take the forms of commissions, boards or tribunals, be more or less independent of the political process, or have broad or narrow competences, with strong or weak enforcement powers. What an agency really depends on is a complex mix of national and organisational cultures, legal systems and political systems (Smullen, 2004). Some scholars claim that autonomous agencies have more independence than bodies with managerial tasks and presided by unelected officials, also known as non-majoritarian institutions (Gilardi, 2004; Thatcher and Stone Sweet, 2002b).13 Autonomous agencies seem to be constitutional hybrids, having both statutory power and incorporated status; such bodies carry out regulation using their own delegated regulatory power, resources and responsibilities (Flinders, 2004a, 2004b; Greve et al., 1999). Gilardi et al. (2006) offer a complementary argument in this regard. They state that the rise of the regulatory state has made agencies key players in both economics and politics, restructuring the state. The process has brought about a proliferation of agencies in both Europe and America, but more so in the former.14 This has been magnificently expressed in the works of DiMaggio and Powell (1983), Jordana and Levi-Faur (2003) and Levi-Faur (2003) on regulatory agency isomorphism. They show how agentification occurs through both coercive pressure (for instance, from international organisations such as the World Bank or the International Monetary Fund (IMF)) and normative pressure from professional networks during economic and political reform processes (cfr. DiMaggio and Powell, 1983; Jordana and Levi-Faur, 2003). They also analyse how the interaction of agents engaged in a reform process not only transforms the rules and institutions of the reforms process itself, but also results in a transformation of the means by which the reforms were advanced. Regulatory bodies have special organisational features that make them unique and which will be reviewed later (Hood, 1998; Hood et al., 1999; Levi-Faur, 1998, 2003; Levy and Spiller, 1996b; Majone, 1990, 1994, 1996a, 1996b, 1997a, 1997b, 1997c, 1999, 2001b, 2001c). Such bodies were established by statute as independent administrative authorities in many countries, leaving them to operate ‘outside’ the line of hierarchical control by the departments of central government that resulted from recent changes to state capacities and state organisation.15

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1.2. Regulation and autonomous agencies Regulatory agencies are the archetype of autonomous agencies. Autonomy is usually portrayed as a prerequisite for independent regulation. However, several questions arise when autonomy and regulation are examined. First, it is important to know why regulation is necessary in the first place. From the classical economics perspective and economic theories of business regulation, regulation is supposed to correct market failures that prevent markets from operating in the private interest, or to address problems of externalities, market power, natural monopoly and information (James, 2000).16 Two principal meanings of the term regulation can be identified. Regulation can be broadly identified as a ‘sustained and focused control exercised by a public agency over activities that are valued by a community’ (Selznick, 1985: 363); or, alternatively, as a specific set of imperative commands, such as taxation and subsidies. More broadly, regulation can be understood as all forms of social control or influence (Baldwin and Cave, 1999; Baldwin et al., 1998c; Meier, 1985; Sappington and Stiglitz, 1987). Some authors point out that regulation can be seen as a process by which order is accomplished, or at least attempted, in a sector in the social and economic realms that displays a propensity for disorder and deserves remedial attention (Baldwin et al., 1998c; Clarke, 2000; Jordana and Levi-Faur, 2003; Jordana and Sancho, 2002, 2004).17 Regulation is thus a way of ‘ordering involving the constitution of a form of authority in order to achieve the practical management of competing interests’ (Clarke, 2000: 5). Baldwin is more precise, conceiving regulation as ‘the promulgation of a set of rules, accompanied by some mechanism, typically a public agency, for monitoring and promoting compliance with those rules’ (Baldwin et al., 1998c: 3).18 In other words of similar authors, regulation, ‘by making information more extensively accessible, accurate and affordable, may protect consumers against information inadequacies and the consequences thereof and may encourage the operation of healthy and competitive markets’ (Baldwin and Cave, 1999: 12). Regulation is then supposed to solve market imperfections. Regulation, on the other hand, has also been criticised. Regulation is also characterised by simultaneous actions and interventions by different public authorities that have varying responsibilities and degrees of power, as well as diverse interests. Regulation creates some room for fragmentation, dispersion and overlapping of responsibilities, since several authorities are involved in the process.19 The interaction with these


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other actors could result in a multiplicity of institutions involved in the management of regulatory decisions. This is reinforced by cognitive limitations that arise from the difficulty involved in defining the limits of policy-related responsibilities (Jordana and Sancho, 2002, 2004). At the same time, mistrust among political powers leads to the establishment of a parallel cross-control system, making the institutional setting more complex and constraining the government’s capacity to streamline its regulatory task. This obscures an already complicated institutional scenario.20 Moreover, as stated by Scholz (1991), such institutional arrangements may increase the cost of regulation. The lack of co-operation between regulators could result in higher transaction costs.21 Struggles between authorities have a negative impact on regulatory action.22 Regulators are often given wide operational discretion and maintain hands-off relations with political power.23 In this context, they may have future job interests or prospects after leaving office, from working not solely for the industry that they formerly regulated, but also for specialised law and consulting firms dedicated to the defence of the regulated industry.24 Regulation could consequently be used by actors to enhance their positions amid political uncertainty (Gilardi, 2004). Autonomous regulatory bodies, in this vein, are meant to provide stable, independent, technically skilled and, most importantly, nonpolitically motivated bodies. The creation of regulatory agencies is based on the need to bring together expertise and a large technical capacity to make decisions, for which none of the ordinary authorities has enough knowledge (Majone, 1996a: 16), together with the need for autonomy from the political process. ‘They were motivated by the conviction that the specificity of the subject matter required special attention and it was not only necessary to establish control but also to formulate consistent and very specific policies. It was considered that the internalisation of these tasks within ministerial departments was not the best solution’ (Jordana and Sancho, 2004: 17). Independent bodies are conceived as a way of guaranteeing impartiality and efficiency.25 The model of autonomous regulatory agencies is taken for granted as the most appropriate organisational form for regulatory action, and as an unavoidable prerequisite for credibility.26 Independence is often presented as necessary to establish credibility. So widely held is the claim that regulation follows from social crisis that it remains virtually unquestionable, and its absence provokes unanswered questions. The creation of autonomous bodies is often conceived as a way to make the whole process of regulation credible and

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de-politicise this process.27 But agentification and autonomisation do not necessarily mean de-politicisation.28 Regulators are also susceptible to capture. As the Chicago School has extensively pointed out, some regulators could be captured by the interest groups the agency was designed to regulate, the interest of which will then proceed to influence the outcome of regulatory processes (Peltzman, 1998; Stigler, 1975). Regulators might begin to set their own standards rather than those formulated by elected politicians or the political executive, directing regulation contrary to the public benefit, leading to a significant distortion of the original aims (Pollitt and Bouckaert, 2004). Estache and Martimort (2000: 50) state that ‘in taking transaction costs into account, structures and processes will affect regulatory outcomes and, hence, should be recognised explicitly in the design of incentive-based regulation’. That said, this section has listed explanatory and methodological differences among the studies of agentification and autonomisation. A detailed analysis shows that agencies and the delegation of faculties to these bodies are characterised by extreme heterogeneity stemming from different theoretical underpinnings. This section focuses exclusively on the reasons that justify the creation of these autonomous bodies (efficiency, regulation, reorganisation, legitimacy). Nevertheless, the critical and political importance of these agencies makes some formal and objective external control necessary.29 The next section thus analyses the interaction between politicians and administration as a consequence of this new organisation, and illustrates different approaches to the study of control over autonomous agencies.

2. Delegation and agency design The study of delegation coincides with the evolution and expansion of the Principal-Agent Model, developed predominantly by American scholars.30 The model was explicitly created to explain the relationship involved when a ‘principal’ delegates a task to a single ‘agent’ through explicit or implicit contracts (see, for instance, Laffont and Martimort, 2002).31 Put simply, the model reflects the interaction of two actors who are collaborating in the creation of a good or service. Equally importantly, it looks at the strategies they will engage in when interacting in order to accomplish a collective task. The Principal-Agent theory offers the analyst appropriate descriptions and ready-made concepts with which to analyse the creation of autonomous agencies (Thatcher and Stone Sweet, 2003b).32 Put simply,


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the Principal-Agent Model is the synthesis and systematisation of a framework that reflects a causal relationship and the consequences of a deliberate social event.33 The literature on delegation is founded on widely divergent assumptions about the principal–agent relationship and the source of agents’ decisions. Consequently, the approach has been largely centred on two different concerns. On the one hand, it focuses on when delegation occurs. On the other hand, it examines the agents’ behaviour once delegation has taken place. The Principal-Agent Model has proven useful yet limited. Government is not the typical principal, and bureaucracy is not the conventional agent. Second, the Principal-Agent framework was originally created to analyse private contracts, short-term contracts, as in the exchange of goods, or long-term ones, for services, and not the delivery of public services or abstract ‘goods’ such as regulation or taxing. With this model, scholars have focused on two main concerns: the origin and legitimacy of delegation, and the limits of delegation. There is an interest in establishing the legitimate sources of delegation so that political controls and accountability institutions could also be established. There are two main trends of thought, which are analysed next.

2.1. Deliberate delegation as agency design The first set of literature reviewed presents the reasons for delegation. This literature has centred its analysis on why elected politicians delegate authority to agents – resulting, in many cases, in independent departments or agencies (see, for instance, Horn, 1995; Levy and Spiller, 1994; Majone, 1996b, 1997c, 1999, 2001a, 2001b). The literature has increasingly centred on the transaction costs of policy-making, stressing the conditions under which the principals delegate (see, for instance, Epstein and O’Halloran, 1994, 1999).34 Those studies focused on analysing the institutional setting that influences the policy-making transaction costs and, consequently, the benefit of delegating powers and discretion to agents (Pollack, 2002). Thatcher and Stone Sweet (2003b) have pointed out that principals decide to delegate based on the assumption that doing so will help to resolve commitment problems, overcome information asymmetries in technical areas of governance, enhance the efficiency of rule-making and avoid the taking of blame for controversial issues.35 Huber and Shipan (2002), on the other hand, argued that delegation results in a practical way for politicians to accomplish policy and political goals. Hence, delegation is a calculated, deliberate decision.

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Politicians delegate some of their authority to another agent to get some political benefits and to control the extent of delegation through various arrangements, such as laws and procedures. More cynical approaches emphasise how the type and extent of delegation is often related to the domains in which politicians can maximise their benefits rather than maximise social welfare (see, for instance, Alesina and Tabellini, 2007). These approaches suggest that politicians will rationally choose to delegate in exactly those areas where the political advantages of doing so outweigh the costs. Principals delegate tasks to bureaucrats in those areas of policy-making where they have negative net rents, or which are especially risky, or which require technical tasks that are not politically profitable in terms of bringing about sufficient campaign contributions from special interests (see, for instance, Fiorina, 1977, 1986).36 In this vein, politicians would be reluctant to delegate redistributive responsibilities, as these are politically profitable and can help to build winning coalitions. As pointed out by Alesina and Tabellini (2004), politicians choose when to delegate, and the opportunistic motivation of politicians determines what is delegated. Politicians never delegate redistributive policies, as these allow them to assemble winning coalitions of voters in elections. But there is much more to think about, as fiscal policies are tainted by a host of time inconsistency problems, but societies seem reluctant to allocate this policy prerogative to independent bureaucrats. The time inconsistency of some policies makes it necessary to delegate them to bureaucrats. Policies with diffuse or adverse and lower net benefits for politicians will be delegated to technical bureaucracies, whereas policies with particularised or greater net benefits will be administrated by politicians in a more traditional executive department or ministry. Epstein and O’Halloran (1994, 1999) and Alesina and Tabellini (2004, 2005, 2007) have proved that the scope of delegation depends on which structure best maximises political benefits. They state that ‘the design of institutions with reference to delegation is geared toward maximising rents at the lowest risk for the incumbent politician’ (Alesina and Tabellini, 2004: 18–9).37 From this point of view, the designs of agencies (such as regulators, courts, independent central banks and so on) might be politicians’ only answers to political problems. The creation of agencies could be the politicians’ escape from making hard and unpopular choices. As stressed by Alesina and Tabellini (2004, 2005), there are several reasons why the structure of bureaucratic arrangements that we observe in the real world is likely to be very different from the social optimum.


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Accordingly, the explanations for different institutional forms depend on politicians’ incentives for maintaining distributive policies. Epstein and O’Halloran (1994, 1999) argued that the formal institutional framework of most agencies is ambiguous, highly flexible and open to many possible interpretations. Similar policy areas do not translate automatically to the same delegation form. Horn (1995) argues that there are distinct institutional arrangements for different administrative functions.38 These structures are created based on the relative preferences and transaction costs of different actors. Although delegation is a trend that has spread across the world, countries have made quite different choices about what, when, whether and how to delegate. According to this approach, principals decide to delegate in selected areas according to a calculation of the political consequences. Following this point of view, agency forms are exactly those that reduce agency losses, as this method of research assumes that the preferences of principals and agents are perfectly aligned. Nevertheless, this does not explain how given policy areas fail to translate automatically to the same delegation form. Moreover, it does not consider successive delegations that are strongly influenced by the strategies and resources of existing agencies.

2.2. Controlling the agents through agency design A second trend in the literature on agency design is concerned not with the reasons why politicians delegate, but with the consequences of delegation. This analysis focuses on devising and testing hypotheses about the conditions under which legislative principals may delegate authority and discretion to bureaucratic agents (Pollack, 2002). Its central focus has been how to control agents once delegation has occurred, and centres on the idea that delegation creates a problem for the principal. As magnificently expressed by Madison, Hamilton and Jay in The Federalist, in the act of passing on policy decisions to others, the principal is creating a controlling problem for himself.39 The problem arises when the principal can obtain the benefits of delegation only by granting discretion to the agents. This means sharing authority and control with someone else.40 Principals know that agents are likely to develop their own interests, such as by producing policies that differ from the ones intended by those who delegated power.41 Thus, to preserve the benefits of delegation, principals have to establish a set of restrictive ex ante and ex post controls, or tight monitoring systems. In the end, institutional design turns into a complex exercise of choosing from a menu of controls to

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facilitate the intended outcomes of the delegation. Hence, institutions assume a configuration that reduces agency loss – to mitigate the deviation from the results that was intended by the principal. A second line of this literature has been concerned with the relationship between principals and agents once the process of delegation has taken place (see, for instance, McCubbins et al., 1987, 1989). This approach essentially focused on how elected politicians implement certain formal controls over bureaucratic agencies – for instance, over nomination, budget-setting and ability to reverse agency decisions – that limit their agencies’ losses.42 Put simply, this approach consists of measuring the preferences of congressional principals (the independent variable) and the behaviour of regulatory agents (the dependent variable), and establishing a correlation between these two variables to determine the conditions under which discretion could be granted. According to this approach, the amount of discretionary authority delegated by politicians is a deliberated action that can be constrained or enlarged at any time. According to this perspective, politicians can, at least up to a point, control the bureaucratic agencies by legal means (see McCubbins et al., 1987, 1989).43 Following this idea, a large body of literature has been produced, showing how principals maintain some degree of control over the bureaucracy (e.g. Calvert et al., 1987). McCubbins et al. (1987, 1989) have argued that the legislators can, at least up to a point, control bureaucratic agencies by means of procedural rules, limiting the agency’s degree of autonomy (see also Wood, 1988; Wood and Waterman, 1991).44 In both cases, they have been assessing the degree of control or autonomy, and, to a lesser extent, the determinants of control and autonomy (Calvert et al., 1987).45 The benefits must outweigh the costs and show that it is feasible for the principal to delegate to an agent.46 Consequently, the benefits of delegation decline as the principal limits the agent’s discretion. Where delegation is needed to secure credible commitment and undertake complex governmental action, principals cannot impose many ex post controls over the agent without undermining the original purpose of delegation. For instance, Lowi (1969) and Stigler (1971, 1975) believe that if delegation is too extensive, it may lead to an abandonment of the politicians’ responsibility. This may open the door to a favouring of special interests. From this point of view, the problem of delegation lies in granting the ‘right’ amount of power and discretion to the agents. Control, however, is not an easy task. Controls impose costs on the principal, as he or she needs to use resources in order to obtain the


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necessary information for an efficient monitoring and correcting. Miller (1990), in his analysis of control and hierarchies, showed that there is no monitoring system capable of controlling every action of the agents. On the other hand, principals might be reluctant to use their authority to limit agents’ powers; studies have illustrated that exercising such powers can result in difficulties (Arnold, 1987b; Canes-Wrone, 2003; Ferejohn and Shipan, 1989, 1990; Wood, 1988; Wood and Waterman, 1991). As proven by Coen and Thatcher (2005a), this mechanism implies costs that are rarely encountered by a principal, who usually must avoid the use of formal powers over autonomous agencies to appoint party activists, reduce budgets or overturn decisions.47 Aberbach’s (2002) findings support this claim, as his research stresses how oversight changes over time.48 This disinclination to use the control of oversight agencies undermines the aims of delegation. Such controls are imperfect, as they entail certain tradeoffs. In addition, as Thatcher and Stone Sweet (2002b) have stressed, the creation of independent regulatory agencies has also been influenced by private interest groups, as these have found an institutional space of their own. The question about political control and accountability arises not only with independent agencies, but also with all non-majoritarian institutions, which are often accused of having a ‘democratic deficit’.49 It is a questionable system that allows an agency to strike down a policy choice made by an elected branch of government and supplant it with a policy of its own choice (Majone, 1990, 1994, 1997b, 1997c, 1999, 2001b, 2001c). When studying presidential–congressional relations, abundant research has examined how the preferences of politicians influence policy-making in general. Others have looked at the consequences for the democratic responsiveness of political incentives on policy design, although these latter studies are less clearly tied to the specific issue of delegation and the resulting institutional design (Moe, 1989a, 1989b, 1990a; Moe and Wilson, 1994). It is expected, then, that agency forms will vary not only in the criteria used to design monitoring systems to control agents and their actions, but also in the intervention of different kinds of politicians in the design of these controls. It is to this issue that we turn now.

3. Actors and the shape of autonomous agencies Other approaches argue that autonomous agencies depend on the relative preferences and transaction costs of different political actors.

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Autonomous agencies are shaped according to the interests of different actors. The explanation for the existence of different organisational forms might be that politicians have incentives for holding on to distributive policies. Different politicians in charge of agency design will thus choose different organisational forms. In a simple model of modern democracy, it is commonly taken for granted that a limited number of actors have powerful and extended faculties of institutional design. This has created a bias towards understanding delegation as a process in which only two actors are involved. Nevertheless, it cannot be taken for granted that the process of delegation is a binary or merely utilitarian relationship. Scholarly debate has concentrated on two main sets of actors, namely, legislators and presidents, with the former being more prominent and prolific than the latter. We now analyse each in turn.

3.1. Legislative-driven agency creation Congress is often perceived as being both the primary and ultimate authority on political decisions. Scholars have tried to explain the role of Congress using the tools provided by agency theory, which allows us to identify the conditions under which delegation problems may occur.50 Delegation theorists have focused on the role of Congress as the principal in the process of agency creation. Congressional literature has largely assumed that Congress formally retains the last word over agency design.51 Agencies and their shapes are the expression of arrangements between coalitions within the Congress and, consequently, may be said to result from the ‘popular will’. This approach assumes that people confer authority on elected officials, and that their degree of discretion is determined by the law (McCubbins, 1991; McCubbins et al., 1987). In this way, Congress enacts the laws, the Executive Branch implements the popular will, and the courts interpret laws and resolve controversy. In this way, delegation legitimises its public authority.52 From this point of view, the stability of the coalitions in Congress determines the stability of the arrangement and structures. Reforms of these institutions depend on the strength of the new coalitions taking over the Congress. In this way, problems with newly created institutions (such as imperfect agency design) could be resolved by successive negotiation within the Congress. In addition, traditional approaches to delegation characterise the delegation process as a merely binary relationship. The central focus of this approach has been dominated by two sets of actors: legislators


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and bureaucrats – congressional principals and executive agents, respectively. Congressional literature has largely assumed that Congress formally retains the first and last word over agency design (see, for instance, Bawn, 1997; Epstein and O’Halloran, 1999; Horn, 1995; Macey, 1992; McCubbins et al., 1987, 1989). Both the decision to delegate and the shape and extent of delegation, from this point of view, are solely the result of a calculated decision made by legislators. The famous ‘McCubbins, Noll and Weingast explanation’ (also called the ‘McNollgast’) claims that agency structure is chosen as an ex ante means of protecting against ex post opportunism by bureaucrats and other political actors (McCubbins et al., 1987, 1989). But these arrangements make sense only if such checks are durable over time. Reforms of those institutions depend on the strength of the new coalitions taking over Congress. Horn (1995) arrived at a similar conclusion, but through a transaction-cost analysis. He concluded that differences in institutional structures across the government are actually the institutional expression of the attempt to reduce transaction costs and information problems among the actors involved. Congress, from this point of view, delegates tasks to bureaucrats either when they have negative net rents, or in areas of policy-making that are especially risky, or technical tasks that are not politically profitable (see, for instance, Fiorina, 1977). As argued by Epstein and O’Halloran (1999) and Alesina and Tabellini (2004, 2005), the selected shape of delegation is the one that politicians regard as the best for maximising their own benefits. Indeed, politicians will be reluctant to delegate redistributive responsibilities, as those are politically profitable for building winning coalitions. In a couple of studies, Epstein and O’Halloran (1999) took this argument further, showing that agencies are granted less discretion when the degree of uncertainty related to the decision is high. They showed that in the context of divided government, conflict between Congress and the executive tends to be higher, resulting in a greater number of constraints imposed on an agency’s design (Epstein and O’Halloran, 1994, 1999). Bawn (1995), for instance, found that congresses grant more independence in relation to the technical complexity of the policy issue. More importantly, she discovered that control depended not only on this, but also on the institutional position of legislators. Committee members are more likely to create ex post control than is the legislator who does not belong to the relevant committee, as the ability of the two to obtain

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information varies (Bawn, 1997).53 Therefore, legislators have the ability to choose between a wide range of institutional options, but these are more related to the political context and the political system. In a similar argument, Huber and Shipan (2002), analysing statutewriting, claim that legislators look to control bureaucrats and, depending on the policy issue at hand, can choose to use detailed statutes to micromanage policy implementation. According to Dunleavy (1991), the control of appointments, the reorganisation of the department and its jurisdiction and the control of the budget can be used effectively to reward and sanction bureaucrats, and to align their incentives with the preference of the politicians.54 Some authors, like Weingast and Moran (1983), studied this in the case of the US Congress, and Wilson (1989) and Moe (1989a, 1989b) examined the President’s effort to control the bureaucracy. For instance, as argued by Martin (1997), the intention of other branches or powers to overturn the preference of the Congress could only be effected by veto.55 Nevertheless, in order for Congress to have consistent polices and decisions, cohesive parties are required (Cox, 1987; Diermeier and Feddersen, 1998a; Epstein, 1980). Also, it has to be noted that in both parliamentary democracies and countries with strong legislatures, cabinets and committee politics prevail over the whole legislature. In these systems, the legislature typically plays a rather marginal role in the policy-making process. ‘It is therefore very rare for scholars to assert that backbench members of parliaments play more than a secondary role in the legislative process’ (Huber and Shipan, 2002: 28). Although parliaments and congresses tend to delegate authority through legislative processes, they do so exclusively as a formality: the real process takes place within the attributions of the Executive Branch, whose structures have to be either created or reorganised. As suggested by the work of Carpenter (2001), agencies can shift electoral preferences by virtue of their political legitimacy.56 At the same time, bureaucracies can be autonomous even when it appears that they are perfectly aligned with politicians’ interests: ‘political harmony and the appearance of control [by legislators or other elected officials] can mask autonomy’ (Carpenter, 2001: 357). McCubbins et al. (1987, 1989) stress that specific bureaucratic structures of the American agencies emerge as a set of ex ante legislative controls, a way for legislators to ensure that their favoured policies are properly implemented by public agencies. The legislative coalitions use their electoral dominance to impose rules and procedures on the bureaucrats in those agencies.57 There is a common basis to these arguments. It is usually taken for granted that both executives and bureaucrats have no direct role in


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institutional design, and that agency design is an exclusive faculty of the legislative branch.

3.2. Presidents and agency design In presidential systems it would be hard to deny the power of the president over decision-making. Presidents, from the previous perspective, seem to be obedient agents who do not hesitate in executing the commands of Congress, or at least do not oppose Congress’ institutional preferences. Presidents, when characterised as part of an enacting coalition, have similar preferences to the enacting legislative coalition, or certify and complement the common wisdom.58 It is hard to think that presidential actions would not affect the organisational design of autonomous agencies. Concerned about this, a group of scholars started to pay direct attention to the role of other actors in the design of bureaucratic agencies.59 Principally, these studies have started to consider the role of presidents in the design of agencies. It is certainly possible to distinguish the president’s perspective from that of Congress, as they are based upon their differing institutional positions and policy preferences. These studies have focused mainly on the presidential power to control appointments, the reorganisation of the bureaucratic structure and the budget; yet, even so, Congress maintains authority, or at least oversight, over agencies (see, for instance, Arnold, 1981, 1987a, 1987b; Snyder and Weingast, 2000; Waterman and Gill, 2005; Wood, 1988; Wood and Waterman, 1991). While rewarding, these studies focused more on the process of how presidents tried to exert control, rather than the process of the agencies’ creation. Presidents recognise their vantage point in policy-making, but in a different fashion from Congress (Howell and Lewis, 2002; Lewis, 2003). They do not think about state administration as a whole when making agency decisions. Since they receive more tangible re-election interests, congresses aggregate the consequences of such action. They diversify their risk more than presidents do. For instance, legislators represent individual districts, and their perspective derives from a parochial view that is structured by the constitution. In contrast, by having a national constituency, presidents are held accountable for the functioning of the government.60 Congress represents districts; the executive has one big constituency (Howell and Lewis, 2002; Lewis, 2003). Congress receives more direct benefits from rebuilding or designing agencies (Howell and Lewis, 2002; Lewis, 2003). Legislators do know that an agency proposal coming from them might result in duplication, overlapping of

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responsibilities, unclear lines of authority and efficiency losses in the long term. As shown by Howell and Lewis (2002) and by Lewis (2003), presidents are in charge of increasingly unmanageable bureaucracies. Presidents have traditionally sought control over administrative structures through three mechanisms: reorganisation (Arnold, 1987b; Moe, 1982, 1989a; Moe and Wilson, 1994); budgetary authority (Rourke, 1984); or centralisation of administrative decision-making in the executive. Bureaucratic reorganisation has focused on removing overlapping and duplication of administrative functions as a way to make bureaucracy more manageable and controllable. Presidents create or redesign agencies in the light not only of Congress’ views, but also of their own criteria for overcoming their own managerial problems (Lewis and Rudalevige, 2005). This can result in a clash of congressional and presidential preferences.61 As illustrated by Howell and Lewis (2002) and by Lewis (2003), presidents also have the faculty to act unilaterally and to shape an agency according to criteria that are different from those applied or desired by legislators. Their analysis of all the agencies in the United States in the second part of the last century proved, unsurprisingly, that those created by presidential action were less insulated from the control of the executive than were those created through legislation (Howell and Lewis, 2002). As we shall see, this finding has implications that support this study. The institutional constraints on Congress and the difficulty of reaching agreements make it virtually impossible to establish agencies that perfectly reflect the preference of the ‘popular will’. Therefore, the number of such agencies is larger when congressional actions are limited. Presidents create agencies that Congress is not able to create on its own, and/or when Congress is unable to offer a counter-proposal (Howell and Lewis, 2002). In subsequent research, Lewis found that agencies created by presidential action are less likely to persist over time than those created by legislative action (Lewis, 2004). Nevertheless, Lewis did not stress the reasons or the consequences. These kinds of agencies debilitate and limit the president’s ability both to control the Executive Branch and to create long-term institutions. Thus different actors involved in the process of agency creation might produce completely different organisational outcomes. The main body of the literature has concentrated on ex post oversight, rather than the role of bureaucrats in the process of agency creation. The conclusions of these studies are varied and well known.62 The findings of these studies showed that the control of the bureaucracy apparently


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had more to do with the ability of politicians than with the controlling structures themselves. At the same time, these studies concentrated on proving the capacity to control the bureaucracy, but not on the quality of the controls. This leads to a constant consultation process between the actors involved and, eventually, might lead to both an increase in the transition costs and the creation of incentives for the players to corrupt the process. This places the control structures somewhere in the grey area: ‘neither perfect nor nonexistent, but rather somewhere in between’ (Huber and Shipan, 2002: 26). The analysis of this phenomenon arose out of the popular belief that both legislatures and executives would generally oppose attempts to insulate governmental agencies. Both want to make them accountable, and any attempt to insulate them constrains not only the ability to achieve policy goals, but also the ability to control the bureaucracy itself. In this situation, as has been proved by Lewis (2003), presidents take advantage of the collective action problem in Congress unilaterally to create and modify agencies, using formal and statutory powers to control the process and the final result. Moreover, the executive uses formal powers to persuade Congress to do likewise. Bureaucratic autonomy, therefore, is politically forged.

4. Bureaucrats: the neglected side of the story This chapter has described in detail some of the most relevant approaches. Approaches to agentification and autonomisation have been varied and prolific. Some approaches emphasise agentification as a consequence of changes in the state organisation and the advent of a new administrative paradigm. Another trend of this explanation has concentrated on explaining agentification as a part of the regulatory competences, making the assumption that the spread of agencies enhances the credibility of government policies. Other sets of explanations have focused on explaining how politicians control those agencies, rather than explaining the agentification phenomenon itself. These studies have shown mixed evidence regarding control and monitoring systems, showing how these varied depending on politicians’ preferences. Nevertheless, these studies have consistently neglected the role that the bureaucracy plays in agentification. Almost none has showed the effect of conflict between politicians and bureaucrats on agentification and on concrete issues such as defining procedures, controls and so on. Bureaucrats are portrayed as either the prodigal son or the root of all

30


evil. When the bureaucracy is mentioned in agency design, it is only in order to repeat the idea of bureaucratic responsiveness to the designers. Bureaucrats are unfailingly characterised as following the dictates of politicians. In the scholarly literature, bureaucrats are often neglected, as they do not take part, at least formally, in the decision-making, and then only in the instrumentation part.63 The role of the bureaucracy has been reduced to a merely technical one, implementing policies according to politicians’ preferences. A bureaucracy’s power rests on technical expertise and its strategic position in the hierarchy, a point that has been extensively analysed. On the other hand, a set of literature recognises that bureaucrats might act strategically to alter the policy outcomes.64 Starting from Weber, scholars have recognised that politicised bureaucrats’ actions have an impact on policy outcomes. Scholars have suggested that this feature works like a double-edged sword, giving the bureaucrats a high level of discretion and also the chance to act against the politicians’ preferences (see, for instance, Peters, 1981, 1989; Rourke, 1984) and to favour their own agenda at the expense of those they deem inadequate. Among the most influential works analysing the phenomenon are Niskanen’s studies (1971) on the perverse incentives of bureaucracy. The findings of these works were highly influential, in that they shaped the scholarly perception of bureaucracy. Niskanen’s studies were quite simple: he thought that bureaucrats’ behaviour could be modelled in the same way as actors within private firms. He believed that, like their private sector counterparts, bureaucrats use their monopoly over information about the cost of supplies to maximise budgets rather than profits.65 More recent studies have shown other effects of bureaucrats’ behaviour on policies (see, for instance, Shepsle and Weingast, 1984). For example, Tsebelis argued that a lack of ideological homogeneity in the enacting coalitions affects their ability to control policy outcomes and changes (Tsebelis, 1999, 2002). Others, like Bawn (1999), have proved that changes in the composition of the government resulted in different levels of spending across the governmental agencies and departments, and a discontinuity in public policies (see also Bawn, 1995, 1997).66 Some authors have argued that the research agenda should move from the question of whether political control occurs, to the determinants for effective political control (Huber and Shipan, 2002; Wood and Waterman, 1991).


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For instance, the most influential works (Bawn, 1995; Epstein and O’Halloran, 1999; Fiorina, 1986; Macey, 1992; McCubbins, 1991; McCubbins et al., 1987, 1989) suggest that enacting coalitions might use, in some way or another, administrative procedures to compel a governmental agency to follow the programme of that coalition. This argument essentially suggests that political battles occur when the methods and processes are determined by politicians in such a way that they cannot assure some kind of outcome for a given policy. They strongly believe that agencies cannot be in full control of the procedures if they were designed by the Congress. As with policies, organisational form is chosen and implemented by both elected politicians and bureaucrats.67 In many cases, bureaucrats do much more, either de jure or de facto, than just implementing policies or acting within the selected institutional design. Bureaucrats are involved in many important aspects of the selection of different aspects of institutional design, such as statutes, and the scope of some faculties.68 If it is true that they do not choose the policy or the institutions directly, but provide the information necessary to do so, the information could be distorted to serve their ends. In light of this, the model is similar to other formal efforts demonstrating the impossibility of neutral administrative arrangements (Hammond and Knott, 1996). Bureaucrats have some degree of freedom to experiment with different possible permutations on any given decision.69 As argued by Carpenter (2001), the rise of the regulatory state has given substantial autonomy to many bureaucracies in deciding how to implement legislation. Regulocrats, or those bureaucrats in charge of regulatory policies, have turned into key players in both the initiation and the execution of a large amount of legislation. Regulatory policies are normally the result of both political and bureaucratic intervention. Conversely, fiscal policy is, by and large, determined by elected representatives (governments and legislatures). Policy decisions are related not only to bills or laws, but also to statutes that are within the sphere of the bureaucrats. Politicians decide ‘what’; bureaucrats decide ‘how’. For instance, during the creation of the independent agencies in the United States under President Franklin D. Roosevelt, Congress had to accept the intervention of the other branches to approve his extensive public intervention (both Congress and the Supreme Court) in the decision-making process, instead of the original idea to integrate these regulatory functions into the ministerial hierarchy (see, for instance, Carpenter, 2001; Macey, 1992; Majone, 1996a; Shapiro, 1988). This

32


makes it clear that, even in a country with a strong Congress and presidency, agency design results from a struggle between the different actors involved. Moe (1989a, 1989b, 1990a, 1990b) and Moe and Wilson (1994) argue that administrative design is basically the result of struggle and negotiation between the executive and the Congress. Essentially, the resulting institutions cannot be understood separately from the capacity and discretion of the executive in the creation process. Bureaucrats have powerful incentives to influence policies administratively. They will attempt to shape administrative structures. These may result in fragmented political control, duplication of administrative functions and overlapping jurisdictions. Consequently, it is not uncommon to find different types of institutions with different organisational designs, where politically active bureaucrats could be found. This phenomenon of bureaucratic political influence is more clearly appreciated in countries with weak institutional settings and unstable political and enforcement systems, or those going through deep transformations and reforms. Newly created regulatory bodies took shape in the form of special units, independent from corruption, parties, and as a way to consolidate economic reforms that took place in those countries. In some cases, it was the organisational solution to the conflicts regarding the spoils system that exists in practically all countries (Geddes, 1991, 1994). For instance, the pre-existence of authoritarian and patronage institutions created a scenario conducive to the creation of autonomous agencies whose scope in their faculties, powers and functions was relatively limited. Different institutional results arise because agencies respond to purpose-based incentives and, in other cases, client-based incentives. Regulocrats and bureaucrats are de facto politicians, since they deflect the direction of public policies, albeit by non-legislative means. Bureaucratic structures must therefore also be regarded as political structures. At the same time, bureaucratic autonomy cannot be analysed apart from the institutional characteristics of the political system and the organisational characteristic of the agencies that experience it. It is impossible to divorce bureaucracies from politics. Bureaucrats in autonomous agencies are powerful bargaining agents for both political action and procedural design. In some ways, bureaucrats can make it politically costly for politicians to change procedures or institutional design. In other cases, the opposite may be the case. In this sense, the conclusions of Lewis (2003) are insightful, yet, at the same time, they show the flaws of previous similar works.


33

Although previous studies have shown the interaction of different coalitions and executives in designing agencies, they have had difficulties in showing why the same enacting coalitions interacting with the same president produce different agency structures. This interaction therefore needs to be analysed further. It might be the case that the organisational shapes of autonomous agencies are the result of the political struggles between different actors. Conflict arises as preferences of the actors involved in the process are not similar, not aligned or not consistent over time. Political conflict is an important element in understanding agentification and autonomisation, and needs to be included in the explanatory approaches. This research thus tries to move towards a broader approach that recognises and analyses the role of conflict between politicians and bureaucrats in the design of autonomous agencies. The next chapter explores this further, developing a framework that explains how different preferences and the interactions among different actors might result in different degrees of autonomy and organisational forms.

2 Zugzwang: Agency Creation and Bureaucratic Reaction

Introduction Structure matters. Structure has a major impact on policy outcomes.1 This is important as agencies’ structures matter. Moreover, several studies have found that agency structures are heterogeneous, ambiguous, highly flexible and open to many interpretations. Varied structures, contrary to traditional explanation, have resulted in fragmented political control, duplication of administrative functions and overlapping jurisdictions. Some scholars have argued that a government agency’s varied forms are basically the result of struggle and negotiations between executive and legislative branches.2 With this in mind, other works have suggested that governing coalitions might use agencies to protect specific policy outcomes and maintain some group control over agencies’ issues (Bawn, 1995, 1997, 1999; Epstein and O’Halloran, 1999; Fiorina, 1986; Macey, 1992; McCubbins, 1991; McCubbins et al., 1987, 1989). This argument essentially suggests that since political conflict occurs in uncertain environments, politicians therefore will seek to control processes and statutes as a way to assure a policy outcome over time.3 Agency design is here seen as a very complex interaction process in which many persons, in many roles, are seeking to achieve divergent objectives, including their own private gain.4 Here agency design is analysed as the result of political struggles, or as a series of intertemporal political agreements, with political institutions facilitating, or the result of hindering such agreements.5 I am not suggesting that political actors care nothing about effectiveness, but as will be demonstrated 34

Agency Creation and Bureaucratic Reaction

35

here this may not be their primary concern (see Fesler and Kettl, 1991). This chapter thus assures that the forms of these autonomous agencies do not arise reflexively or automatically in response to environmental demands on government, or because of the ability of politicians and their reform teams to advance their agenda. Instead, agencies take shape through political negotiations that are rooted in, and mediated by, pre-established arrangements in the political system. The resulting institutions cannot be adequately understood by an approach that is divorced from the capacity and discretion of the bureaucrats involved in the creation process.6 Bureaucrats have powerful incentives to influence policies administratively. Consequently, it is not uncommon to find different types of institutional settings with different organisational designs wherever we find politically active bureaucrats. This, in turn, reveals that, contrary to conventional explanations, delegation varies systematically across issue areas and over time, and is not always due necessarily to deliberate principal preferences, but rather to the interplay with actions and resistance from other actors, resulting in unintended organisational forms. This chapter then develops this simple premise through a schematic illustrative model that shows how different degrees of autonomy emerge from conflicts between politically motivated actors involved in the process. For those not familiar with chess, Zugzwang refers to the situation in which a player is forced to make an undesirable or disadvantageous move. More precisely, it describes a position in which a player is reduced to a state of utter helplessness and obliged to move, yet every move only serves to make his position even worse. On analysing this phenomenon and contrary to the conventional wisdom, we have found that politicians faced limited available moves towards the end, costing the player pieces, damaging positional effect, damaging the reformer strategy as a whole and individually for every agency. I develop the argument in three parts. First, I briefly discus the concept of autonomy, and I describe the dimension of autonomy selected for the analysis. This is important, as variations in the degree of autonomy might give clues to possible disagreements among bureaucratic groups. Secondly, I elaborate this idea further through an explanatory recount of how conflict between bureaucrats and politicians can shape different degrees of autonomy through the manipulation of statutes. Finally, I show that three possible outcomes derive from different kinds of bureaucratic reaction. The cases shown here are rather important, as they are the foundation for the empirical analysis of the Mexican case.

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1. A typology of autonomy Although the concept of autonomy is frequently used in the studies of agency creation, it is far from being a unified concept. Autonomy is usually characterised as a dependent variable that varies significantly according to different theoretical underpinnings.7 Analysis and measures of its conceptualisation have been varied, with a clear overlapping among the concepts and classification of autonomy. Studies differ concerning the variables and measures of autonomy. Some studies have focused on the formal-legal aspect that could help to measure managerial autonomy. Other studies have developed more elaborate concepts and measures of autonomy. In some cases, the analysis is qualitative, using normative arguments, while in others it is quantitative, aggregating data to create autonomy indexes. Here, I offer a simpler, illustrative characterisation of autonomy, according to the aims of this research. The concept of autonomy utilised in this study draws heavily on four previous studies but expands and reshuffles these ideas. First, it draws on Gilardi’s (2002, 2003, 2004) notion of formal independence that divides autonomy into five basic dimensions: legal status; relation with the government and the Congress; financial and organisational autonomy; staffing; and regulatory competences. Second, it draws on the work of Christensen (1999) that sets different dimensions of autonomy as a tradeoff between control and independence. The study of Verhoest et al. (2004) that developed an empirical study of different dimensions of autonomy – namely, managerial, policy, structural, financial, legal and interventional – also provides a good taxonomy of autonomy. Finally, the work of Huber and Shipan (2002) enlightens as to how statutes help to enhance or constrain those dimensions. The analysis is based upon using a conceptual distinction between two kinds of autonomy, namely, autonomy as discretion and autonomy as a level of independence vis-à-vis the government or head ministry. The former refers to the exemption of constraints on the actual use of decision-making competencies of the agency, such as financial, legal, operative constraints, while the latter refers to a legal-structural status of the agency. This is also clearly linked in the literature of delegation to a common concern about control. As reviewed in previous chapters, a large focus of the literature on agency creation has centred its analysis on the means that governments have to control agencies’ behaviour.8 Control appears in opposition to autonomy and refers to the mechanism used by


37

politicians/government to influence or constrain an agency’s decisions and actions, which could be varied and sophisticated. It is expected then that an agency could experience different constraints to its activity, regardless of its formal-legal status, due to formal and informal means of influence from government jurisdictions. We can find different degrees of this interaction, from the lowest degrees of autonomy, when the government takes the decision itself without asking the agency, to the highest degree of autonomy, when the agency takes the decision itself without consultation of government, without being restricted by any rules set by government. We can also expect numerous degrees of autonomy expressed in the many possible situations where the government and an agency take a decision together. This could imply multi-dimensional changes, both in the level of control by central government and in the agency’s formal status. This shows that autonomy is multi-dimensional and is not necessarily defined solely by agencies’ formal or legal status (Peters, 1998; Peters and Pierre, 2001). Agencies with the same formal status might vary substantially in their autonomy, and similar agencies could vary in their institutional setting or from country to country (Pollitt and Bouckaert, 2004). Thus, in order to have a better grasp of the degree of autonomy of an agency, it is necessary to analyse not only the formallegal status, but also the extent to which the government can constrain policy matters by managerial, financial and operative means. Political preferences over degrees of autonomy might be related to some particular managerial criteria, a political perspective or to costs associated with certain degrees of autonomy. The central aim of this book is to show how political conflict shapes government agencies (for political survival in most of the cases) rather than to elaborate a comprehensive measure of autonomy. A multidimensional analysis is thus beyond the aims of this research, and it will have to wait for future projects. With this in mind, I have limited the analysis to only two of the many possible dimensions of autonomy. This decision is based upon two criteria. First, the analysis and description of different dimensions of autonomy may appear blurred and unclear in many cases, especially when undertaking research that tries to show changes over time. The data show that there may be tensions between different dimensions of autonomy in certain cases. The overlapping and fragmentation of dimensions could also lead to confusion. Second, limiting our research to a bi-dimensional analysis offers perfect graphic and analytical evidence to show how political actors shape autonomy in order to maintain or gain political authority, as

38


some level of heterogeneity persists. Similar concerns about the weak potential for understanding public organisations by looking at formallegal positions alone are expressed by Bouckaert et al. (2000), who claim that at least two other dimensions are relevant for understanding these organisations. Here, the analysis is limited to modelling how different forms of government organisations (expressed by different degrees of autonomy) emerge from political conflict between politicians and bureaucrats. The final degree of agency autonomy and the organisational form arise from a conflict between different actors involved in the process of creation, who may have differing preferences for each. Thus, autonomy appears in this book as an instrumental concept to illustrate our argument. In this sense, autonomy is measured vis-à-vis the government and, more clearly, the oversight ministry. The first dimension of autonomy refers to the legal status, and the other explores how politicians constrain or enhance that particular legal status through controls and other means. One represents the formal status of the agency, that is, the degree of independence given in a law or statute; the second represents the political autonomy that is granted depending on how many substantial faculties are retained by the principal or the agency. This dimension is consequently rather descriptive, as it shows the typical tradeoff between control and independence. The first dimension thus refers to the legal status of the relevant agency. When analysing the creation and further development of autonomous agencies, it is important to know that this axis is rather important. The legal dimension is a continuum of formal-legal types, which depicts the formal-legal status according to the laws and statutes, and it is labelled Formal Organisation Position. As expressed in Table 2.1, the Mexican legal framework recognises five legal types of formal autonomous agency.9 This axis defines different levels of formal autonomy and is based upon the coding of the basic laws and statutes for the case studies.10 The first type refers to a body with legal personality under the umbrella of the head ministry. These bodies have an autonomous status, but all their decisions are made in negotiation with the head ministry. The second degree refers to a body that has the autonomy to decide over the kind of methodologies, techniques and procedures used to aid the decision-making. Usually, these groups serve as experts or research bodies to the head ministry. They need to consult the head ministry for decisions over their resources. The third type refers to those bodies that have the capacity to decide over their resources, such as material,

Agency Creation and Bureaucratic Reaction Table 2.1

39

Degree of formal-legal autonomy

Autonomous body

Technical autonomy

Operational autonomy

Executive autonomy

Financial autonomy

Government body with legal personality under the umbrella of the head ministry

Capacity to decide over methods and techniques

Capacity to decide over its resources, inputs and processes

Capacity to execute their actions directly

Capacity to negotiate its own budget directly with Congress

Code: OAD

Code: OAD + TA

Code: + Op

Code: + Ex

Code: Budget

Growing autonomy

−→

human and financial. This implies the capacity to make decisions over staffing and expenses, within a budget that is set by the head ministry. The fourth type refers to those bodies with the capacity to execute their own decisions and resolutions. This is particularly important, as many regulatory agencies need the organisational and institutional capacity to implement their own resolutions and sanctions. This type of autonomy gives the authority to prosecute directly, rather than through the means of the head ministry. The final type refers to the capacity of an agency to determine its own budget and to negotiate directly with the Congress, as opposed to doing so through the head ministry. At this level the agency can also decide how to spend its money without consulting the head ministry. The level of technical, operative, executive and financial autonomy indicates the extent to which the organisations are exempt from constraints on the actual use of their decision-making competencies. This axis can be considered as a continuum of organisational forms that have an increasing level of autonomy, where financial autonomy is the highest degree. The types are also classified by increasing distance from the Executive Branch or the head ministry. For a further analysis it is necessary to move beyond the dimension of formal autonomy. Hence, the second dimension of autonomy refers to the extended or limited independence besides its legal status. This dimension shows to what extent the government can constrain the use of these competencies by structural, financial, legal and interventional means. This dimension helps us to see if politicians retain authority

40


in some way or another, or if this could constrain agencies’ behaviour. It has been labelled, in short, as Political Control.11 There is a wide range of administrative procedures available, and these vary from case to case. They include appointment power limits, time limits, spending limits, executive and legislative veto or direct oversight, appeals procedures, exemption and compensation.12 I have decided to use what the literature calls the managerial dimension,13 as this illustrates how politicians control agencies’ behaviour through procedures. These procedures could also be relatively easy to track through laws and statutes, rather than other more complex and informal ways of constraining independence. This axis consists of constraints on the three main aspects. First are constraints on organisational procedures of the agency, such as the control of personnel (staffing, appointment of the board, regulation over the civil service or level of salary of employees, the conditions for promoting personnel, the way of evaluating personnel and the way of appointing personnel). Second is resources (for instance, financial management of the agency, whether it is possible to interfere on decisions over loans for investments, setting tariffs for products or services, participation of private law legal persons and running costs, including managing investments, over several years). And last among the most important are procedural actions (prosecution through the ministerial means, overturn or veto of decisions made by the agency). For illustrative reasons, I have decided to assign the index a range from 0 (minimal political intervention or maximal autonomy) to 1 (full political intervention or minimal autonomy). Each of the three constraints mentioned above (i.e. personnel, resources and financial controls) counts for one-third of the total index. The end result is a set of attributed organisational scores as indicated in Table 2.2.14 The heterogeneity of dispositions in the Mexican case does not allow me to give special weight to any of the indicators, as they could be quite important in some cases and non-existent in others.15 This also avoids distortions when comparing heterogeneous agencies. In addition, as can be seen in our narrative of the case studies, politicians and bureaucrats tried to move their preferences through single statutes rather than a complex matrix of these. Actors tried to move statutes as a whole first, and then they start struggling on different dimensions of the managerial autonomy and trying to maintain or gain some authority that would provide other faculties. In some way or another, legal status is slightly linked to some managerial powers. As with the previous one, this axis can be considered

Agency Creation and Bureaucratic Reaction Table 2.2

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Attributed organisational scores

Control of personnel Ministry is represented on the board?

Staffing

Procedural autonomy The agency decides on the policy instruments to be used? (One by type of policy instrument)

If so, has the oversight minister a veto-right concerning the decisions of the organisation? Financial/Resources autonomy To what extent is the agency dependent on the government for its income The agency decides on the resources to be used? (One by type of policy instrument)

No (score = 0), Yes, no majority (score = 0.33) Yes, majority (score = 0.66), No board (score = 1) By the ministry (score = 1), Ministry and agency (score = 0.5), Agency (score = 0) Minister decides independently (score = 1) Organisation decides within conditions set by the oversight ministry (score = 0.5) Agency decides independently (score = 0) Yes (score = 1) No (score = 0)

–0–10% (score = 0) –11–50% (score = 0.33) –51–90% (score = 0.66) –91–100% (score = 1) Minister decides independently (score = 1) Organisation decides within conditions set by the oversight ministry (score = 0.5) Agency decides independently (score = 0)

a continuum of organisational forms that have an increasing level of independence. Both dimensions are depicted in Figure 2.1. In drawing conclusions, it is important to keep in mind that it is necessary to give special consideration to the main mandate given to each agency. It is also a good idea to see if other managerial dispositions and faculties are shared with the head ministry. As will be seen later in this book, in many cases, the first article of the law creating the agency implicitly states that, besides the autonomous formal-legal status, actions ‘might be made in co-operation with the head ministry’.


Political control

42

Autonomy Figure 2.1

Autonomy/control tradeoff

The formal-legal status does not have a straightforward relation to control and autonomy, and therefore it is not an appropriate measure for the discretion. I have decided to analyse this matter separately for each case, as it deserves further attention. Hence, I have presented a bi-dimensional characterisation of autonomy for the empirical analysis. Besides the characterisation of autonomy, it is important to include in the analysis how actors interact to set those levels of autonomy. I aim to explore how conflict shapes this autonomy in regulatory agencies in Mexico. The next section elaborates further the idea of politicians and bureaucrats negotiating statutes in order to define different levels of autonomy; I offer an appraisal of some factors to explain some of the variance in these levels.

2. Statutes and agency design Agency design could be seen as a game between special interest groups, each of which is organised for the pursuit of profit through the arms and agencies of the state. Sometimes, it is useful to think of agencies as the output of a struggle between rent-seekers, or groups who try to secure private profits using government agencies. Some groups try to expand their authority, whilst others try to constrain it. The challenge for the research lies in how to operationalise this interaction. Representing political behaviour with the tools of game theory and rational choice theory, combined with institutional analysis, is a standard procedure in current political analyses.16 Although an obvious simplification of human behaviour, the expanded rational choice model has proved a powerful tool for handling various aspects of political


43

behaviour.17 Furthermore, rational choice models force the analyst to think systematically about collective choices and what actions are available to ‘players’ at different stages of the ‘game’, based on predefined goals.18 I assume that actors are politically motivated. Getting involved in the process of agency creation and modification gives them some opportunity to obtain more authority over the decisions taken by an agency. Some of them might not look to have permanent control over the decision-making of the agency, but certainly at least to have influence when key decisions are taken or when they think their interests might be affected. They would prefer an organisational form that allows a maximisation of their power and influence over decision-making. For the concerns of this research, I have identified two principal groups: politicians (or, in delegation theory, principals), who want to create autonomous agencies and bureaucrats (or agents), who are in charge of implementing the agency’s mandate.19 The reason for this is twofold. First, from a heuristic perspective, restricting the number of actors to two keeps the model simple. Second, from a more inductive perspective, looking at two groups helps to reflect better the dynamic of creation of autonomous agencies in many developing countries, especially in Latin America, where president and bureaucrats have been the main actors in shaping policy decisions. Given the nature of the Mexican political system, this research then does not explore the role of the legislators nor the courts in the process of agency creation. Thus, in this model, politicians and bureaucrats try to use laws and statutes in order to gain or maintain some control over the agency’s behaviour. Actors have to agree on a point or degree of autonomy for each agency, especially when one is newly created. They will try to maximise accordance to their preferences, and their interaction will take place under some predetermined rules that are delimited by the political or institutional system. Each actor will act strategically to promote their goals, depending on their participation in every stage of the creation process. They may change their preference according to the responses of the bureaucrats in some particular economic/administrative domain. The degree of control may also be related to the organisational design learning process. Actors learn from previous experiences, reorganise their resources and rethink their actions, in order to move their aims forward in new circumstances and given new information. Another important assumption is based on the idea that preferences over levels of discretion and autonomy for each agency may diverge.

44


It is important to bear in mind that principals and agents may have different or, in some cases, opposing motivations and incentives.20 In uncertain environments, both will try either to maintain or gain power and discretion. The relative power derived from their strategic and institutionalised position in the design process will make them act differently, and, consequently, react in different ways to agency design projects. Their relative strength gives them the capacity to encourage, change or block the bills and statutes, and this may result in unexpected organisational outcomes. Each actor has to decide on a particular degree of independence for an agency. For instance, politicians may be reluctant to give extensive autonomy to some regulatory agencies, trying to avoid a blank cheque or possible capture.21 The success or failure of the creation of these new agencies depends fundamentally on the strategy followed in each agency or economic domain, rather than on the decision to create them in the administrative state as a whole. Politicians will try to look ahead, using legal procedures in order to minimise rebellious bureaucrats’ actions.22 Designing agencies’ structure is costly for politicians (in terms of time resources, the political risk of failure to complete the creation and so on). The actual level of these costs should depend on the capacity of the politicians to obtain their first institutional preference.23 Bureaucrats, on the other hand, have the opportunity of accepting or modifying the politicians’ proposals. In the end, there is no one logic of delegation, but rather multiple and diverse logics. This is partially generated by the fact that actors do not have the same preferences with regard to economic domains or over time, and also by how the other actors involved react in different ways to politicians’ preferences. Where a high degree of divergence among actors exists, politicians will try to control every single aspect of the agency’s behaviour.24 Procedures can reduce independence by making an agency rely on other bodies for information, promulgation, instrumentation or decision-making itself. In this sense, they also affect political independence, not merely agency authority over policy or regulatory decisions. In game theory terms, one is behaving non-co-operatively where one is seeking to secure differentiated gains that are not shared by all the individuals in the game. This may result in a struggle among rent-seekers. It will develop finally into a negative-sum game, or, at best, a zero-sum game. This is where the aggregate losses will be larger than, or equal to, the aggregate gains. This is why agency design is modelled here as a non-co-operative game.


45

Statute 2 Statute 1 SQ Figure 2.2

P

B

Statute preferences

Politicians will prefer some point where they can create the agency and maintain some degree of control over it. On the other hand, bureaucrats may prefer some combination where the agency is granted a more considerable degree of autonomy. This is as shown in Figure 2.2. This figure depicts examples of two possible agency discretion types, based on a statutory proposal: one that gives considerable discretion to the agency and another that gives much less.25 Both statutes have a leftmost boundary at the point named SQ, which represents the status quo. Note that a proposal offers no discretion if the right boundary is equal to the left boundary. Statute 1 has a right boundary on ‘P’, representing the politicians’ preference. Statute 2 has a right boundary at point ‘B’, representing the bureaucrats’ preference, which is far to the right of Statute 1. This statute gives the agency, and consequently the bureaucrats, considerably more discretion than does Statute 1.26 Politicians will have a hard time when their preferred option is not the same as, or is not close enough to, the bureaucrats’ preference. To illustrate this, as in Figure 2.3, I assume all possible agreement on the points where both zones of negotiations of the actors converge. Second, for Possible agreement

Statute 2 Statute 1 SQ

P

B

All possible combinations Figure 2.3

Zone of negotiations

46


explicative reasons, I also assume at this point that the agreement is also the outcome. Figure 2.3 suggests that the area of the oval to the left of P would represent perhaps an opening position but one that is better than what is hoped for. On the oval for B, the area to the right of the oval that extends beyond the bar for B would be a degree of control or autonomy that exceeds the hoped-for goal. This diagram suggests there is a meeting point but virtually no overlap between the reserve prices of each party. This may not be the case; the B might accept a lower autonomy level than the P absolutely requires, and conversely, the P might accept a higher degree of autonomy than the B absolutely requires. If we assume that the politicians’ policy utility decreases linearly as the policy moves down from its preferred outcome, then the political gain from adopting the low-discretion statute decreases as much as the distance between the bureaucrats’ ideal point and the politicians’ ideal point. If it is the case that both actors have only a small degree of disagreement, and that their ideal points are close together, then the benefits and the blame could be ‘easily split’ between them. However, it could be the case that when conflict is great, and the ideal points of both actors are far apart, then the benefits of the low-discretion statute are large. Politicians may be reluctant and uncertain about giving extensive autonomy to some regulatory agencies. They will try to avoid writing a blank cheque where possible. The same occurs when bureaucrats have different preferences over the degree of autonomy. The combination of these two factors reflects the actual autonomy according to the total provisions granted at the end. To illustrate this, consider two extreme agency structure proposals: a law with very high discretion that grants both agency and bureaucrat extensive autonomy, and a situation where one of the actors prefers a very low-discretion law that actually reinforces the existing regulatory policy even more than in the previous statutes. For illustrative reasons, we have omitted the statutes but maintained the reference for preferences of actors in the continuum. As can be seen in Figure 2.4, the bureaucrats’ ideal point is far right from the politicians’ ideal point. If we assume that politicians’ utility decreases linearly as the policy moves down from its preferred outcome, then the political gain from adopting the low-discretion statute is again decreasing by as much as the distance between the bureaucrats’ ideal point and the politicians’ ideal point. However, when conflict is great and the ideal points of both actors are far apart, then the benefits of the low-discretion statute are large.27


P

SQ

SQ Figure 2.4

SQ

B

P

B

Bu

47

P

Possible variations

Another situation that is important to consider is when politicians want to grant less autonomy than that already in the status quo. This situation could help us explain why, in some situations, although both actors may be better off with another degree of autonomy, their extreme preferences do not allow them to move in either direction. This situation is an extreme type, called trébuchet (another imaginative way of naming this last situation is the ‘Mexican standoff’, which proves illustrative for this research) because a full point (win versus loss) is at stake – an allor-nothing situation.28 In this case, either the politicians or bureaucrats will order their preference in such a way as to force a win, or, in the other case, to maintain the status quo. This extreme position sees any other point on the continuum as suboptimal. Another explanation could be that the costs for both sets of actors are greater than the benefits. Figure 2.5 depicts this situation. This figure provides an idea of how both politicians and bureaucrats may interact to decide over degree of autonomy. Before moving to an extended version of this conflict, it is necessary to summarise a series of elements. First, actors’ preferences provide an important insight about their optimal point. Unless both sets of actors have the same degree of

P Figure 2.5

No agency or status quo

SQ

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autonomy as a preference, it is suboptimal to adopt a statute that grants a different degree of autonomy from one’s best preferences. The status quo always provides the starting and reference point. Nevertheless, some actors may see that they could be better off with the status quo. Otherwise, they will start an action to modify the status quo to approach a level of autonomy closer to their preferences. From the politicians’ point of view, the second best option may be to adopt a modified version, rather than not to have it at all. This provides the basic idea as to why both groups of actors decide to negotiate with each other. At the same time, the players’ ability to push their preferences is conditioned by, and derived from, the institutional structure of each administrative domain. As conflict between actors increases, the probability of reaching an agreement close to both actors’ ideal points decreases. If there is a large difference between ideal points, we should expect interactive effects. By contrast, if the difference between the ideal points is smaller, the probability of centripetal forces pulling actors inward in order to reach an agreement is higher. Under these circumstances, the degree of autonomy of a given agency will arise from the relative power of actors. Therefore, the agency’s final degree of autonomy and power comes out of negotiations between the different actors involved in the process of creation, as they might have different preferences. When actors involved in the process of creation have the same preferences or ideal points over agency autonomy, the probability of obtaining their most preferable agency structure preference is closer to 1. As ideal points diverge, it moves closer to zero. If there is a large difference between ideal points, we should expect interactive effects. As conflict between actors increases, the probability of reaching an agreement close to both actors’ ideal point decreases. When this happens three potential outcomes are possible, namely (i) more discretion is granted than politicians initially propose; (ii) less discretion is granted than politicians initially propose; or (iii) the status quo is preserved. These cases are important. First, they form the basis of the next part of the chapter. Most importantly, they set out the grounds for analysing our case studies. Next, I concentrate on sketching the multiple possible outcomes of the interaction between politicians and bureaucrats. I then break the big framework into three smaller, analytically tractable, subsidiary models, each branching off from the encompassing frame, which is also presented.


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3. Three possible cases As reviewed in previous sections, agency creation-as-politics involves playing many simultaneous games, with shifting interests over time. So far we have analysed the degree of autonomy as an outcome based on the preferences of the actors. In this section, we elaborate and create graphic models that illustrate the universe of possible outcomes based upon the actors’ actions and reactions. Here, autonomy is not the main concern, but the ways actors react to actions taken by other players.29 I have selected an extensive form of this interaction, common in rational choice models, since it explicitly illustrates the sequential aspects of the game. The principal object of a stylisation of the agency creation process in a decision tree is to put the research in a position to analyse all the possible options and outcomes that emerge from our previous analysis. To simplify here, I treat collective choices as analogous to choices by an individual. The tree also facilitates seeing previous and posterior stages of this process. I do not pretend to solve the problem, but to illustrate the process, I provide some elements to help obtain and explain the strategies of the actors. If agency creation consistently constrains the possibility of one or more interest groups from taking part in the game, then this may be understood as a negative-sum game for at least one of the individuals, and they will then act to change an unfavourable situation. If at least one of the members of the polity considers himself to have wound up as a net loser, he will create or increase pressure to change it. At least one actor will start the reform process again if he thinks he could be better off than under the status quo. It is also important to consider that the actors involved might learn from this process. Thus, I examine here the interaction of the players at three different stages of the process. This model shares many features throughout the different stages, starting with the fact that politicians at every stage launch the process and initially move on a one-dimensional aim. I construe an agentification process under the bureaucratic reaction game. I will call this stylised framework the Amplified or Extended Game, which is depicted in Figure 2.6. I use an extensive form here to illustrate the different possibilities of outcome in a game for two players. Such representation facilitates appraisal of the process and its consequences without altering the premises. The tree also facilitates the illustration of the stages of the process. Nevertheless, note first that the model involves an extremely simplified representation of this process.

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Figure 2.6

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The extended game of agency creation

As illustrated in Figure 2.6, the decisional game begins with a preestablished situation or status quo (denoted by SQ), in which players ‘P’ and ‘B’ jointly decide whether or not to change under rules that I portray in the extensive form of the game. As in previous figures, player ‘P’ represents the politicians and player ‘B’ the bureaucrats in any given administrative domain. P starts the sequence by choosing one of two options available, namely, (1) do not start the process of agentification, or (2) start the process suggesting a statute that grants some level of autonomy. The second node represents the possible reactions from the bureaucracy, B, to this statute. The amplified game ramifies into distinct sub-games depending on the action chosen by P in his first move and the reaction of the bureaucrats. There is no assumption about the kind of proposal made by the P and consequently the kind of response from the B. I do not describe the sequence of action; instead, I create exposure to some of the sub-games of the amplified version. In the following sections, I elaborate further on this interaction. I also devote the last third of the book to an outline of each, through the narrative of empirical cases.


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3.1. Status quo or no agency creation I start with a description of the briefest sub-game of the amplified version, located at the top of the figure. This is the ramification of the politicians deciding not to create an agency. This situation may occur when politicians feel that the creation of an agency is either not necessary or where they are reluctant to grant any kind of autonomy to the bureaucracy. They can always create any other kind of government body, but without the status of an autonomous body. This situation may also occur when politicians want to reinforce some authority, instead of delegating it. It could also be the case that the bureaucrats may think that it would be better off if no agency were created, or no autonomy granted. Figure 2.7 shows the only possible option when politicians are reluctant to start the agentification process. This option represents that this P prefers to retain the status quo (SQ). There could be many reasons for politicians deciding not to create an agency. In all the cases, the cost of not creating an agency must outweigh the benefits. Politicians also need to be willing to pay the cost of not having an agency. Costs and benefits are not constant over time. When the costs of not having an agency rise, then SQ turns into an unstable

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Figure 2.7

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situation. The reasons for this could be varied – internal and external pressures, credibility and so on. If the necessity of an agency arises later, politicians could always start a process of creation at that point. SQ is not a sustainable option, as the costs of not having an agency eventually outweigh the benefits of evading the whole process. Nevertheless, politicians could also be reluctant to create an agency in a case where they perceive that bureaucrats may be unsympathetic or belligerent to their proposal. Our empirical part analyses a case where a regulator was not created. 3.2. Co-operative agency creation I now move to a description of the sub-game that is situated at the bottom of the amplified game in the first move of the larger game. This represents the situation where player P has opted to start the process of agency creation, by introducing a proposal to create an agency. In this section, I will present a slightly elaborate version of the subgame. Basically, this case reflects when the proposal of the politicians is received with no hesitation and bureaucrats decline to start a process of negotiation. Politicians here have the chance to implement their first preference. Figure 2.8 depicts this situation when agency creation is a co-operative game. This notably simplifies the exposition of the present sub-game’s sequence of play. Co-operative games are rare, as they usually lack mechanisms by which actors can enforce co-ordinated behaviour. There is a large literature exploring this kind of game (see, for instance, Bilbao, 2000). Usually, the definition of this kind of game is very general, allowing the concept to be used in a wide variety of forms. It is not the focus of this subsection to develop a theory of this kind of interaction. The objective here is to illustrate how this process takes place and that it displays similar characteristics to this kind of game within game theory. This interaction implies that the players have some kind of consensus process when choosing the strategies. It therefore requires that both politicians and bureaucrats have some basic consensus on the degree of autonomy, or that this creates no conflict between them. The proposal must satisfy both parties and pay-offs need to be positive for both players, meaning that both obtain benefits from this outcome. Pay-offs are allocated in some fair way and must benefit both parties enough above zero, such that each party can overcome his costs. The importance of this case is that it shows no reaction from the bureaucrats, meaning that politicians have the chance to implement their first preference. In the literature of agency creation and delegation,


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Figure 2.8

Co-operative agency creation

it is usually taken for granted that agency creation occurs with no resistance by other forces in the process. Our amplified game shows that there are more alternatives to this case. The next subsection elaborates the last kind of possible games. 3.3. Non co-operative agency creation The middle sub-game of the amplified version is by far the most elaborate. Here, I break this game into a more structured description of the inter-medium sub-game. This is in essence the ramification of the politicians launching a strategy for agency creation, and the bureaucrats responding in some way. The revised sub-game is still quite elementary, as this game could be extended ad infinitum. This sub-game follows an attempt by a given reform team (RT) to establish a new agency when bureaucrats react. In this section, I repeat the procedure of the previous one, presenting a modified version of the previous sub-game. Below, I will recompose the previous version so that it reflects this alteration in its actual sub-games. What can be seen in Figure 2.9 is the core of the argument of this chapter. The sub-indexes used here reflect this situation. This game starts when bureaucrats’ gains and losses are either less than or more than zero. The literature on rational choices is prolific

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Figure 2.9

Non-co-operative agency creation

in analysing these games. Bureaucrats might think that their situation could be less optimal for them if the agency is created beyond a certain degree of autonomy; the reasons could be varied. The main point here is that bureaucrats will find it more rewarding to start action against it than accepting such an agency. As the president (P) decides to create an agency, then the game ramifies into distinct sub-games depending not only on its decision, but also on the different reactions of, and possible negotiations with, the bureaucrats. One can expect to see many interactions where there is a high level of tension and disagreement. This could result in a varied outcome, depending on actors’ interactions, where no prediction could be made in advance. The extended form offered suffices to give a preliminary answer to some of the questions that opened this section. Conflict among politicians and bureaucrats during agency creation could lead to different levels of autonomy, not only across countries, but also within a country. Most importantly, this could change over time. The figure shows how many possible outcomes are possible for just a single action. Although the figure only shows one move, if institutional insulation is analysed over time, it is possible to see many more outcomes. The origin, reason and extent of these conflicts depend on many factors, and not only on the relative preferences of the actors. Different interaction needs further attention. This is the focus of our next section.

Final remarks: towards a more dynamic analysis of agentification In this chapter, I have sought to accomplish several things. The goal of this chapter was to uncover the dynamics between politicians and


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bureaucrats as the birth of an agency. Towards that end I have focused on several things. I identified the multi-dimensionality of autonomy, and chose to concentrate my attention on two concrete dimensions, namely, the legal status and the managerial autonomy. The reasons for this are twofold. On the one hand, it allows us to evaluate to what extent an agency is really autonomous, not only through a formalistic approach. On the other hand, it gives us an image of the levels of autonomy that allow comparison among and within agencies and over time. I then presented a framework that showed how the interaction between actors could lead to different arrangements that set various levels of autonomy. I selected a model that illustrates how the interaction or conflict between politicians and bureaucrats in respect of diverse statutes grant different levels of autonomy. I then sketched the amplified version of the game, a model that places these interactions into a general framework for the study of agentification and its different levels. Next, I broke this amplified game into some of its relevant sub-games, which are analytically tractable. I focused mainly on three sub-games that will help me in the empirical part of this book. The first showed the non-creation of an agency; the second illustrated the co-operative creation of an agency; and the third showed a non-co-operative version of this game. This chapter also develops the basic premise of this book through a descriptive model showing how different degrees of autonomy emerge from conflict. In addition, it complements the overwhelming emphasis of previous chapters on the political character of institutions and how the analysis of agency creation and institutional insulation has systematically neglected the role of bureaucrats in the process, overseeing the effects of this interaction. These elements are also important to set the basic elements for my further analysis of the Mexican case. I will elaborate a further discussion around the cases discussed in this chapter. In Chapters 5–7, I will adopt an empirical approach to the premises presented here. Nonetheless, cases reviewed below show that reality is even more complex than any model can ever capture. This model serves as a guide to explore reality then. The case where an agency is not created is explored in Chapter 7. The case of the Energy Regulatory Commission is illustrative and shows that when an autonomous regulator is not created, it is for more reasons that just rational decision-making following from a cost-benefit analysis. The chapter elaborates the case analysing how bureaucrats, in an industry completely dominated by state-owned companies, limited

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the privatisation process making the process of creation of a regulator literally useless. Bureaucrats in that sector managed to block privatisation in many ways, the privatisation process was aborted and the creation of the regulator rendered pointless. This case is important, not only for theoretical reasons, but in empirical terms. In the literature of agency design, it is usually taken for granted that agency creation occurs without opposition or hesitation of the bureaucrats in charge of the implementation. Chapter 5 narrates how co-operative agency creation may not be free of conflict. It also shows that ‘successful’ agency creation is a relative term. This case then proves interesting, as it describes how the creation process really happens, making evident the complexity of a process often taken as simple and easy. Most importantly, it shows how agentification can be manipulated for political purposes. This can only be seen when the whole process is analysed and when both bureaucrats and the conflict they are involved in take a central role in the analysis. Although it is a common task in rational choice theory to show how a situation can be resolved and how individuals succeed in their decision, the Banxico case shows how difficult it is to get optimal solutions. Non-co-operative or contested creation is by far the most interesting case and carries with it the most analytical potential of the extended version. This could provide not only more elements for our analysis, but also elements for a further research agenda. As can be seen in Chapters 5–7, all cases have some degree of conflict. The interesting part of these cases is not just showing the different stages of this process, but also analysing how actors ‘solve’ this conflict. Most importantly, these case studies show how costly the degree of autonomy of a regulator could be. Conflict over autonomy does affect the performance of the regulator. Chapter 6 shows this, describing the process of setting up a regulator for the telecommunications industry in Mexico. In conflicting areas or industries, it could be expected that there would be a certain level of interaction, and constant conflict. We could predict that where conflict is high, organisational outcomes are just momentary solutions. Actors will try to move the agency to their most preferred option. These games could be extended ad infinitum, showing not only the multi-dimensionality of autonomy, but also that autonomy is dynamic. Figure 2.10 locates the case studies into the framework. As an analytical concept that combines the explanatory power of political interactions and institutional approaches, political struggle merits further attention to better understand variation in autonomous

Agency Creation and Bureaucratic Reaction Chapter 7: The Energy Regulatory Commission

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Chapter 5: The Central Bank

Decision tree and case studies

agencies. By placing the motives and actions of specific actors at the centre of the analysis, I place the actors and the structures of strategic interaction that constrained them in context. I also focus on politicians’ institutional choices and the bargaining between the reformist group and the different bureaucratic groups. Both elements help to explain the varied institutional outcomes and the divergent institutions for market governance that resulted from them. The next chapters, therefore, elaborate a discussion around three major points: incentives, conflicts and outcomes. The concept and illustrative method of autonomy presented here has a twofold function. On the one hand, it serves to find sources of conflict between actors as well as their preferences. On the other, it helps to illustrate how different government bodies’ forms emerge from conflict, and their variation over time. This framework is complemented with a series of analytical tools. I will describe the actors and how the institutions where they are embedded shape their incentives. Second, I describe the process of agency creation in Mexico for the three aforementioned cases. First, an institutional analysis will help to clarify actors’ incentives according to their setting. I then analyse the basic political institutions in order to show how these shape the incentives of the actors. The analysis shows that a change in the basic political institutions affected the balance of power and that this change turned once co-operative bureaucrats into belligerent actors. A second important element is network analysis. This is particularly important, especially in a country where political careers are

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characterised for their homogeneity. I then explore the profile of the actors involved in the process, identifying two main groups. On the one hand, there are those actors in charge of moving a modernisation agenda forward, labelled reform team, and, on the other hand, we have the bureaucrats in charge of implementing it. The latter may also comprise diverse groups, depending on the industry or economic domain. It is not then expected that they present the same set of incentives, since they do not present the same profiles. Third, external and internal conditionality complements the analysis. Policy coping and institutional isomorphism are important elements in the spread of autonomous agencies around the world. Nevertheless, this process has taken place by several means. Isomorphic agencies spread following the establishment of autonomous agencies in industrialised democracies. As one agency model, it was rapidly copied in other countries and domains in a ‘snowball’ effect. The role of epistemic communities in spreading the benefits became critical. The linkages and sources of interactions could be found in many international organisations, such as the World Bank, the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF). The coercive and normative pressure for institutional reform is well documented, and it needs to be taken into account in the study. Although any of the mentioned elements and literature can help to answer the central question of this research, the use of merely one of them suffers from a number of limitations, as it plays down other important elements that take part in this process. Moreover, approaches that explain agentification without going further miss much that is vital in the understanding of this phenomenon. Thus the aforementioned three elements complete the toolkit needed for the following empirical analysis. In the next chapter, I begin describing how the process which developed the institutional conditionings that may allow, or limit, efficient commitments among politicians for the case of Mexico took place. I then move to analyse the aforementioned illustrative cases.

3 Institutions, Coalitions and Struggles in the Mexican Federal Bureaucracy

Introduction: behind the curtain of hegemony The 1990s started well for Mexico. By 1991, the positive atmosphere of economic reform placed the country in the world’s spotlight and attracted global attention to the promising Mexican economy. In only a couple of years, inflation declined from 160 per cent to 12 per cent, the public sector deficit was turned into a surplus, the GDP started to grow by almost 4 per cent after a decade of decreasing growth and private investment increased by 24 per cent.1 A privatisation programme was extensively and successfully implemented in a relatively short period of time. With the exception of some strategic sectors such as oil and electricity, most public enterprises were sold, merged, transformed or liquidated. The number of state-owned industries was reduced from 1155 in 1982 to just 60 a decade later, and the sell-off generated a total of approximately US$20.9 billion.2 The liberalisation programme of Mexico’s presidents, Miguel de la Madrid (1982–88) and particularly Carlos Salinas de Gortari (1988–94), was so rapidly and successfully undertaken that the latter was quickly compared to prominent American, European and even Russian reformist peers.3 Mexican commentators were quick to point out that the success of reforms was profoundly influenced by a favourable international environment and the way in which the technocrats running Mexico chose the best reform strategy.4 An extensive literature has focused on demonstrating that reformers took advantage of previous authoritarian polities in order to introduce and undertake some reform initiatives.5 Many scholars have argued that the relative success of Mexican economic reforms is the product of institutional features not found in 59

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other, more democratic countries (Haggard and Webb, 1994b; Ros, 1994; Santiso, 2003).6 It has also been argued that Mexico’s success in implementing economic policy cannot be understood without analysing the basic institutions of the Mexican political system (Haggard and Kaufman, 1992: 337) or taking into account the ‘hegemony of a single, exclusive policy paradigm’ in the de la Madrid and Salinas administrations (Babb, 2001; Barber, 1989; Centeno, 1994: 40; Domínguez, 1997; Montecinos, 1993). Nevertheless, a closer analysis of the process of reform reveals a completely different picture. Whilst the role both of reform teams and of high-level bureaucrats proved critical for the rapid and effective instrumentation of the economic reforms, several structural changes arising from the process of political and economic reform affected the balance and structure of power inside the central bureaucracy and were met with some resistance, which limited their scope. The centralised character of the Mexican political system helped to consolidate the power of the president as well as the bureaucrats. Hence, high- and middle-level bureaucrats formed powerful political groups that could define which policy would be taken into account. How did these battles unfold and what can be learned about political power in the creation of regulatory entities? This is the focus of the chapter. Bureaucrats reacted to the reforms that affected their interests – this fact is often neglected by the analysts, yet it was well known to the reformers. Struggles within the bureaucracy and between presidents and bureaucrats were not unusual in the post-revolutionary period, yet bureaucrats remained obedient servants as long as the balance of power was not altered. The scope of the reforms took these struggles to new heights, transforming them into battles for political survival. The chapter unfolds in the following order. First, I review how the inner dynamic of the Mexican central public administration was derived from a series of events that took place early in the twentieth century, shortly after the Mexican Revolution, and further developed during the long governmental tenure of the Partido Revolucionario Institucional (PRI). Second, I analyse how a series of events altered the equilibrium within the bureaucracy, resulting in the supremacy of one bureaucratic group over others. The reformer teams decided to start a reform agenda that deepened the struggles in the bureaucracy.

1. The institutional foundations of bureaucratic politics Before the breakdown of the authoritarian regime and the transition to a more democratic one, the Mexican political system was renowned for

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the stability of her one-party political system, which seemed to have found the coveted elixir for combining political stability and economic growth, especially in a region characterised by political disruptions (Huntington, 1968).7 It is widely believed that Mexican presidents controlled all the political, economical and social levers of the country and that the Party, Congress, bureaucracy and the judicial branch were always compliant.8 According to this approach, these extended faculties gave the president the power to control corporatist sectors, labour unions and peasant organisations and gave him the opportunity to negotiate directly with business associations.9 Based on these assumptions, several scholars have characterised the Mexican political system as anti-democratic, corrupt and authoritarian – a ‘perfect dictatorship’ with a democratic façade.10 There is no question that the presidents of Mexico exercised an extraordinary range of powers. Although originally weak, legal and extra-legal faculties created conditions which prevented others from acting as collective players against Mexican presidents. The postrevolutionary period can thus be characterised by an over-concentration of power in the presidency, and it is important to analyse this further. 1.1. The expansion of the presidential powers Presidential powers were supplemented by two important elements: first, the lack of electoral competition, based on an official Party11 as an ‘electoral ministry’ and the regulator of political conflict; and second, a set of unwritten rules, also known as ‘meta-constitutional powers’.12 These included the possibility of appointing and removing governors, members of the judicial branch, peasant and union leaders. With the president as the direct leader of the Party, it was also possible to appoint candidates for the Congress and the Senate, and to control Party actions.13 Three conditions were necessary for presidencialismo to occur.14 First, a unified government; second, Party discipline; and finally, the ability of the president to set the Party’s agenda and to punish unco-operative behaviour by the members of the PRI’s legislative caucus (Molinar Horcasitas and Weldon, 2001; Weldon, 1997b). Based on these elements, the regime achieved a lasting stability, combining political survival and economic development.15 ‘The Mexican president was therefore the linchpin of an inter-temporal agreement that succeeded in reassuring key interests that the bargain they had struck with the regime would continue’ (Lehoucq et al., 2004). Mexican presidents were certainly not omnipotent actors, and they did face several constraints on their authority. As scholars have

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documented, Congress, the Supreme Court, the central bureaucracy and corporatist organisations all challenged presidential powers at some point during the PRI regime (Castañeda, 1995; Cordera and Tello, 1981; Weldon, 1997b). For instance, it is usually assumed that the president reformed the Constitution with only superficial changes to the amendment by Congress, while bills were often passed on the nod. Nevertheless, Weldon (1997a, 1997b, 2004) has documented how Mexican legislators opposed the president’s will despite the institutional matrix sustaining presidencialismo. Staton (2004) has shown how judges were politically active actors. Yet, due to the loyalty of all such political actors, a series of arrangements allowed a no re-election clause and political control of the Party. For instance, during the 39th Legislature (1934–37), the first such to be subject to the prohibition on consecutive re-election of elected officials, the success rate for Executive-sponsored legislation rose to 95 per cent.16 Thus, the most powerful constitutional tool that the Mexican president had for dealing with Congress was the package veto. As argued by Weldon (2003), it was a reform that the national PNR leadership expected would rein in unsympathetic legislators, and which helped to subdue Congress for most of the twentieth century. Moreover, during presidencialismo, the PRI came to monopolise all committee chairs and all positions of influence within Congress and the judicial branch, which was advantageous in those situations in which they needed to gain a large majority approval. Something similar happened with the judicial branch. Although the 1917 Constitution guaranteed its formal independence, Congress exercised political control over it, mainly through the rules on appointment, tenure and impeachment of judges. These procedures were monopolised by the presidency, with the approval of the Congress, which was also controlled by the Executive. This scheme evolved from a series of events during Plutarco Elias Calles’s term (1924–28). First, he amended the Constitution in such a way that the president could nominate judges, subject to the approval of a simple Senate majority. At the same time, the president obtained the power to request that Congress dismiss judges, as happened during Lázaro Cardenas’s presidential term (1934–40) when he discharged all the members of the Supreme Court. Consequently, the tenure of judges of the Supreme Court was changed to a six-year term, concurrent with presidential terms. Thus, the presidency, both de jure and de facto, secured the loyalty of both the legislature and judiciary.17 The foregoing factors resulted in a highly centralised decision-making process around the Executive, and narrowness and secrecy in relation


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to decision-making in a strong central bureaucracy (Lehoucq et al., 2004). The supremacy of the Executive Branch over other branches of government and the centralisation of political activity shaped the central public administration’s structure. For instance, the Desarrollo Estabilizador economic model, from the mid-1950s to the early 1970s, was a successful one, at least in terms of the few actors involved and the secrecy and independence of the process.18 Thus, the key players during the PRI regime were the successive presidents and their cabinets. 1.2. The bureaucratic control As a consequence of the expansion of presidential power, the central public administration was relatively isolated from the pressures of the political system. Hence, during the 1960s, the continued institutionalisation of political control consolidated the role of some particular secretariats and governmental bodies, such as the Ministry of the Interior (Secretaría de Gobernación, SeGob) or the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, SHCP). This tendency continued until Gustavo Díaz Ordaz’s term (1964–70); he consolidated political control of the bureaucracy, largely basing it in the staff of the Ministry of the Interior over other government branches. Through a series of unique characteristics, the PRI ensured internal stability combined with mobility for its governing members. Paramount was the fact that the PRI’s presidential candidate was selected from within the ranks of the administration. This introduced a powerful incentive for the system to attract and retain well-qualified candidates (Hernández Rodríguez, 1984, 1993b). Another factor contributing to stability was the regulations barring consecutive re-election within the Mexican Congress. Elected office was therefore used as a stepping stone to other political positions (Smith, 1975, 1979).19 Between major turnover in key positions expected at least every six years, and the selection of the presidential candidate from within, the PRI treated its career politicians/bureaucrats well. Cabinet officials were freely appointed by the president, needing no ratification by any of the other branches of government. Indeed, the president appointed not only the cabinet, but a wide assortment of middle-ranking officers in the secretariats, other cabinet-level agencies and parastatal enterprises (Carpizo, 1983; Hernández Rodríguez, 1994). This extensive appointment prerogative provided a formidable degree of freedom to the president. At the same time, this was an important

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factor in ensuring the discipline of the cabinet, since its members could be removed at any time. The centralised character of decision-making engendered an asymmetry among bureaucratic agencies and, in many ways, resulted in a specialisation by policy area or ministry. For instance, the Ministry of the Interior dealt mostly with political matters while the Ministry of Finance focused on economic issues. The Ministry of the Interior played the most important political role, since within its ranks were located the intelligence agencies that kept supporters and opponents under surveillance. It was the most important ministry for the political members of the cabinet (Ortiz Mena, 1998). It was staffed by the experienced political operators of the PRI and by highly educated policy and public management experts from the federal administration. The Ministry of Finance, on the other hand, which controlled revenues and expenditure, exercised political power inasmuch as it could facilitate or block actions of state agencies. In doing so, it controlled the career prospects of its heads.20 The interior and finance ministries together operated to check and balance the power of the president. Other ministries had a limited influence, while agencies were relegated to an even more technical nature. The foregoing factors shaped the inner dynamic of the central public administration as well as the careers of the bureaucrats. Given these tight structural controls, how can there have been significant struggle between bureaucrats and politicians in forming new agencies? To understand this fully, more of the picture needs to be outlined. 1.3. The profile of the bureaucrats A traditionally and commonly discussed notion of Mexico’s public administration is that political recruitment within the Mexican government takes place by being close and/or in direct contact with the governing elite and, more specifically, with the president.21 According to this approach, the Mexican political system was based on a ‘camarillas’ scheme – one that revolves around a dedicated group of employees working under one leader (see, for instance, Branderburg, 1964; Camp, 1993; Grindle, 1977a, 1977b, 1977c; Smith, 1979). In this vein, political groups worked together, both within the administration and the Party, to support elected political officers to whom they owed loyalty. This scheme, in the eyes of these scholars, seemed to be an inefficient and unprofessional system, since it was built on a ‘patronage’ basis, resulting in high turnover rates of bureaucrats and poor training of officials (see mainly Camp, 1982; Grindle, 1977a; Smith, 1975,


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1979; Suárez Farías, 1991). But regardless of these downsides, from this point of view, the so-called camarillas were a fundamental component of the political system that was useful in assuring political compliance. Recent studies put these assumptions to the test, showing that highlevel bureaucrats rose through the ranks of the public administration after long careers with increasing complexity and responsibility. Studies examining the careers show that access to the higher levels of administration was conditioned by a number of requirements. These studies further showed that high-level bureaucrats presented stable, administrative backgrounds, with long careers spanning more than two decades (Ballinas, 1998, 2000; Camp, 1982; Greenberg, 1970; Hernández Rodríguez, 1984; Luna López, 1997; Smith, 1982).22 There was low staff turnover, and steady promotions (Ballinas, 2001; Hernández Rodríguez, 1994). Once appointed, officials served an average of 40 months in office, the longest term in Latin America (including Chile), and three times the average of the region (Naim, 1995b). Along with the patterns of mobility and permanence in each position, this illustrates that promotions were gradual, as well as consecutive, and that they were vigorously controlled (Hernández Rodríguez, 1984, 1993b). This issue was not limited to the highest levels of administrative hierarchy; rather, it was reproduced at the levels of immediate subordinates and the middle ranks – including undersecretaries, director-generals and directors (cf. Ballinas, 1998, 2001; Greenberg, 1970; Hernández Rodríguez, 1984, 1993b). Promotions and directions revealed a clearly defined distribution of talent and knowledge, designed so that privileges and incentives increased as the difficulties and responsibilities increased. Officials held their posts long enough to become knowledgeable and trained, and to have demonstrated expertise and ability.23 The most senior government appointments were set aside for political appointees who came up through the ranks of the administration in the areas in which they discharge their duties. Mexican presidents appointed secretaries and filled upper-level positions from a pool of trained officials, rather than choosing from among persons close to them. This process derived from the fact that the president could not himself know enough people to fill all such positions (which represented a weakness), and it was necessary to have trained personnel who could maintain the stability of the regime. Closeness to the president was important to unsure rising through the ranks of the public administration yet this did not translate into blind loyalty to the president (Hernández Rodríguez, 1984).

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Hence, director-generals were potential sub-secretaries, who in turn were potential secretaries, each of whom could possibly become president. The resulting system might have become a successful example of a flexible and informal, albeit effective, civil service which combined effective stability with non-existent rules of tenure (cf. Ballinas, 1998, 2000, 2001, 2002; Greenberg, 1970; Guerrero Amparán, 1997; Hernández Rodríguez, 1984, 1993b, 1994, 1997, 1998; Lindau, 1992; Luna López, 1997; Smith, 1982). Figure 3.1 illustrates this dynamic. The system was based on the specialisation and experience of bureaucrats, who prevented the rest of the system from collapsing and were rewarded with high political rents (Ballinas, 1998, 2001, (2002), 2003; Hernández Rodríguez, 1984, 1993b, 1997; Lindau, 1992; Luna López, 1997). These arrangements helped to define the career patterns within the administration as well as to create niches of political power inside the bureaucracy. The system proved stable, at least until 1982. 1.4. The bureaucratic dynamic and the balance of power The world economic recession of the 1970s had devastating effects on the Mexican economy. This put great pressure on the regime, as it

President

Minister

POLITICAL Interior Labour Foreign Affairs

Figure 3.1

FINANCIAL ECONOMIC SOCIAL Finances Telecommunications Health Planning Mining Poverty Trade Energy Environment

DECENTRALISED Social Security Oil Electricity

Promotion patterns within the Mexican central bureaucracy, 1942–82


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resulted in a deep financial imbalance and an enormous public debt (Cárdenas, 1994; Ortiz Mena, 1998). The crisis inevitably raised questions regarding the models of economic development and opened the possibility of realignments in the central bureaucracy. The nationalist/statist approach and the opposing liberal view became the two main camps in this debate. The nationalist model was present throughout the post-revolutionary period, and it established the principle of state intervention in the economy.24 The liberal model established the internationalisation of the economy through an open market. The central bureaucracy turned into an arena of conflict between these opposing projects (Cordera and Tello, 1981). The nationalist bureaucrats in the government suggested that increased intervention of the state was needed to tackle the crisis caused by declining commodity prices (Hamilton, 1982). The nationalist model had nonetheless come into question because of its heavy dependence on the state as an engine of development (Bartra, 1982: 25). Critics of the nationalist model also complained that the model encouraged inefficiency, waste and high costs, translating into higher prices for consumers. Bureaucrats in the financial sector of the central bureaucracy (particularly the Ministry of Finance and the central bank) were among the major proponents of the open-market model of development. Struggles inside the government were, nonetheless, not new. During the decade of the ‘Mexican Miracle of the 1950s’, as well as later on during several attempts to tackle the crisis and the destabilisation, the Ministry of Finance consolidated not only its place in the cabinet, but obtained a degree of autonomy from the other ministries and the presidency. The increase in technical know-how with regards policymaking for matters of public finance permitted the accumulation of enormous political power. Presidents lost some control over the internal decision-making process and made strenuous attempts to recover it. For instance, once elected in 1970, Luis Echeverría Alvarez, a former Secretario de Gobernación, managed to expand public sector expenditure, and attempted to manage aggregate demand as a means to recover some political legitimacy. Attempts to open internal markets to external competition were sidelined.25 Instead, an excessive microeconomic intervention was increased in most sectors within the economy, and an apparent change to more socially oriented policies was proclaimed. A change in personnel within the bureaucracy ran parallel to these changes.26 The designation of Luis Echeverría Alvarez as the candidate of the Party for the presidency brought new efforts to regain control over

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the process in the finance ministry. Most of the economic teams who had been managing economic policy under the previous model were replaced. During the process of selecting the presidential candidate prior to the election, both Echeverría (from Gobernación) and Antonio Ortiz Mena (from Hacienda) were considered as potential candidates. Once selected, Echeverría drew up the blueprint for his government and realised that the SHCP could stand in his way. Therefore, he convinced President Díaz Ordáz to remove Ortiz Mena from the post of finance minister. By this decision, he was trying, first, to eliminate the other contenders in the presidential race; second, to disassociate from the government the private groups that were supporting Ortiz Mena; and, third, to recover control for the presidency over the finance ministry’s decision-making. The removal of Ortiz Mena resulted in a succession of struggles inside the ministry and with other bodies of the Executive Branch. In any case, the selection of Echeverría and the removal of Ortiz Mena, the longest-serving Finance Secretary in Mexican history, represented a clear victory for those bureaucrats who were trying to recover control over financial decision-making. Struggles inside the government continued throughout the 1970s. Cordera and Tello (1981) have narrated the details of this struggle, which they called La Disputa por la Nación, where bureaucratic groups fought to control the destiny of the country. Traditionally, the Minister of the Interior presided over the most influential ministry. However, in the mid-1970s, the Secretariat of Programming and the Budget (Secretaría de Programación y Presupuesto, SPP) was created to co-ordinate all government agencies, supervise the budget and design the national development programme, but specifically to counterbalance the influence of the Secretariat of Finance. Hence, this ministry was the launch pad for the three presidencies of de la Madrid, Salinas and Zedillo (Ballinas, 1998, 2001; Centeno, 1994, 1996; Centeno and Maxfield, 1992; Hernández Rodríguez, 1984, 1993b; Luna López, 1997; Rousseau, 1998). Miguel de la Madrid, Carlos Salinas and Ernesto Zedillo had held several financial and economic posts in the Mexican government prior to their selection to succeed their predecessors; among the positions they held were Deputy Finance Secretary and Secretary of Planning and the Budget. During López Portillo’s administration, the nationalist faction tried to face the attack of the liberals in the financial sector of the government. It has been said that with the creation of the Secretariat of Programming and the Budget, the presidency attempted to recover the control of government finances (Hernández Rodríguez, 1993a). More importantly, it


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was a way to signal to the finance ministry that the economic decisions were still taken by the president. Carlos Tello Macías, one of the most influential bureaucrats, had to resign, only briefly holding the post of Secretary of Programming and the Budget, over an economic policy dispute with the Finance Minister, Silva Herzog.27 The new decade brought this struggle to new heights. On 1 September 1982, in his last State of the Union address, after the election that had selected his successor, President López Portillo announced the nationalisation of Mexico’s private banks. This move took the nation and the President-elect, Miguel de la Madrid, former Minister of Programming and the Budget, by surprise – even more so than the bankers themselves. The cabinet and the President-elect, Miguel de la Madrid, and his campaign co-ordinator, Carlos Salinas de Gortari, had been informed of the decision to nationalise only hours prior to the President’s speech, at which time he asked for the resignation of those who opposed the move.28 The nationalisation decision seemed rather to have been influenced by the nationalist sector within the government, particularly Carlos Tello Macías.29 Tello was appointed director of the Banco de México (Bank of Mexico, the central bank), which in turn was transformed into a decentralised agency controlling the newly nationalised banks. The nationalists would command the biggest of all state agencies. As noted by Robinson, the director of the central bank ‘was being given the heart of the private sector on a plate’ (Robinson, 1982: 48). However, that would last for only a couple of months, until the new government took over. These events prepared the ground for future episodes. The conception of Tello and other nationalist advocates that banking should become an instrument of social and economic reform confronted the orthodox financial philosophy of the finance ministry. In that era, governments throughout the world had displayed a growing optimism about the prospects for market-oriented reforms, and the incoming governing coalition identified with this approach.30 The nationalisation of the banks actually represented a late, desperate and ultimately doomed effort by the nationalists to reverse an imminent event: the arrival of the liberals to the top of the government. This event shaped the formation of the reform team for the next two administrations, as presidents wanted to have more cohesive teams, so as to avoid disputes within the government. The full implications of this measure would be realised in the subsequent administration of Miguel de la Madrid and Carlos Salinas, analysed next.

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2. Structural reforms and a shift in the patterns within the bureaucracy Before looking closely at the implications of these events in Mexico, it is necessary to take a step back to understand how the literature on structural reform in Latin America came to characterise the process. This will help reveal its limitations. In the literature on structural reforms, there is general agreement that the success thereof was profoundly influenced by the ability of the elite or reform team to deal with the different interested parties who would be affected, such as legislatures, political parties, interest groups, national governments and international institutions. Studies on market reforms in developing countries have consistently stressed that, to advance liberalisation initiatives successfully, it was necessary to insulate reform teams from countervailing pressures. Such reforms were intended to stabilise the economy after a decade of cyclical crises. They were geared towards strict fiscal discipline, broad deregulation programmes for trade and investment, and the privatisation of public enterprises (Naim, 1995b: 5).31 Reform teams played a critical role in moving the reform agenda forward and presidents had to be skilful enough to insulate these teams from countervailing pressures (Haggard and Kaufman, 1992, 1995; Haggard and Webb, 1994b). The role of change teams in Latin America has been extensively analysed.32 Studies have underlined how market reforms were generated by the Executive dispatching reform teams rather than by legislatures, political parties, interest groups or think-tanks.33 Researchers have pointed out that reformers concentrate authority for economic management in ‘change teams’, which are protected from political pressures both from outside and within the government itself, facilitating the reform process (see mainly Centeno, 1994, 1996; Domínguez, 1997; Grindle, 1977a, 1977b, 1977c, 1980, 1996, 2000a, 2000b; Grindle and Thomas, 1991; Naim, 1995a, 1995b; Williamson, 1994).34 Economic reform leaders typically introduced their reforms through Executive decrees rather than the legislative process; consequently, the cabinet and immediately subordinated posts became extremely important because they become the principal architects of the policy decreed by the president.35 Thus, the notion that presidents lead, delegate and protect while technocrats formulate and implement policy has obtained a prominent position in the reform literature (Bates and Krueger, 1993; Haggard and Kaufman, 1992, 1995; Manzetti, 2000; Waterbury, 1993; Williamson, 1994; Williamson and Haggard, 1994).


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2.1. The formation of the reform teams In the throes of attempting to introduce major economic policy reforms, both Miguel de la Madrid and Carlos Salinas granted their cabinets extensive powers. Both presidents concentrated power in technocratic teams inside the Executive, in order to design policy packages and negotiate with international financial institutions. Economic reform would have been impossible without the centralisation of power within a small nucleus inside the bureaucracy that was able to establish internal ideological homogeneity and to impose that vision on the rest of the regime. During the reform, the cabinet and its immediate subordinates were, like the reform team itself, appointed from among personnel with the same profile as the incumbent president. In fact, close personnel were placed in strategic offices, such as the Treasury, Programming and Budget, Energy, Trade, and Communications Ministries, and the Central Bank. In addition, the manner in which the reforms were introduced helped to raise the institutional predominance of the economic branch of the government and to push its officials to the top of the government (Ballinas, 1998, 2000, 2001; Centeno, 1994, 1996; Domínguez, 1997; Hernández Rodríguez, 1984, 1987, 1993b; Luna López, 1997; Morales Camarena, 1994). For instance, at the beginning of Miguel de la Madrid’s administration, there were clearly five different reformer groups in the cabinet, each in charge of different portfolios and aspects of the reform process, such as trade, economy, finance, and political and social elements. Each group was in charge of a completely different reform agenda, but all were centrally co-ordinated. Among the reformers were Jesús Silva Herzog and Gustavo Petricioli (Treasury), Carlos Salinas de Gortari (Programming and Budget), Alfredo del Mazo and Francisco Labastida Ochoa (Mines and State-owned Companies), Héctor Hernández Cervantes (Trade), Daniel Díaz Díaz (Communications and Transport), Manuel Bartlett Díaz (Interior) and Miguel Mancera Aguayo (Central Bank).36 Members of the president’s team were also placed in other non-strategic secretariats that were nonetheless of importance for the reforms, such as Manuel Camacho Solis (Ministry for the Urban Development and the Environment, SEDUE), Francisco Rojas Gutiérrez, and Ignacio Pichardo Pagaza (the Comptroller General, SECOGEF). The reform agenda had as its common denominator the need for sophisticated and technical leadership and extensive control of the state’s capacities.37

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Carlos Salinas decided to deepen the economic reform and, consequently, the profile of his reform teams. During Salinas’s term, analogously, technical-economic personnel were placed in key administrative positions, whose control would be vital for legislative approval of reforms. These included Pedro Aspe at Finance, a holdover from de la Madrid; Manuel Camacho Solís, Regente of Mexico City; Jaime Serra at Commerce; Ernesto Zedillo at Budget and Planning;38 and Luis Donaldo Colosio, who would later be president of the PRI, was made the first secretary of the newly created Ministry of Social Development. María de los Ángeles Moreno went to the Secretariat of Fishing, and Patricio Chirinos to the Secretariat of Urban Development and Ecology. The strategy for a successful reform was to place members of this team in those areas of government where they were able to carry out economic reforms. These same people had to approve specific privatisations, and they provided input to the economic cabinet for the implementation of specific programmes. At the same time, the Regente of Mexico City was in charge of part of the political reform agenda. Completing the team, Jaime Serra Puche was in charge of trade liberalisation; José Ángel Gurría of renegotiating the debt; and Guillermo Ortiz in charge of the re-privatisation of banks. They and the president shared similar backgrounds, and each staffed his ministry with technocrats through the secondary and even tertiary levels. Even more important was José Córdoba Montoya, the Chief of Staff to the President, who served as the Minister of the Interior and was de facto in charge of the whole reform agenda. During Salinas’s term, politicians identified with the traditional elite were included, such as Carlos Hank González, Jorge de la Vega (who had also been in charge of the PRI’s presidency during the campaign), Enrique Álvarez del Castillo and Fernando Gutiérrez Barrios, the only one entrusted with an important secretariat, albeit one with limited functions.39 Table 3.1 details the differences between both groups of officials. As could be appreciated, the main strategic ministries for structural reform were controlled by a small group of people who had had the same type of educational background and similar careers, but who had little training in the areas to which they were assigned. Reform teams were closer to the president, had similar careers and, more importantly, were in charge of the most delicate, strategic and sweeping reforms. Other members of the cabinet included specialists in each area and politicians recognised as the ‘traditional elite’. While the ‘political’ personnel could not be fully entrusted with strategic economic areas, they were essential

Struggles within the Mexican Bureaucracy Table 3.1

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Carlos Salinas de Gortari cabinet, 1988–94

Salinas’s inner circle

Pedro Aspe Manuel Camacho Jorge Carpizo Patricio Chirinos Luis Donaldo Colosio Emilio Gamboa Emilio Lozoya Ignacio Morales Ma. de los Angeles Moreno Jaime Serra Diego Valadés Ma. Elena Vázquez Ernesto Zedillo Other members of the cabinet Enrique Álvarez del Castillo Manuel Bartlett Andrés Caso Víctor Cervera Arsenio Farell Patrocinio González Fernando Gutiérrez Barrios Carlos Hank González Fernando Hiriart Guillermo Jiménez Pedro Joaquín Coldwell Jesús Kumate Miguel Montes Fernando Solana Jorge de la Vega

Career type

Previous offices Career in years (average) (average)

Bureaucratic

5

11.5

Electoral + Party + Bureaucratic

9

25

Source: Hernández (1994: 198)

to ensuring the political agreements that would consolidate the reforms. In Salinas’s administration, this is even evident where the influence of the second group was also limited, and their decisions were, in many ways, subordinated to those made by the first group (Babb, 2001; Barber, 1989; Haas, 1992).40 The cohesion of the reform team was based on its homogeneity and common ideology. Put simply, the reform teams were in charge of

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the operative part of the reforms and the creation of the new institutions, but they were centrally co-ordinated by the Finance/Programming and Budget/Presidency groups. This resulted in an arrangement with a certain complementarity between the Finance/Programming and Budget/Presidency nexus.41 Its momentum was employed to overcome some of the still-significant opposition from middle-level managers and bureaucrats from the Industrial Development sector (leftovers from the Echeverría-López Portillo era), and from most of the ‘patrimonialist’ agents still in power. 2.2. A change within the central bureaucracy The rise of a new generation of officials using a complex organisation for structural reform, often characterised as technocrats, imbalanced the structure of power within the central bureaucracy. The formation of the reform team had a direct impact on team members’ careers in the central bureaucracy. This observation is upheld by analysing the career patterns of both cabinets. Ministers obtained fewer years of experience in the public administration, with very low turnover in those areas considered technical – the Treasury, Communications and Agriculture departments – and only medium turnover rates in those that were not. The reform team was predominantly peopled by those with careers in the so-called ‘economic cabinet’, and who had an increasingly specialised educational background (Ballinas, 1998, 2000; Centeno, 1994, 1996; Luna López, 1997). The data leading to this conclusion came from three different research areas. First, Ballinas (1998, 2001) and Hernández Rodríguez (1993b) show that contrary to the patterns presented in the period from 1946 to 1982, the profile for the upper-level bureaucrats changed during Miguel de la Madrid’s presidential term, and more dramatically during Carlos Salinas’s, confirming that members of the reform team who came from the financial part of the government were appointed in the ministries where reforms would take place. The top bureaucrats in the secretariats in which reforms were taking place (Agriculture, Communications, Urban Development, Energy, Agrarian Reform) did not have officials who had risen through the ranks of the same agencies, but, rather, ones who came from other agencies (Hernández Rodríguez, 1993b: 464). This can be seen in Figure 3.2, which depicts how, in the throes of the creation of the reform teams, the inner dynamic of the central public administration was altered. This figure should be compared with the previous Figure 3.1. The contrast between the previous figure and this one demonstrates the sea change: where once top members of the ministries


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President

Minister

POLITICAL Interior Labour Foreign Affairs

FINANCIAL ECONOMIC Finances Telecommunications Planning Mining Trade Energy

SOCIAL Health Poverty Environment

DECENTRALISED Social Security Oil Electricity

Figure 3.2 Promotion patterns within the Mexican central bureaucracy, 1982–2000

rose through the ranks of their respective specialties, suddenly the top people of every ministry were all recruited from the finances wing of the government. Moreover, one-quarter of the cabinet members had not had previous contact at all with the secretariat to which they were assigned, although some had developed their careers together with, or close to, those of other officials. The differences with the career patterns of the bureaucrats were even more dramatic during Carlos Salinas’s administration. On the one hand, the second circle was characterised by officials recognised as specialists in the area in which they worked, as well as politicians who identified with the traditional elite. They stood out by their extensive careers in administrative, electoral and party settings, in an important respect: the lengths of their careers were double those of the first group. According to Ballinas (1998, 2000, 2001), Hernández Rodríguez (1984, 1987, 1993a, 1993b) and Luna López (1997), the rest of the bureaucracy remained unaltered, especially in its mid-level areas. It was not possible to remove all the bureaucrats at the central public administration, as some level of expertise was needed to continue performing ministries’

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basic tasks. Although the formation of reform teams proved fruitful in the short term and for the implementation of macroeconomic reforms, it altered the balance of power in the central bureaucracy, as shown below. 2.3. Struggles in the bureaucracy: round two The formation of reform teams created new tensions with the bureaucrats who were still in the government and who had differences with the liberal reform project. Because of these differences, once in power, de la Madrid started removing bureaucrats opposed to privatisation and liberalisation from the highest bureaucratic levels and from governmentowned companies. Such reforms hinged on personnel committed to the plan of reforms.42 The retention of Jesus Silva Herzog was a clear signal to the national private sector and the international community. The banking community was particularly pleased by the return of Mancera as Director of the Banco de México, replacing the controversial Carlos Tello. Although the arrival of Miguel de la Madrid as president represented the emergence of a group that had won a great debate over the ‘destiny of the nation’, it did not mean that opposition to liberalism had been eradicated from the central bureaucracy. Rather than demonstrate contradictions in the efforts of state officials to come to grips with Mexico’s economic crisis, the last three months of the López Portillo administration made evident the struggles among bureaucratic groups focused on their own survival (see Cordera and Tello, 1981). The nationalisation of the banks and the establishment of exchange controls represented a late effort, not to reverse a crisis caused by the fall in commodity prices already far advanced, but to try to recover some control over the decision-making that the new liberal coalition had started to dominate (Elizondo, 1993). Public sector expansion in the 1970s created a dense network of vested interests inside the state, where careers, institutional prestige and budget allocations were linked closely to these structures.43 Contradictions within the state limited the scope of the ‘nationalist interlude’ of the bank nationalisation, and in many ways strengthened the liberal approach. During the de la Madrid administration, ministries still had wide discretion. The economic reforms were carried out relatively promptly and without political interference. The reforms concentrated the political faculties and capacities into a unique political structure of reform based on teams being placed strategically at the top of ministries. The fact that


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reform teams were placed at the top of the ministries and hence only infiltrated the higher levels of officials, however, left intact the pattern of the mid-level officials, in order to preserve continuity and stability. This did not put an end to the struggles inside the bureaucracy, however; in many cases, officials at the second levels of the bureaucracy raised questions about the consequences of this process (MacLeod, 2004; Teichman, 1995, 2001). In the de la Madrid years, the privatisation debate within the political bureaucracy was largely shaped by bureaucratic imperatives, but it was also influenced by the probability of bureaucratic resistance from mid-level bureaucrats who may have been opposed, if not to the whole reform plan, to the way and pace at which it would be undertaken. From the beginning of the de la Madrid administration, reformers were unsure whether to reform many areas, given the potential political resistance. Mid-level bureaucrats were still in place, as they were not affected by the massive removal of first-line bureaucrats that occurred at the beginning of that administration. The result of replacing this second level would have been disadvantageous, as the expertise of these bureaucrats would be needed for implementing the economic reforms. Also, as highlighted by MacLeod (2004), the system governing the parastate sector was fragmented and created serious problems of co-ordination. Even after the removal of first-line secretaries, ministers made the reform teams dependent on information, selection and criteria from those who probably were not in favour of the reforms. The remaining mid-level bureaucrats put up resistance, at least to the pace of privatisation.44 Although the cabinet and sub-cabinet identified ideologically with each other, the fluidity and mobility was brought to a standstill in the remaining levels of the federal public administration. Some mid-level bureaucrats may not have identified with the nationalists, but they may have thought that the reform should be going in a different direction, or at a different pace. Differences in background also resulted in differences in opinion about the way the reform was taking place. Ideologically, they were two complete sets of bureaucrats, and their background and perceptions of reform may have impacted on their actions.45 Economic reform then met the resistance of those bureaucrats concerned not only about their employment, but also about the future of institutions. This happened across distinct policy arenas when trying to liberalise the economy. However, by the second part of the Miguel de la Madrid administration, when other bureaucratic groups, headed by

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Carlos Salinas, were in charge of the whole reform process, the liberal ideology finally prevailed (Centeno, 1994, 1996; Centeno and Maxfield, 1992). Having learned from his experience as Minister of Programming and the Budget, Carlos Salinas tried not only to fill strategic positions with personnel of the same profile, but also to alter the whole decisionmaking process inside the central government, restructuring the flow of information and concentrating decision-making in a handful of people. Through rule-changing, instrument-creating and strategising behaviour, they helped engineer their own autonomy and gained control of the policy agenda by changing the organisation of the decision-making and administrative structures. This minimised the possibility of bureaucratic resistance. Salinas consequently decided to centralise and co-ordinate the reforms with the assistance of just a few people placed in strategic ministries.46 The finance, trade and economy ministries and ministers were given discretionary powers, while other ministers and mangers delegated their legal power to the core team.47 Hence, the crucial moves came not only from Salinas himself, but also from Finance Minister Pedro Aspe. Aspe actually proposed establishing new procedures to govern the reform process.48 Following Aspe’s advice, Salinas thus narrowed the parameters of state proprietorship to those entities mandated by the Constitution.49 Moreover, there was some dogmatic rigidity in areas that policymakers had once regarded as strategic, leading to the imposition of some written and unwritten boundaries to secure control over the reform process and ensure that no other branches or incumbents were involved in it. This brought about important reconfigurations of political power, reversing historical trends towards ever-greater centralised control of the government. The dynamic of liberalisation and the conformation of reform teams created a tension in the mid-level bureaucracy, whose members saw in the reforms a threat to their status, their privileges and even their ideas about how the reform should be undertaken, as well as their scope. Paradoxically, in a country characterised by a highly disciplined bureaucracy, the most vociferous opposition to change in economics and politics came not from interest groups, legislators or voters, but from bureaucrats within the government. Carlos Salinas de Gortari, considered the most successful liberal reformer in the Latin American region at the time, has widely admittedly that the real enemies of the reforms were not outside, but within the government itself.50 The group that


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tried to obstruct the changes, he recalls, ‘comprised government officials who had exercised enormous power during the period when the economy was closed and protected . . . [E]conomic reform ended concessions that had allowed them to make arbitrary and discretional decisions’ (Salinas de Gortari, 2001: xviii). In sum, in the process of rebuilding the foundations of the Mexican economy, reform teams found ferocious resistance throughout the Mexican government. Although bureaucrats stressed long-term gains in the first part of the economic reforms, they stressed short-term gains when it came to governmental reforms. Bureaucrats, who gained most from maintaining the government’s institutional status quo, were clearly and unequivocally the group that resisted change most strongly. Reform, if not aborted or weakened from the start, may then have been sabotaged, distorted or reversed. Since the answer to reforms was varied and multifaceted, the outcomes were also multifarious.

Final remarks Given the centralistic character of the Mexican political system, decision-making revolved mainly around the presidency. Mexican presidents were the dominant actors in both decision-making and policymaking. Decision-making during the PRI’s tenure allowed presidents to shape policy around their preferences, and provided a sort of continuity to policies across presidential terms (sexenios). There was a symbiotic interaction between presidents and the bureaucracy on policy-making. Also, given the technical character of many policies, the bureaucracy enjoyed a certain level of independence from the president. They usually took unilateral action without consulting other branches of government or the Party. Given this, there was little investment in policy capacities in other spheres. In many cases, bureaucrats managed to place themselves at the top of the political axis and to establish control over other governmental branches. Consequently, PRI’s presidential candidates were selected from the ranks of the federal bureaucracy; the public administration was also a political arena, where not only decisions were taken, but also many political struggles took place. Power-seekers had strong incentives to develop their careers by rising through the ranks of the central public administration. Therefore, the rise and promotion of Mexican civil servants was regulated by a series of written and unwritten rules developed during the post-revolutionary period. This created groups and

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institutionalised coalitions within the governmental bodies that shaped the internal dynamic of the Mexican public administration. The economic and political crises in the 1970s resulted in a series of contradictory decisions that aired divisions between bureaucratic groups. The need to define the new development model for the country resulted in the clash of two main bureaucratic groups, which would eventually result in the supremacy of the liberal model over the so-called nationalistic approach. Once in power, liberals started a series of reforms that would deepen just one administration later. As a strategy, and as a consequence of these struggles, reformers decided to concentrate the decisions, powers and implementations in a closely held core team. Nevertheless, the concentration and centralisation of power in some persons and agencies as a way to achieve reform goals may have proven successful in the short term, but had consequences for further reforms that could have jeopardised the whole reform process. In order to gain more control over the process, the reformers altered deep-rooted institutions that regulated the central public administration. Mid-level bureaucrats were cut out from the decision-making process, though not initially from the implementation process. As bureaucrats’ perceptions were different from those of the reform teams, bureaucrats started to act in order to alter the pace and extent of reforms, adapting, modifying or even aborting them. The reform teams thus faced opposition not only from outside the government, but primarily from nationalists, experts as well as traditional bureaucrats from inside the government. This affected the scope of the reforms and distorted their original aim. The following chapters are devoted to analysing the effect of these political struggles on the creation of autonomous regulatory institutions.

4 An Overview of Mexico’s Autonomous Agencies Constellation

Introduction On studying autonomy, agencies are often portrayed as apolitical bodies led by technocratic personnel who promote efficient economic performance. Nevertheless, this formalistic approach leaves out important elements of the analysis. Drawing conclusions about different levels of autonomy using a formal-legal approach could prove a futile task because it does not take into account the potential discretion it may have in decisions concerning aspects of policy (such as the choice of policy outcome and policy output). Furthermore, as the setting up of these instructions occurs concurrently with economic and political transformation, the process may trigger political incentives for actors affected by these processes.1 In order to gain a better grasp of the process of the creation of these autonomous agencies, we need to focus less narrowly on the legal and technical characteristics of these agencies and look closer at the struggles behind the process of creation. The nature of previous institutions and the ways in which these are reformed have an impact on both the design of autonomous agencies and their evolution. The two elements are of equal importance. In this spirit, this chapter aims to offer an overview of the constellation of the Mexican autonomous agencies. In order to have a better grasp of the nature of these bodies, it is necessary to move beyond a formalistic classification. I devote this chapter to an overview of the diversity of agencies in Mexico – what I call a constellation – and then move on to offering a political explanation of variation in the level of autonomy and political control of autonomous agencies in Mexico. 81

82


1. The formal-legal/organisational autonomy of Mexican agencies Most autonomous agencies in Mexico were established at the beginning of the 1990s, in the aftermath of the state and economic reforms. Nevertheless, arm’s-length bodies are not a new phenomenon in Mexico; they have existed since the mid-1970s. An excessively large public sector put enormous pressure on public expenditure. Therefore, in the beginning, bodies were created not with the intention of empowering them, but of relieving the pressure on public finances. They were ‘atypical bodies’ in that they were created to improve service delivery, rather than as a radical change in the structure of the government. The Mexican central public administration has always had a centralistic character, in legal and in practical terms. Article 90 of the Constitution reflects the centralised nature of the federal administration. The Ley Orgánica de la Administración Pública Federal of 1976 governs in more detail matters related to administrative order. This explicitly empowers ministries as the fundamental political and administrative organisations of the Mexican public administration.2 The Mexican public administration structure is divided into two sectors only: the centralised and the parastatal. The distinction between these two forms of organisation is established by law.3 The centralised administration typically refers to ministries. On the other hand, decentralised agencies (organismos descentralizados) are created by law or decree. They perform specialised public and social functions. State participation enterprises (empresas de participación estatal o industria paraestatal) had either majority or minority state participation, and were created in the usual form of a private corporation, but controlled by the government through majority stock ownership. Although in the beginning the intention was to leave autonomous regulatory agencies as part of the public administration at large, with a legal personality and property, and a greater level of autonomy, the Mexican legal dispositions implied that they needed to be under the umbrella of some ministry.4 ‘Autonomous body’ was a concept once reserved for specific government agencies (typically public firms or state-owned companies), to grant them independence for decisionmaking and delivery of services. Primary examples of the former include the Mexican Social Security Institute (Instituto Mexicano del Seguro Social, IMSS) and Petróleos Mexicanos (PEMEX). Table 4.1 offers a simple snapshot of different organs that could be considered autonomous agencies.

83 Table 4.1

Autonomous agencies constellation in Mexico

Economy

Financial sector

Education

Energy

– Comisión Federal de Competencia (CFC)

– Consejo Nacional para la Cultura y las Artes (CONACULTA)

– Comisión Reguladora de Energía (CRE).

– Procuraduría Federal del Consumidor (PROFECO)

– Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros (Condusef)

– Instituto Mexicano de la Propiedad Industrial (IMPI)

– Comisión Nacional del Sistema de Ahorro para el Retiro (Consar)

– Comisión Federal de Mejora Regulatoria (COFEMER)

– Comisión Nacional de Seguros y Fianzas (CNSF)

– ProMexico

– Instituto para la Protección al Ahorro Bancario (IPAB)

– Instituto Nacional de Bellas Artes y Literatura (INBA) – Instituto Nacional del Derecho de Autor (INDA)

– Comisión Nacional para el Ahorro de Energía (Conae) – Comisión Nacional de Seguridad Nuclear y Salvaguardias (Conasenusa)

– Instituto Nacional de Antropología e Historia (INAH)

– Comisión Nacional Bancaria y de Valores (CNBV)

– Comisión Nacional del Deporte (CONADE)

Environment

Communications and Transport

Health

Others

– Comisión Nacional del Agua (CNA)

– Comisión Federal de Telecomunicaciones (COFETEL)

– Comisión Federal para la Protección contra Riesgos Sanitarios (Cofepris)

– Comisión Nacional de Derechos Humanos (CNDH)

– Comisión Nacional de Arbitraje Médico (CNAM)

– Instituto Federal Electoral (IFE)

– Procuraduría Federal de Protección al Ambiente (Profepa) – Comisión Nacional Forestal (Conafor)

– Aeropuertos y Servicios Auxiliares (ASA) – Caminos y Puentes Federales (Capufe)

– Instituto Mexicano de Tecnología del Agua (IMTA) Note: I have excluded stated-owned companies.

– Instituto Federal de Acceso a la Información Pública (IFAI)

84


In many cases, the hierarchical subordination might not imply technical or financial autonomy. Mexican public administration legislation organises ‘autonomous bodies’ according to their legal faculties, and it places them under the umbrella of the ministry of the sector. The regulatory oversight they have over the bodies is specific to the individual organisation and is as described in the organisation’s founding documents. If we consider the current constellation of regulatory autonomous agencies in the Mexican public administration, we can identify a handful of agency types. Analysing the different types of bodies that we can find in the Ley de la Administración Pública Federal, we can place the autonomous bodies into five different categories. Although the Ley does not offer a clear classification of autonomous bodies as such, according to the different levels of political and managerial independence vis-à-vis the government a typology could be created and interpreted as a continuum of autonomy. Namely, (1) simple autonomous bodies, (2) autonomous bodies with technical independence, (3) autonomous bodies with technical and operative independence, (4) autonomous bodies with technical, operative and executive independence, and (5) autonomous bodies with technical, operative, executive and financial independence. The wide range of bodies (deconcentrated authorities, regulatory agencies, independent commissions, autonomous bodies and other related concepts) reflects the lax use of the concept. Also, the increasing number of ‘atypical bodies’ (i.e. those that do not fall under the standard categorisation of the 1976 Law) reveals that they were created on an ad hoc basis. In a short period of 15 years, more than a dozen autonomous agencies were created, and in the same period the Ley de la Administración Pública Federal was amended twice as many times to adapt the reform to these bodies. In retrospect, the law concerning the structure of the Mexican public administration appears as one in a series of recurrent efforts to consolidate political control over government agencies. Under such a rigorous differentiation, there was little room for organisational innovation. The rationale for the establishment of agencies followed a course that was by now familiar. The Mexican legal framework lacked a legal distinction and classification for ‘agencies’, which permitted activities deemed to be primarily technical, administrative or entrepreneurial in nature to be protected from direct influence, contrary to the parastatal sector that might have come into being as a consequence of the conflict between state intervention and private initiative to provide public services. The

An Overview of Mexico’s Autonomous Agencies

85

consolidation of political control appeared more evident during the creation of autonomous regulatory agencies. The next section analyses the genesis and evolution of these agencies.

2. Creation and evolution of the Mexican autonomous agencies Although political and economic reforms had to be undertaken simultaneously, Mexican reform teams chose to pursue a strategy that placed the economic reform ahead of political reform. Political and technical operators in charge of the political and economic reform constituted two completely disconnected teams, and pursued two different and, in some cases, opposing agendas (Naim, 1995a, 1995b; Naim and Tulchin, 1999; Williamson, 1994; Williamson and Haggard, 1994). Whilst the Mexican reformers in the political arena were looking for legitimacy, those in the economic arena were looking for credibility. Both political and economic reforms resulted in many ways in a thorough and sensitive institutional reorganisation. The long and authoritarian tenure of the PRI government was based on its control over elections and chronic violation of human rights. Then the electoral commission and the ombudsman were the most representative examples of this process of agentification and autonomisation in the political arena. The Federal Electoral Institute (Instituto Federal Electoral, IFE) is the body in charge of organising elections and ensuring the fairness and probity of electoral politics (IFE, 1996, Article 1). The National Commission for Human Rights (Comisión Nacional de Derechos Humanos, CNDH) is the citizenry’s advocate, in charge of defending the human rights of individuals and groups against the incursions of the state (Constitución Política de los Estados Unidos Mexicanos, Article 102). According to Ackerman (2007) in his analysis of independent political agencies in Mexico, the creation of the ombudsman’s office came after intense pressure was exerted on Mexico by the international community to improve its human rights record. During the ratification of the North American Free Trade Agreement (NAFTA) by the US Congress, the treaty was at risk of being delayed by serious concerns voiced by legislators from the opposition parties over Mexico’s human rights violations. As a consequence of international accusations over systematic violation of human rights, the Salinas administration decided to create the CNDH, an independent body created to ‘defend the human rights of individuals and groups against the incursions of the state’.

86


The creation of the CNDH was, admittedly, president-driven, and its policy-making and sanctioning capacities were significantly limited (Ramírez et al., 2002). The Mexican Constitution was amended in order to grant the CNDH full autonomy (Reyes, 2000). Nevertheless, various elements of the law limited its autonomy and effectiveness. According to Ackerman, despite its legal status and independence, and the international scrutiny, the CNDH has failed to investigate seriously many of the most important violations, and has displayed favouritism towards states ruled by the PRI. He continues that the activism of the ombudsman ‘arises from partisan interests, not from a real institutional consolidation of the CNDH as such’ (Ackerman, 2007: 18). Contrary to expectations, the IFE developed in a similar way. Through the control of the governmental machinery, the PRI was able to accommodate opposition whilst maintaining simultaneous control over the central levers of power. Reforms of the electoral laws in the subsequent decades were designed so as to ensure that other political parties were represented in the institutions, to provide some legitimacy to the regime.5 For instance, the 1963 reform introduced proportional representation in order to guarantee the presence in the legislature of some small, and other loyal, opposition parties. Subsequent reforms essentially continued this principle. Altogether, more than 22 reforms were enacted after 1929, but none created any real threat to the PRI’s hegemony – reforms were designed to ensure the dominance of the PRI (Molinar Horcasitas, 1996; Molinar Horcasitas and Weldon, 2001; Prud’homme, 1996). Electoral reform rarely implied changes to the electoral body. Yet, after the 1988 elections, the Mexican government had to demonstrate to both national and international civil society its seriousness in combating electoral fraud. The post-election crisis demanded further democratisation rather than the typical answer of the regime: small changes with a democratic façade. Nevertheless, contrary to the expectations of many analysts and journalists, what resulted was a double-edged electoral reform.6 The 1990 constitutional amendment tried to respond to the postelection crisis by giving more space to the political parties, but without the government losing its control over the electoral process. As a result, the 1990 reform did not grant the IFE significant autonomy from the Executive Branch or the ruling party. The Secretary for the Interior (Secretario de Gobernación) was still president of the institute, and the voting members, by virtue of either direct selection or indirect control,


87

disproportionately represented the PRI and the government (Molinar Horcasitas, 1993, 1996; Molinar Horcasitas and Weldon, 2001). The 1993 reform was along the same lines. Rather than strengthening the IFE as an institution, the reform focused on regulating representation in the Senate and, more importantly, campaign finance (Molinar Horcasitas, 1996; Molinar Horcasitas and Weldon, 2001; Prud’homme, 1996). The 1996 reform, which vastly increased public funding for political parties, improved the fairness of access by the media, controlled private campaign contributions and took the crucial step of granting political independence to the Mexico City government by granting elections for the leadership. This was seen by many as the most important electoral reform because it created an independent citizen-driven electoral body. But this was in fact the natural consequence of the democratisation process, rather than a deliberate design of the PRI or the government (Becerra et al., 2000). Although the IFE was, for many, the archetypal electoral commission for countries undergoing transitions from authoritarian eras, it contained serious deficiencies and limitations that made it easily ‘capturable’ by political factions and parties. According to the analysis of the independence of the IFE by Barajas (1998), the autonomy of the institute relied more on the goodwill of the parties represented in the Congress than on an institutionalised independence. Barajas argues that the institutional design of the Institute in 1996 represented an institutional equilibrium for all the political parties; it was nonetheless fragile. The 2007 reform to the IFE made evident many of the pitfalls in its design. Being accountable to Congress rather than to the citizens made it unlikely that IFE’s Council would take a decision against the interests of the political parties in Congress. This was borne out twice, in 2003 and 2007. In 2003, Congress had to decide whether to reappoint the previous members or appoint new ones. Congress decided on the latter option. In 2007, after the highly contested presidential election of 2006, the parties in Congress decided to remove the newly appointed councillors and appoint new members, including the president of the council. This confirmed that the independence of the IFE was very fragile and that the control of the council still relied on the parties in Congress, who would not hesitate to use their powers to shape the institute in their own favour. On the economic side, things were no less complicated. It was necessary to delegate authority to autonomous bodies in charge of independent regulation. Yet it was also necessary to retain some degree of control

88


over such bodies in order to avoid their potential capture by private economic agents and new regulatees. The reform team wanted to lead a frontal assault on decades of over-regulatory practice, and designed and pushed forward a regulatory modernisation agenda (Haggard and Kaufman, 1992; Haggard Lee and Maxfield, 1993; Naim and Tulchin, 1999).7 Nevertheless, the creation of regulatory agencies affected multiple and concrete institutions, and the costs of the changes fell on groups, which were to lose the benefits and prerogatives they had held during the old regime. Our narrative starts in 1989 with the creation of the National Water Commission (CNA). The creation of CNA was not casual. Water is a vital resource not only for life, but also for the economy. Water is the vital element in agriculture. For decades, the government operated all of the country’s water-resource systems. The regulation of water used to overlap with regulations concerning mining, industrial and commercial issues. Consequently, these different aspects of water regulation took place through different government organs and under different criteria. The division of functions (monitoring, authorisation of exploitation and so on) was rather inefficient. The land tenure reforms introduced in the Salinas administration necessitated a series of reforms. The CNA became the only authority responsible for regulating water resources. Although the creation of the CNA passed without delay, the bill for the creation of the CNA – the National Water Law – however, was not passed in Congress until 1992. As Salinas himself illustrates in his memoirs, ‘[the creation of the CNA] affected the bureaucracy that had previously exercised official but inefficient, ironclad control, as well as the few who had profited from access to water without having any responsibility for the operation, maintenance, or financing the system’ (Salinas de Gortari, 2001: 470). Immediately after the creation of the CNA, the Federal Bureau for Surety Industries (Comisión Nacional de Seguros y Fianzas, CNSF) was created. The recently created CNA and CNDH, mentioned before, were reformed two years after their creation. At the same time, the Registro Agrario Nacional (RAN) (the body in charge of regulating the tenure of the land) was created by decree, as a consequence of the constitutional amendments to the governing of the land. By the second part of the Salinas administration, the Federal Competition Commission (CFC) had been created. Salinas himself recalls that ‘in June 1993, the Trade secretary, Jaime Serra Puche, proposed to me that we create a small, simple organisation, but with highly qualified staff. Thus, the Federal Competition Commission came into being on


89

June 23, 1993. The CFC followed the design of the Comisión Nacional de Derechos Humanos, and it set a precedent for the autonomy of the Bank of Mexico’ (Salinas de Gortari, 2001: 476). An autonomous central bank was then established in 1993, together with a consulting organ for the energy sector, the Energy Regulatory Commission, and a further reform to the electoral body, now called Instituto Federal Electoral. At the end of the Salinas administration, a body in charge of regulating the retirement funds, Comisión Nacional de Seguros y Ahorros para el Retiro (CONSAR) was also created. During Zedillo’s administration (1994–2000), many of the autonomous bodies created in the previous administration were tuned up, such as the Comisión Reguladora de Energía (CRE), Banxico, the IFE, CNDH and the Land Tenure Agency (Registro Federal Agrario, RFA). The administration also created the Comisión Nacional Bancaria y de Valores (CNBV), an organ in charge of regulating banks and stocks, the Sistema de Administración Tributaria (SAT), the Mexican version of the former Inland Revenue Service (now HM Revenue and Customs, HMRC), to collect taxes and enforce the internal revenue laws, and finally, the Federal Telecommunication Commission (COFETEL), an organ in charge of regulating telecommunications. The advent of the new democratic government in 2000 was accompanied by the establishment of a new autonomous agency, the Federal Bureau of Regulatory Improvement (COFEMER). Towards the end of the Fox administration (2000–06), both the electoral body and the COFETEL were reformed. The reforms resulted in new appointments to the board of both bodies. The latter reform was appealed and remains under judicial review. Table 4.2 offers a glimpse of some Mexican autonomous agencies, focusing on regulatory agencies, and also reveals some other important features. This classification is important, as it affords a snapshot of the differences among autonomous bodies and can improve understanding of the creation of autonomous bodies in Mexico. It is important not only to show a snapshot of the Mexican regulatory agencies but also to show their further evolution. The methodology presented in Chapter 2 offers an opportunity tracking changes over time and after formal creation has taken place. I have decided to present the analysis here in graphical form only for two reasons: first, because the methodology has been described already, and second, because it allows a better grasp of the main focus of this chapter. Presenting it in graphical terms permits a visual appraisal of the changes among agencies and within an agency. More importantly, it provides a visual tool with

Mission/Field

Water (provision and regulation)

Insurance and guarantees (monitoring and supervision)

Ombudsman

Land possession (control and files)

Economic competition (regulation)

Law

D:10.01.89 L:12.01.92

L:03.01.90

D&L: 1990 1992/1999

R:02.26.92 04.04.97

L:24.12.92

Comisión Nacional del Agua (CNA)

Comisión Nacional de Seguro y Fianza (CNSF)

Comisión Nacional de Derechos Humanos (CNDH)

Registro Agrario Nacional (RAN)

Comisión Federal de Competencia (CFC)

Interior

Agrarian Reform

Trade

Chief Director

President

Treasury

President

President

Environment

Ministry

DirectorGeneral

Head

Basic structure of the Mexican regulatory agencies

Agency

Table 4.2

Governing Committee

Regional juntas

Board of Councillors

Governing junta

Technical Council

Decision committee

Staff & Line

Registers

Staff & Line

Staff & Line

Not specified

Officials

OAD + TA + O

TA + Budget

D + TA + O+ Budget

OAD + Executive functions

OAD + TA + O

Structure

90

Monetary policy (authority and supervision)

Electoral body (organisation)

Energy, light and gas (regulation)

Retirement funds (regulation)

Banking and financial firms (regulation)

DOF 1993/1995

D:1990/93/ 1994/96/06

D1993 L:31.10.95

L22.07.94

L:28.04.95

Banco de México (Banxico)

Instituto Federal Electoral (IFE)

Comisión Reguladora de Energía (CRE)

Comisión Nacional del Sistema del Ahorro para el Retiro (CONSAR)

Comisión Nacional Bancaria y de Valores (CNBV)

Interior

Energy

Treasury

Treasury

President

President

President

Treasury

President

Governor

Governing Committee

Governing Committee and Consulting Council

Governing Committee


Board of Governors

D + TA + Executive

OAD + TA + Executive Staff & Line

Staff & Line

OAD + TA + O

D + TA + O+ Budget

D + TA + O+ Budget

Staff & Line L

Staff & Line

Staff & Line

91

President

Regulation (supervision)

Transparency

D&L:2002

L:12.6.02

Comisión Federal para la Mejora Regulatoria (Cofemer)

Instituto Federal de Acceso a la Información (IFAI)

None (Treasury)


Board

Governing Committee and Consulting Council

Governing Committee

Decision committee

Staff & Line

D+ TA + O + Budget

OAD + TA

OAD + TA + O Staff & Line

Civil Service

D+ TA + O

Structure

Civil Service

Officials

Notes: Codes: Law = D: Diario Oficial; L: other specific law; R: statute (reglamento). Formal Organisational Structure = OAD: Decentralised Autonomous Body; TA: Technical Autonomy; O: Organisational Autonomy; D: Decentralised. Source: Elaborated with information from Diario Oficial, Decrees and Laws.

President

Communication and Transport

President

D:09.08.96 Telecommunications (regulation and promotion)

Comisión Federal de Telecomunicaciones (Cofetel)

Trade

Treasury

President

Tax collection (Executive authority)

L:15.12.95

Ministry

Servicio de Administración Tributaria (SAT)

Head

Mission/Field

Law

(Continued)

Agency

Table 4.2

92


93

which to see differences in the degree of autonomy and its variation. Hence, the next group of figures develops the story not only of how agencies were created, but also of how they have evolved to their current stage. Subsequent reforms developed the Mexican constellation of autonomous bodies. Figure 4.1 depicts the changes in the regulatory agencies’ constellation. At first sight, the actual formal-legal and extended/limited autonomy balance may well depend on agency-specific factors, such as type of task (e.g. regulatory versus service delivery); on the type of agency; political and economic salience and policy complexity; or on the existing political norms of the day, such as norms of political accountability at the time of creation of the agency. Yet the figure makes evident the heterogeneity that characterises the Mexican autonomous agencies. The causes for these differences need further analysis.

3. Problems brewing: bureaucratic reaction to agency creation Lacking a tradition of autonomous agencies, Mexican law empowered ministries and central bureaucracies to promulgate economic regulations (Aspe, 1992, 1993; Aspe and Beristain, 1984). This practice granted too much authority to ministries and high-level bureaucrats in regulating operations within their jurisdiction. This system also usually ended up augmenting presidential power, as the Mexican president had to make the final decision. The organisational tradition in the Mexican bureaucracy required any policy decision to be sent directly to the Office of the Presidency, where legal scholars reviewed the proposals prior to receiving the president’s signature (Camacho Solís, 1977; Carpizo, 1983). Salinas started a more aggressive strategy of liberalisation, which brought about a reconfiguration of economic institutions. The process consisted of rationalising certain economy-wide regulatory requirements (including technical standards and general administrative procedures) and targeting those economic sectors in which the benefits of deregulation would be greatest, including tourism, railways, air transport, ports, land transport, petrochemicals, electricity, telecommunications, satellites, customs administration, foreign exchange, water supply, financial institutions, mining and fishing (Aspe, 1992, 1993). Efforts were concentrated on removing rent-generation restrictions and on eliminating bureaucratic red tape at the federal level. Under Salinas’s administration alone, more than 1200 amendments were made to the

Political control

0

1

0

Figure 4.1

Political control

CNA

CNSF

1990

OAD+TA +Op +Ex Formal organisational position

Banxico

Before 1988


+Budget

+Budget

0

1

0

1

The evolution of Mexican autonomous agencies, 1988–2010

OAD

OAD

Banxico

Political control Political control

1

OAD

OAD

CNA

CNA

CNSF

1992


Banxico

1989


Banxico

+Budget

+Budget

94

Political control

0

1

0

Figure 4.1

Political control

CNDH

CNA

CNSF

OAD

OAD+TA

+Op

+Ex

OAD+TA

CNDH

CFC

+Op

RFA

Banxico CNA

CNSF

1992(3)

+Ex

Formal organisational position

RFA

CNA

1993

+Budget

0

OAD

CNDH

CNSF

1992(4)

RFA

CNA

CNSF

1

0

Banxico


CNDH

CFC

+Budget

1


Banxico

1992(2)


(Continued)

OAD

OAD

Banxico


1

+Budget

+Budget

95

Political control

0

1

0

Figure 4.1

Political control

Banxico CNA

CNDH

RFA

CNSF

CFC

RFA

Banxico CNA

CNSF CONSAR

1994


CNDH IFE

CFC

1993(2)


(Continued)

OAD

CRE

OAD

CRE

+Budget

+Budget


1

0

1

0

1

OAD

CRE

OAD

CRE

RFA

Banxico CNA

CNSF

IFE RFA

Banxico CNA

CNSF CONSAR

1994(2)


CNDH

CFC

1993(3)


CNDH IFE

CFC

+Budget

+Budget

96

Political control

0

1

0

Figure 4.1

Political control

CNDH

CFC

IFE

RFA

Banxico CNA

CNBV CNSF CONSAR

IFE

RFA

1995(3)


CNDH

CFC CRE

CNBV CNSF CONSAR SAT Banxico CNA

1995


(Continued)

OAD

OAD

CRE

+Budget

+Budget


1

0

1

0

1

OAD

OAD

IFE RFA

Banxico CNA

CNBV CNSF CONSAR

CNA

CNDH

1995(4)


RFA

CNBV CNSF CONSAR SAT CFC CRE

IFE

1995(2)


CNDH

CFC CRE

+Budget

Banxico

+Budget

97

Political control

0

1

0

Figure 4.1

Political control

RFA

1997


RFA

CNBV CNSF CFC CONSAR CRE SAT COFETEL CNDH CNA

1996


(Continued)

OAD

OAD

IFE

CNBV CFC CNSF CONSAR CRE SAT COFETEL CNDH CNA

Banxico

+Budget

IFE

+Budget

Banxico

0

1

0

1


1

OAD

OAD

RFA

CNBV CNSF CONSAR SAT COFETEL CNA

1999


CFC CRE

1996(2)


RFA

CNBV CNSF CONSAR SAT COFETEL CNDH CNA

CFC CRE

Banxico

+Budget

IFE CNDH Banxico

+Budget

IFE

98

Political control

0

1

0

Figure 4.1

Political control

OAD+TA

+Op

+Ex

RFA

CNA

CNBV CNSF CONSAR SAT COFETEL

RFA

2006


COFEMER CFC CRE

2002


(Continued)

OAD

OAD

CNBV CNSF CONSAR CRE SAT COFETEL CNA

COFEMER CFC

+Budget

IFAI CNDH Banxico

IFE

+Budget

IFE CNDH Banxico


1

0

1

0

1

OAD

OAD

+Op

+Ex

RFA

RFA

2006-2010


CNA

COFEMER CNBV CNSF CFC CONSAR CRE COFETEL SAT

2002(2)


OAD+TA

CNBV CNSF CONSAR CRE SAT COFETEL CNA

COFEMER CFC

+Budget

IFAI CNDH Banxico

IFE

+Budget

IFE IFAI CNDH Banxico

99

100


statutory framework, and more than 5000 to the existing regulations (Molinet, 2003). The liberalisation process, together with the negotiation of General Agreement on Tariffs and Trade (GATT), NAFTA and other free-trade agreements with Central and South American countries, more recently,8 had a profound influence on Mexican policy formulation, given the scope and pace of the policy reform involved.9 A significant amount of change in the developmental model of the 1970s, and the accumulated inefficiencies of a relatively closed market, affected in particular the overall structure of the economic sector, the funding of patronage and the corporatist organisation.10 Mexican reformers knew that they needed to start a consistent and credible process of institutional innovation in order to attain credibility in the economic arena. Over a fairly short period, it became apparent that investments would not be forthcoming purely on the basis of policy pronouncements, and that private investors were worried about the conflicts arising out of the multiplicity of roles played by the government. It was largely as a result of these concerns that the government started to consider the establishment of independent bodies in key infrastructure sectors in order to make sure that the whole privatisation and liberalisation process was credible and sustainable (Aspe, 1992, 1993; Lustig, 1992). The reform teams started an ambitious process of institutional innovation by reforming the governmental institutions. Creating autonomous agencies appeared rather difficult. These bodies were not part of the Mexican legal framework. The legal organisation of the central bureaucracy was based on direct authority exerted by the ministers on all the bodies or units under their responsibility. Essentially, in the setting up of the new agencies, some basic structures had to be removed from the ministries, as illustrated in Figure 4.2.11 Regulatory authorities were usually located at different levels within the structure of the central bureaucracy, often under the jurisdiction of one of the viceministries or directorates-general.12 These offices contained not only the legal faculties and resources, but also the expertise and the institutional memory. Given this organisational complexity, the introduction of regulatory authorities with some new jurisdictional, administrative or secondary rule-making functions became arduous. Each reform required a combination of political support and expertise (Aspe, 1992, 1993; Centeno, 1994, 1996; Haggard and Kaufman, 1992, 1995; Haggard Lee and Maxfield, 1993). This rebuff underscored the constraining influence of the broader institutional environment reducing control over


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Minister New regulatory agency basic structure Vice-minister Directorgenerals Directors

Lower levels Figure 4.2

Structural creation of autonomous regulatory agencies in Mexico

institutions and actors and undermining the capacity of anyone to support the political alliances underlying the new model (Haggard and Kaufman, 1992; Przeworski, 1991). This also affected the internal agenda of the ministries, which could provide benefits to reform groups by virtue of their access to external aid.13 With regulatory authority distributed across state ministries according to their policy focus, deregulators had little real leverage over the policy as first proposed, which involved scrapping existing regulations by sector. Yet, the deregulation process could be contested by other actors within the government ministry. Reformers thought that by controlling the strategic and critical points of intersection within the bureaucratic matrix, they would control the whole bureaucratic space.14 According to organisation theory, managers controlling such spots are better positioned to acquire and control information and other resources and can obtain significant leverage over the policy process, not only the power to veto points (Tichy and Fombrun, 1979). Nevertheless, where deeprooted arrangements exist, any effort altering the previously accepted balance will create a new arena for conflict (Moe, 1990a). By changing the standard procedures that work as the balances of power among different actors and empowering them as counterweights, conflict among bureaucrats was created. As illustrated in previous chapters, by appointing personnel who did not rise up through the ranks of their respective ministries, presidents broke the internal dynamic of the central public administration, altering

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long-existing power balances and relationships among the civil servants. By breaking the dynamic within the central Mexican bureaucracy and the balance of power not only in the central administration, they also changed it in the political system. Different models and options were considered inside the ministries but had to be approved centrally by the main reformer team. This was essentially because in many cases this entailed amending the constitutions of some secondary laws, which in turn implied the involvement of other officials outside of the main reformer team, such as the Minister of the Interior or the President. These would allow closer co-ordination of economic reform activities from the centre using the committees and teams already used for the privatisation process. Rather than advancing within the same organisation to the top, higher civil servants from the same policy network would be sent to key positions in the areas which were going to be reformed (Centeno, 1996; Centeno and Maxfield, 1992). Economic reform deepened existing divisions between the officials. In the beginning, the economic cabinet in charge of the reforms thought that it might be possible to weaken official influence through exacerbating such divisions. Economic reform also accelerated the process of disintegration of the old state/party, corporatist/clientelist relationships, eroding two pillars of the Mexican political system, namely, corporatism and patron clientelism (MacLeod, 2004; Murillo, 2001; Teichman, 1995, 2001). Reformers sought a window of opportunity to reduce the power and influence of official labour leaders, especially those in government-run companies. In doing so, they were divested not only of their economic leadership capabilities, but also of important sources of patronage and, therefore, important mechanisms of political control. These were the basis of the PRI regime. New institutions became arenas in which political parties, interest groups and other political actors would reorganise, recombine or reassert themselves to take advantage of new resources or to reclaim lost ones. Reformer teams tried to control and use bureaucratic networks in order to move their agenda forward (interview with a Banxico official, September 2006). During the first phase, they were generally closed and resistant to outside penetration and influence, and worked in relative isolation. Later they had to face groups of officials that did not sympathise with the idea of privatisation, on the one hand, and, on the other, officials who wanted a more gradual process of policy reform (interview with an official of the Ministry of Telecommunications, SCT, August 2006). Discussions over trade liberalisation between banks and


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Mexican government officials were acrimonious (interview with an official of SCT, August 2006). Many top officials were not enthusiastic about liberalising and the way it was taken, and they used various tactics to deal with the problem (see MacLeod, 2004; Teichman, 1995, 2001). As documented by Teichman (1995), economic reform was set up in such a way that decision-makers were dependent on the information coming from middle-level bureaucrats. Then the second level of officials placed in strategic ministries started to discuss the different options for institutional innovation under a new regimen of market-oriented solutions.15 Some bureaucrats mounted direct opposition to the process, while others were looking for a slower-paced process to create the regulatory authorities. In other cases, they directly opposed the process by providing misinformation, manipulating the information flow from the bottom up or directly challenging the process. In open cases of opposition, although the directors of public firms could be dismissed, it was not feasible to replace large numbers of technocrats who possessed specialised knowledge. The defiance came as liberalisation and privatisation altered the long-existing power balance in the central public administration, altering the incentives of the bureaucrats. Bureaucrats thus became the most vociferous opposition to creating autonomous regulatory agencies.

Final remarks By describing the constellation of the Mexican autonomous agencies, I achieved two things. First, I identified and described the types of public organisations that exist in the Mexican public sector. I then assigned the current Mexican autonomous agencies a position according to the methodology presented in Chapter 2. Employing this methodology proves useful in comparative terms and also facilitates the appraisal over time. This approach proves critical to the understanding of highly heterogeneous agency creation. Second, I described the organisational problem rising from the process of creation. During the creation of these bodies, there persisted some organisational limitations, which affected the institutional design. From the organisational point of view, there was no tabula rasa or blank slate for the creation of these bodies. Autonomous agencies had to be created using pre-existing structures inside the central bureaucracy. Regulation typically took place inside the various ministries of the central government. Therefore, when autonomous agencies were created, they had to

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use the personnel and structure of the offices that had been previously in charge of these matters within the ministries. Finally, I showed how different reform strategies in the political and the economic arena affected the institutional design of autonomous agencies. Reform teams had diverse and, in some cases, opposing strategies of reform. Both political and economic reforms altered the previous balance of power, as well as the incentives for the formerly tenured bureaucrats. Bureaucrats and regulocrats began seeing autonomous agencies as ways to maintain or gain power, controlling certain regulatory policy. The heterogeneous form of autonomous agencies is not only related to the reasons behind their creation, but, more importantly, to the dispute over their creation. Bureaucrats and reform teams disagreed over the number and scope of faculties that would ultimately define who would be in control of certain regulatory policy. Disputes over the control of the regulatory policy led actors to struggle at many levels trying to advance some particular organisational form to allow them more control. Constant reforms and changes in the level of autonomy of different autonomous agencies are caused by recurrent efforts to consolidate political control over these agencies. The following chapters show these struggles in greater detail by illustrative case studies. They are, as mentioned in Chapter 2, the central bank, the Federal Commission of Telecommunications and the Energy Regulatory Commission. The case selection represents different examples of the institutional design process. On the whole, these cases represent examples that are emblematic not only of the constellation of the Mexican autonomous agencies but of the political struggles over their political control and their organisational shape. These cases are now examined in detail.

5 The Central Bank

Introduction The idea of central bank autonomy is taken for granted as a feature of the modern economy. The creation of autonomous central banks appears as the most prominent example of institutions insulated from the direct influence of elected officials and political cycles. Independent central banks thus provide a satisfactory protection from politicians’ temptation to manipulate monetary policies in order to obtain short-term gains (i.e. votes), disregarding the long-term cost that this decision might have (i.e. inflation). Politicians decided to give up control of monetary policy to provide more politically neutral policy solutions that are not easy to accomplish in the context of partisan politics. This idea has produced an increase in the independence of central banks over a wide swathe of nations. Central bank independence has been a growing theme since the Second World War.1 During the 1990s, concerns about central bank autonomy reached new heights. In the few short years between 1990 and 1995, 35 countries legislated increases in the autonomy of their central banks, representing the highest rate of change in 50 years (Maxfield, 1997a).2 Consequently, there has been an increasing interest in these autonomous institutions, and a considerable and growing literature studying central banks, especially in advanced democracies.

1. Approaches to central bank independence Independent central banks have largely been associated with low inflation and an overall economic stability. These ideas were confirmed by numerous quantitative studies that showed an inverse relationship 105

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between central banks’ independence and inflation.3 Complementary studies showed that economies with independent central banks were less prone to political cycles (Clark, 2003; Clark and Hallerberg, 2000; Clark et al., 1998). Scholars have produced a vast literature attempting to prove how some institutional characteristics, such as fragmented, multi-party systems or parliamentary factions, assist in the development of independent, autonomous banks (Alesina, 1988; Alesina and Gatti, 1995; Alesina and Summers, 1993; Cukierman, 1992; Cukierman et al., 1992; Goodman, 1991). Accordingly, studies on central bank independence in emerging economies also focused overwhelmingly on the relationship between independence and economic performance.4 Nevertheless, these studies found no evidence of political manipulation of monetary instruments leading to economic cycles of growth and unemployment (Alesina and Summers, 1993). Inflation, growth and employment appear to have a mixed relationship to central bank independence. In fact, delegation to autonomous banks produces partisan policies, with significant distributional effects. Haggard and Kaufman (1992) argue that, sometimes, these polities also facilitate the creation of blocking coalitions that obstruct the necessary consensus for policy stability and for the reform of independent institutions, such as central banks.5 Another set of literature argues that the differences in preferences on monetary policies could trigger the creation of autonomous central banks. From this point of view, constant, unmanageable conflict will lead political actors to grant autonomy to a central agency to regulate the monetary policy under technical criteria (Alesina, 1988; Alesina and Gatti, 1995). However, this argument is not sufficiently persuasive unless it tackles the question of why ideologically opposed politicians would agree to forgo their partisan objectives and install an independent central bank. Similar studies have established that, despite the empirical association between central bank independence and low inflation, there is no clear evidence of how autonomy affects other real outcomes, such as growth, deficits and unemployment (Eijffinger and De Haan, 1996). Indeed, some studies suggest that central bank autonomy may actually increase the short-term tradeoff between output and inflation (Debelle and Fischer, 1994; McNamara, 2002; Walsh, 1995). Other comparative and long-term studies have failed to find a consistent relationship between autonomy and inflation (McNamara, 2002). Analyses of nonindustrialised democracies have shown different economic effects from

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those of industrialised democracies.6 Most recently, empirical studies have questioned the idea that central bank independence provides a reliable and universal remedy for all monetary ills (Kishor Kulkarni, 2004; Sola and Whitehead, 2006). Still, it represents a striking transformation, as independence removes a key aspect of economic decision-making from politicians. Theoretically, independent central banks allow for a more dynamic economy, yet the creation of independent central banks also has political consequences. Critiques are well known. The basic argument claims that the creation of central banks could lead to suboptimal performance of the economy, as fiscal policy could act for anticipated monetary policy and vice versa. Co-ordination amongst instruments could become problematic as two powerful but disconnected players act upon different criteria. One player could predict a tighter monetary policy when an expansionary fiscal policy is desired and create a path of reaction to the other that was not necessarily anticipated. Some authors have used an illustrative analogy, for example, portraying this situation as akin to a car with two drivers (Grieder, 1987). The quest for international credibility has been the main line of analysis for other sets of studies looking to the reasons for the creation of central banks in developing countries (Downes and Vaez-Zadeh, 1991). Autonomous central banks seem to allow politicians to create credible commitments and horizons for macroeconomic policy. According to this approach, politicians decide to create independent central banks because they want to signal creditworthiness and attract and retain capital (Maxfield, 1990, 1993, 1997a). By delegating control of monetary policy to autonomous bodies with clearly defined rules and attributions, politicians send unambiguous signals that technical decisions will prevail over political ones. Those countries who control their currency independent of political gains in the short term necessarily reassure investors that at least this factor will not erode the value of an investment through currency manipulation/inflation (Maxfield, 1990, 1997a; Maxfield and Schneider, 1997). Nevertheless, this approach assumes that international investors should be willing to invest in those countries using only the central bank independence as a guarantee, rather than investing in a country that offers a higher return after discounting the risk.7 Furthermore, politicians can retain control over other key elements of the economy, and they could be willing to pay the cost of reversing central bank autonomy. Finally, developing countries’ politicians and government leaders are portrayed here as desperate individuals who, based on

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their need of capital and investment, are willing to give up authority to control key economic instruments. In sum, studies have failed to find the reason behind the creation of independent central banks, as they are often based on certain benefits that are not necessarily tangible. Second, the benefits of creating an independent central bank are often ambiguous and subject to different interpretations. The evidence does not support the argument that central bank independence guarantees low inflation, more investment and, consequently, high growth;8 rather, evidence about the benefits of central bank independence is decidedly mixed. Corroboration for the correlation between independence and low inflation and high growth is not significant, and it is blindly assumed that this is empirically proven.9 There is some reason to believe that independent central banks may actually make things worse as will be discussed below. This element operates almost as ideology.

2. The proliferation of central banks There are coincidences between two authors regarding this topic. Both Kishor Kulkarni (2004) and McNamara (2002) argue that governments opt for an independent central bank because delegation has important legitimising and symbolic properties which render such independence attractive. In some cases, politicians still maintain the basic legal prerogatives both to control monetary policy and to monitor the central bank action (Kishor Kulkarni, 2004). In others, theories of institutional isomorphism (coercive and voluntary), or the copying of organisational models, provide an alternative sociological explanation for why people borrow models from other settings, even when it is materially inappropriate to local needs (McNamara, 2002).10 Simply, the view that such delegation is rational, efficient and acceptable in a democratic society may owe more to power and ideational factors than to the functional requirements of economic management. Central bank independence is viewed by political, business and most academic elites as a highly desirable and legitimate policy, which accounts for its spread as an organisational form. Empirical work, nonetheless, has questioned the degree to which delegation is linked to superior economic outcomes. Technocratic expertise does not de-politicise monetary policy. Central bank independence is designed to skew policies away from the preference of voters, and therefore does not necessarily have a broader legitimacy in terms of a nation’s general public and is not popular among those societal groups who do

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not favour the price stability emphasis that central bank independence locks in. Although central bank independence ends up being empty in practice, politicians use this organisational form for symbolic purposes (McNamara, 2002: 60). Two elements need to be considered in understanding the increase in the number of independent central banks. First, central bank independence came into fashion and was a major issue in the early 1990s. In that time, foreign portfolio investors dominated financial flows. Therefore, investors and global asset management companies, much more than politicians and finance ministers, became obsessed with credit ratings. Exchange rate risks loomed as a determinant for investment rather than inflation. Based on the apparent correlation between low inflation and independent central banks, investors started demanding independence for central banks as a guarantee for their investments. Second, epistemic communities have played a critical role. The adoption of independence for central banks may occur through a process of social diffusion of organisational models, rooted in social processes of legitimisation. Proponents are on firm ground as to the benefits of central bank independence, as, indeed, they are often central bankers themselves. Economists and central bankers have propagated the idea that autonomous central banks are a key to healthy economies (Maxfield, 1997a; Santiso, 2003, 2004; Wood, 2005). Central banks have also played a key role in financial integration. International integration of markets has empowered central banks as powerful actors in regulating the flow of investments in different countries. With few exceptions, studies trying to identify the sources of central bank independence in the developing world are scarce.11 Studies on central bank independence initially tried to replicate methodologies to prove or dismiss the correlation between independence and low inflation. Other studies have analysed how independent central banks could also have been set up through normative or coercive processes of institutional isomorphism. International organisations, such as the OECD, the World Bank and the IMF, have contributed to the spread of these institutions (Williamson and Haggard, 1994). The role of these organisations in ‘suggesting’ such institutions when negotiating loans is well documented (Naution and Griffith-Jones, 1998; Santiso, 2003, 2004; Williamson, 1994; Wood, 2005). The role of political conflict in shaping central bank autonomy is often unseen.12 Common analyses focus on the roles of market participants, domestic and foreign private sectors, bond holders and international organisations in the process of the creation of autonomous

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central banks. This literature is rather extensive. Although I am not denying the importance of these actors, I focus here on the struggles between the political actors in the process. This approach is innovative and illustrates how political struggles affect the autonomy of central banks. The case of Mexico’s central bank provides a particularly good example for study in this regard.

3. The Mexican case There are only two extended studies on the reforms that granted more independence to Mexico’s central bank.13 On the one hand, Boylan (2001, 2004) provides a comparative analysis of the creation of the central banks in Chile and Mexico. For the Mexican case, she argues that the electoral threat appeared as the main reason for politicians to grant autonomy to the central bank. Nevertheless, she fails to provide solid evidence that Mexican politicians were concerned about electoral turnover when designing the strategy for granting autonomy to the central bank. Second, she fails to explain why, if politicians were concerned about the electoral threat, they decided to implement a partial autonomy instead of a full autonomy. A full autonomy would have helped the argument to remain logically sound. On the other hand, Maxfield (1990, 1993, 1997a) offers a useful introduction to the political economy of central banking in developing countries. Her central argument has two main analytical elements. First, she argues that politicians in developing countries want to remain in power – yet the longer they stay in power, the worse the balance of payment problems and the scarcer the investment in the country can become. Second, she claims that foreign investors demand proof that politicians will not use exchange rates and monetary policy for political purposes. Politicians will therefore create independent central banks in order to signal increased creditworthiness to potential foreign investors. Although interesting, both Boylan’s and Maxfield’s arguments prove insufficient to explain the Mexican case. On the one hand, Boylan’s argument appears incomplete. First, she only explores the creation of the Mexican central bank, omitting an analysis of the further evolution of this reform. Second, the electoral threat that apparently triggers the strategy for creating the central bank seemed non-existent at the moment of creation (analysed later on). Maxfield’s arguments appear as necessary, but not sufficient. She argues that politicians seeking creditworthiness will isolate central banks and will retain them whilst they are rewarding for politicians. Credibility might lead politicians to extol

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bank independence, yet it does not explain why politicians decide to increase the independence of the central bank, as politicians will, in reality, covet maintenance of the central bank under their control despite its formal independence. The approaches above offer, then, limited explanations. The pattern of reform of the Mexican central bank might seem an inconsistent and lapsed strategy that can only be fully explained if we take into account other factors. Here I explore a competing hypothesis. I argue that conflict between reform groups and bureaucrats shaped the independence of the Mexican central bank and conditioned its further evolution. International organisations, investors and epistemic communities pressured the Mexican government to offer some guarantee of the apolitical operation of monetary and exchange rates. Nevertheless, this would tie the hand of the reform team. Consequently, in 1993, the reform team decided to promote just partial autonomy for the central bank. This new scheme would create enormous tension and conflict between the finance ministry and the central bank over critical economic instruments, especially during the agitated electoral year of 1994. This conflict resulted in the peso crisis at the end of that year. The differences between bureaucratic groups regarding the role of the central bank in the economy and how to drive the monetary policy degenerated into an open conflict that affected subsequent stages of reform. This is summarised in Table 5.1. To have a better grasp of this process, it is necessary to analyse the creation of the autonomous central bank and its further evolution through a politics-centred approach. In this sense, the methodology presented in Table 5.1

Strategy of independence 1993

1998

Priority

Credibility to reform

Recover lost credibility

Strategy

Create an independent central bank but maintain control

Centralise monetary policy in one body

Elite internal conflict

Low (and then high)

Low

Possibility of crisis

Low (and then high)

Low

Proximity of electoral threat

Distant

Imminent

Degree of autonomy

Partial

Full

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Chapter 2 proves essential. First, this model helps to illustrate how the reform teams’ decisions over different levels of autonomy were taken and how bureaucrats reacted. The case of the Mexican central bank thus helps to prove that, even with favourable conditions, the degree of autonomy varies according to the conflict between the reform team and the bureaucrats. In addition to being negotiated during two presidential administrations, the involvement of two different groups with completely different priorities and necessities led to the application of different approaches, strategies and actions. The narrative of this chapter will show that ‘successful’ agency creation has more to do with political struggles than with an impartial agency design. The following sections describe this evolution, analysing the two stages of the process.

3.1. The trigger and the partial insulation strategy It is usually taken for granted that entitling central bank independence was part of a deep economic reform during Salinas’s administration. Scholars were quick to point out that reform of the central bank was an action to show creditworthiness as a means to attracting and retaining capital (Boylan, 2001, 2004). On the other hand, another set of explanations emphasised that the creation of an independent central bank was a response to the logic imposed by epistemic communities and the role of international organisations (Maxfield, 1990, 1993, 1997a). This section, however, stresses that the creation of a partially independent bank was driven by political motivations, rather than for economic or ideological reasons. This eventually evolved into a conflict that shaped the final degree of independence of the bank. I analyse these ideas in that order.

3.1.1. The history of the subordination of the central bank to the Ministry of Finance The Mexican central bank – the Bank of Mexico or Banco de México – came into existence in 1925, once the Mexican Revolution had finished and order had been re-established. The post-revolutionary government found itself close to bankruptcy, and the capitalistic structure of Mexico at that time was quite embryonic. Mexico’s leaders thus conceived that it was necessary to create a network of economic institutions for development (Krauze, 1977). The economic structure for development was itself an objective of public policy (Glade and Anderson, 1963). The central

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bank would play an essential role, especially through the relation with the banks and in providing credit for development. The Bank of Mexico was a mechanism designed to be reciprocally beneficial to the development of the economy, the achievement of the revolutionary reforms and the furtherance of political objectives. The central bank played a typical role in the political system, and was also a mechanism of great political utility in assuring the effective implementation of basic economic and political decisions. For instance, credit was one of many powers used by the government as political sanctions. Mexico’s politicians accepted the central bank as the operative mechanism for that and also as a legitimate device of political authority.14 The central bank would play a role which was a mixture of tutelage and stimulation of the private sector. More broadly, the central bank would play the role of the basic creditor for the development plan of the incumbent governing coalition for the moment. The central bank would emerge out of a broad framework which would account for both economic and political aims. As correctly stressed by Glade and Anderson (1963), the evolution of the Bank of Mexico corresponds not to any plan for economic development, but to the necessities of the political systems: Rather, it is to the political system that we must look to explain the emergence of this hodge podge set of institutions, which is a system only insofar as it reflects a reconciliation of the policy demands which had to be met in order to maintain the cohesion of the Revolutionary coalition while achieving economic development through the creation of a modern economy. (Glade and Anderson, 1963: 121–122) In keeping with this view, the Bank of Mexico has been reformed six times (1934, 1954, 1972, 1983, 1993 and 1997), each time being associated with the national and political priorities of the moment (Maxfield, 1990, 1997a; Turrent Díaz, 1982). The history of the Mexican central bank shows the ways in which presidents and finance ministers shaped the central bank’s capacities.15 They strengthened and weakened its capacities according to the political priorities of the moment, and limited its faculties when the central bank could have played a preponderant role. This shaped the relationship between the Ministry of Finance and the central bank, which in turn contributed to the specialisation of the tasks of the central bank and its personnel.

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Although the finance ministry and the central bank had grown up as identical twins, they were far from being a unified body. This duality would feature throughout most of their lives. More than just twins, during most of their history both the finance ministry and the central bank upheld an incestuous relationship between the monetary regime and public finance. As a matter of fact, it is difficult to understand the evolution of public finance and monetary policy in Mexico without studying them together. Since the early 1950s, the Ministry of Finance had consolidated itself as a multi-functional institution.16 Most of the credit and monetary functions were the responsibility of the finance ministry, both by law and in practice. The central bank’s function had to be adapted to the interests of the incumbent president or the finance minister in turn. This guaranteed that the monetary policy would be under the control of the president and the finance minister, while also guaranteeing the flow of money to the government.17 Control of revenues and expenditures could be translated into political power, inasmuch as the ministry could facilitate or block any state agency actions and therefore the career prospects of the top bureaucrats. During the time of the Desarrollo Estabilizador, the relationship between both bodies grew under co-operation. It has been argued that the joint strategy between the Hacienda, headed by Ortiz Mena, and the central bank, directed by Rodrigo Gómez, was based on a disciplinary fiscal and monetary policy, allowing sustainable growth and controlled inflation (Ortiz Mena, 1970, 1998).18 On the institutional side, the model proved to be fruitful for both bodies, as it also helped to shape their respective authorities. On the one hand, the finance ministry could consolidate its bureaucratic authority over the rest of the government as the body in charge of not only the country’s finances, but also of the nation’s economic destiny (Chávez, 2001). On the other hand, the central bank could consolidate its enormous institutional authority and maintain a healthy distance, and relative independence, from the central government. Some authors, in their analysis of the fiscal and economic policy of Mexico, have also emphasised how the role of the central bank has fundamentally been subordinated to the finance ministry and that the role of the central bank entailed financing the government (Brothers and Solís, 1967; Cavazos Lerma, 1976; Chávez, 2001; Cortés Conde, 2006; Fernández Hurtado, 1976). For this reason, the Bank of Mexico never fulfilled the classic function of a central bank. Nevertheless, given the technical character of its activities, based essentially on supervision

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and the supply of information for decision-making at the Ministry of Finance, it developed a certain degree of independence in training its own personnel.19 In many cases, the excellence of its personnel was used to breed bureaucrats at the Ministry of Finance, as was the case with Guillermo Ortiz, who has been the governor of the central bank since 1998. Hence, the central bank developed in an insulated manner, creating an organisational ethos of its own. Yet the Ministry of Finance maintained political control of its activities. Although tacitly accepted by both partners, this relationship was not totally assumed by the bureaucrats in the central bank. Officials in the central bank were, in a certain manner, seen as subordinate to those in the finance ministry (interview with a former SHCP official, August 2005) and were never seen as equals vis-à-vis their colleagues in the finance ministry. Moreover, it could be said that the central bank accumulated resentment towards the bureaucrats in the Ministry of Finance (interview with a former Banxico official, September 2006). With the global financial crisis at the beginning of the 1970s, it was necessary to fine-tune the workings of the central bank and consequently the role of the central bank, such that it was reformed again in 1972. In the same vein, the 1985 modification concentrated on ‘empowering the Ministry of Finance to respond flexibly under inflationary pressures and restricting the central bank to acting in accordance with the decision taken by the directives on credit and monetary policy indicated by the Minister of Finance’ (Banco de México, 1985 Article 2). This allowed President Miguel de la Madrid’s government to respond to the constant monetary shocks that characterised the 1980s. The public disputes over the control of the economy during López Portillo’s presidency led the relationship between these two bodies to new heights.20 Central bankers developed an idea that they needed to constrain the incompetence of the rest of Mexico’s state agencies (interview with a former SHCP official, August 2005).21 Miguel de la Madrid conceived the central bank as a key element of the macroeconomic stabilisation. He appointed Miguel Mancera Aguayo as director of the Bank of Mexico. He was a renowned Yale-educated economist who rose through the ranks of the central bank. Once appointed, he would face one of the country’s toughest crises. With the 1985 reform, the central bank’s role was severely constrained. Although extremely active, it acted only under orders from the bureaucrats of the Ministry of Finance. Furthermore, the administration of the banks after the 1982 nationalisation was utilising many of its organisational

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resources. The nationalisation of the banks in 1982 was not part of Miguel de la Madrid’s strategy, and it brought more problems than solutions to the bureaucrats at both the central bank and the Ministry of Finance. As a matter of fact, the director of the central bank, Miguel Mancera Aguayo, publicly agreed to restrain the role of the central bank in this matter, in order to focus on monetary policy.22 The central bank would play an essential role during the next administration headed by Salinas. Together with the macroeconomic stabilisation, Salinas wanted to launch a new national currency and continue with the divestiture programme, which included re-privatising the commercial banks. Roughly eight years after the Mexican banks were nationalised, and three years before the 1993 reform of the central bank, Carlos Salinas submitted to Congress on 2 May 1990 a constitutional amendment to re-privatise commercial banks. It is true that Mexico’s banks were privatised as part of a broad programme of divesture of state-run enterprises. Yet, the privatisation of the banks started almost immediately after the nationalisation. In 1984, the de la Madrid administration began to sell off the brokerage houses, insurance companies and other bank operations that did not take deposits or make loans.23 Nevertheless, the purpose of this privatisation programme was more than merely fiscal; it was also political.24 With the privatisation of the banks in 1992, the return of a fair equilibrium between the Ministry of Finance and the Bank of Mexico was also anticipated. 3.1.2. The creditworthiness approaches to 1993 reform On the surface, it may have seemed as if the search for credibility played a critical role in the decision to create an independent central bank. Nevertheless, on a clearer analysis, the decision to make the central bank autonomous seemed to create a problem for the stabilisation plan of the reform team. The global trend of transformations and the reigning paradigm in the 1990s suggested that the creation of an independent central bank was not only the best way to signal creditworthiness to international investors, but also a sign of a healthy economy. The evidence thus suggests that other factors played a decisive role on the initial thinking behind the decision to make the central bank autonomous. The two priorities for Salinas’s team in the macroeconomic arena have largely been documented as being the reduction of Mexico’s foreign debt and reducing inflation (Aspe, 1992, 1993; Salinas de Gortari, 2001; Serra Puche, 1992). Between 1976 and 1982, the debt rose from US$19.6 billion to US$58.8 billion (Gurría, 1994: Appendix 1). To achieve the

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macroeconomic goal of stability, inflation had to be controlled. Having reached a high of 159 per cent, it was still near 100 per cent at the time Salinas took office (Strother, 1992). The first set of actions in Salinas’s term concentrated on facing both issues. Previous to Salinas’s presidency, one of Miguel de la Madrid’s economic adjustment actions focused on paying off the debt through exports. This effort never reduced the capital of the debt but only made payments on the interest. Salinas then decided to renegotiate the debt (Gurría, 1994; Salinas de Gortari, 2001: 15). Salinas’s incoming administration started to signal its intention to cancel the negotiations and to establish a unilateral moratorium (Gurría, 1994). This created a tension with foreign commercial banks, which decided against making further loans. In the adverse landscape, Mexico managed to negotiate a flow of money and new terms from the United States, the so-called ‘Brady Plan’, and a couple of loans provided by the World Bank and the Inter-American Development Bank. By July 1989, Mexico had persuaded creditor banks to agree to a reduction in the government debt. The direct debt reduction was around US$7000 billion, which meant a saving equivalent to 5 per cent of the GDP (Gurría, 1994). Alongside these negotiations, the Mexican reformers also focused on alternative ways to control inflation and manage the exchange rate. Inflation was contained through different economic pacts throughout Salinas’s term. Together with this, cyclical devaluations of the Mexican peso made monetary policy a politically charged issue (Frieden, 1991, 2006; Frieden et al., 2000; Kessler, 1998, 1999; Zedillo Ponce de Leon, 2008). During Salinas’s sexenio, the Ministry of Finance and the central bank focused on increasing the slope of the exchange rate flotation band, to avoid a sudden liberalisation. This would also avoid market shocks and would allow a coherent strategy over the presidential term, important in building up credibility on an international level. It is assumed that the reduction of the foreign debt would improve the condition of the Mexican economy. The savings from the reduction of foreign debt were used for social expenditure (Aspe, 1992, 1993). While the sale of government entities in the process of privatisation was also providing liquid money to the government, money coming from privatisations was earmarked exclusively to pay off the domestic debt. Then it was expected that the North American Free Trade Agreement (NAFTA) would also stimulate investment in Mexico and provide a boost to the economy. Changes in the global economy predicted that Mexico would receive capital from NAFTA in any case. During the late 1980s and early

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1990s, a change in the composition of international financial resources occurred. First, the world finance market no longer depended on commercial banks. Second, international investors began looking for a higher return, as the interest rate in the United States was very low following record highs in the late 1970s. It was expected that there would be a flow of capital to emerging economies. Latin America thus became very attractive for investors, especially after successful macroeconomic reforms. According to the IMF, in 1992 alone investment increased from US$29 billion to US$123 billion (International Monetary Fund, 1998). Before its implementation in 1994, economists expected that NAFTA would increase foreign financial inflows to Mexico and argued that this would necessitate a series of institutional reforms to guarantee stability in the long term and provide a certainty that investment was based on clear rules. International investors knew that Mexico urgently needed to obtain the foreign capital in order to meet the targets of the economic programmes. There was also some urgency in attracting investment to these countries, as Mexican politicians wanted to prove that NAFTA was working. Towards this end, the provisions in NAFTA were complemented by the Foreign Investment Law, which aimed to provide security and assurances to foreign investors. In the early 1990s, Mexican politicians thought that this would be enough to provide incentives for long-term investment in Mexico and then it would not be necessary to make the central bank autonomous. Yet this guarantee would only apply to investments coming from Canada and the United States. Some analysts argued that the Mexican government needed to create a positive reputation amongst the whole international community and to do so would need to grant autonomy to the central bank. This would diminish investor uncertainty, even though it would translate into politicians losing control over monetary policy (Maxfield, 1997). For some officials, reform was necessary to ‘transcend individuals and transform themselves into institutions’ (Secretaría de Hacienda, 1993). The president of the central bank himself insisted that monetary policy should be institutionalised by making the bank autonomous to reinforce the credibility throughout the whole term and beyond (Salinas de Gortari, 2001: 183). Despite these arguments, credibility was not a major concern in Salinas’s inner circle. In 1993, Mexico was accepted into the OECD, and the economic indicator of the Salinas sexenio showed that Mexico was not necessarily vulnerable to external economic pressures. Moreover, within just a couple of years, the reputation of Mexico’s economy gained

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enormous prestige. Salinas’s government was proud of its high credibility with the international community in the latter half of its sexenio (Gil Díaz and Carstens, 1996, 1998).25 Other approaches might suggest that Mexican politicians who worked towards making the bank autonomous were motivated primarily by the need to take out some sort of ‘institutional insurance’ on their economic programme in the face of an uncertain future. For some that suggested a political solution of making what might seem on the surface a more vibrant democracy, in the form of an opposition party or a fictitious faction of the PRI. But for the most part, analysts saw that the Salinas’s strategy centred on reconfirming the central bank as a technocratic-financial nucleus, without social, legislative or executive control, so that the group then in power could continue to direct economic policy indefinitely, regardless of the political regime. This would be an institutional shield, almost as though they were preparing for a disaster (Molinar Horcasitas, 1993; Molinar Horcasitas and Weldon, 2001). Nevertheless, this institutional shield was not the motivation for making the central bank autonomous – after the mid-term elections in 1991, the PRI recovered a large majority in the House and the Senate, and electoral preference polls showed that the PRI could win the next presidential elections (see also Salinas de Gortari, 2001).26 Additionally, in the opinion of some scholars, a transition to a true multi-party democracy was not yet underway in 1993 (Whitehead, 1994b). Moreover, electoral prospects may have been improved by tightening control of the monetary variables in 1994.27 3.1.3. The role of international organisations The market, contrary to the classic theory, is not guided by an invisible hand, but by the unceasing interactions of economic actors. Behind the power of the market is hidden a multitude of actors, analysts, strategists, economists and portfolio managers, who constitute a veritable epistemic community with its own dynamic of opportunity and constraint. These actors decide the trends and the way things are done. Here, therefore, it is important to take into account the concepts of epistemic communities28 and cognitive institutions.29 The logic behind the concept of epistemic communities is seductively simple. An epistemic community is a network of professionals with recognised expertise and competences in a particular domain, having an authoritative claim to policy-relevant knowledge within an issue area. Epistemic communities take different forms at different levels. Their

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members share the language and the understanding pertinent to the issue. With growing internationalisation, these communities span across borders and experts are coloured by the views of their colleagues internationally. Members will find that colleagues share their opinions on many matters. From this perspective, international co-operation can have a significant influence on the attitudes and behaviour of the actors. The role of epistemic communities is crucial in explaining international co-operation and, therefore, the role of international institutions in shaping governmental institutions for development. The roles of epistemic communities and international organisations in shaping economic policies in Mexico and Latin America have been widely analysed (Centeno, 1994, 1996; Centeno and Maxfield, 1992; Domínguez, 1997; Haggard and Kaufman, 1992; Haggard and Webb, 1994a; Haggard et al., 1993; Naim, 1995a, 1995b; Santiso, 2003, 2004; Wood, 2005). These studies have shown how knowledge communities, together with international and Washington-based organisations, played a pivotal role at critical junctures, such as during the liberalisation processes of the 1980s and 1990s. During these decades, international organisations provided information, advice and practical knowledge, as well as promoting best-practice institutions. These institutions formed communities that shared the same economic language, as well as similar methods and codes for the production and diffusion of knowledge. In Mexico as well as the rest of Latin America, the rise to power of technocrats trained in financial institutions produced strong repercussions throughout these epistemic communities. This phenomenon had a double effect: the increased importance of economic problems stimulated an influx of very able new recruits, attracted by the extremely favourable career prospects associated with the possession of this economic expertise; at the same time, the importance of these epistemic communities and cognitive institutions grew when economists arrived in the top ranks of the government (Centeno, 1994, 1996; Santiso, 2003, 2004; Santiso and Whitehead, 2006; Wood, 2005).30 These institutions served as arenas of interaction between ‘experts’ and ‘decision-makers’, who contributed to the dissemination of ideas. These institutions made a key contribution by formulating proposals, stimulating debates and, when academics entered the government arena, by promoting implementation. As mentioned in the preceding chapters, Carlos Salinas and his team were also part of those epistemic communities. The members of Salinas’s inner circle, comprising Pedro Aspe, Manuel Camacho, José Ángel

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Gurría, Jaime Serra, Miguel Mancera Aguayo and Guillermo Ortiz, were educated in the educational centres that have traditionally provided the ‘umbrella’ under which various cognitive institutions operate. They worked and taught in the different think-tanks and research institutions that played a critical role in disseminating the liberal paradigm in Mexico. It is not surprising, then, that these communities, using their knowledge and standards, played a pivotal role in the decision to make the central bank independent.31 The theory that international forces will push forward the creation of a central bank could be a one-sided or deterministic interpretation. It cannot be denied that the pressure of international forces and epistemic communities was influential; yet different modes and speeds of reaction could take place in different arenas.32 Given the notable degree of instability and unpredictability in the global international financial system, it would be a mistake to think there was a singular force behind causation. Mexico could not have simply imported financial stability by creating an independent central bank. Mexican officials showed, especially during the Salinas administration, sufficient political autonomy and independent capacity to generate their own initiative, or to modify and adapt the suggestions of the international organisations and forces. Salinas and his team wanted to reconstruct home-grown financial institutions that were viable, but which would also allow them to complete their whole reform plan without the ‘traditional’ end-of-presidency instabilities and devaluations. They wanted to continue to control the monetary policy as long as possible. The administration faced the paradox of needing to insulate the central bank, whilst avoiding tying their hands. The influence of international forces on shaping economic reform in Mexico cannot be entirely denied. It is true that economic reforms were carefully attuned to the doctrines and suggestions of international economic forces, but assuming that governing coalitions accepted all the recommendations coming from these epistemic communities is taking the argument too far. Although part of these communities, the Mexican reformers did not implement all the policies they suggested, and those that were adopted were not implemented blindly. Salinas and his cabinet have made this public in various published works (Aspe, 1992, 1993; Gurría, 1994; Ortiz, 1994; Salinas de Gortari, 2001). Siding with Salinas, other analysts, like Kugelmas (2006), have also criticised the one-sidedness of some efforts to explain how international ideas shape domestic politics.

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During the Salinas term, different episodes generated tensions with both the international and also the domestic economic community.33 Tension with international commercial banks would suggest that the Salinas administration was not willing to follow the communities’ suggestions indiscriminately. Furthermore, in different situations, various members of these circles, as well as Salinas himself, have stated that, while restructuring the economy towards modernisation, losing control seemed worse than over-control (see Aspe, 1993: 93; Gurría, 1994; Salinas de Gortari, 2001). Actors have some discretion in the implementation of these ideas. Domestic actors also face institutional restrictions and social opposition that might have made some reforms difficult to implement, especially when these reforms involve political concerns. In the event that they needed to create an independent central bank, reformers wanted to go for one with controlled autonomy. It would thus be conceivable that the reform had been designed purely for window-dressing purposes to assure creditworthiness. More importantly, no matter how committed and indoctrinated government officials were to market principles, politics came first. Two authors agree with this argument. First, Dresser (1998) affirms that Salinas’s administration presented two contrasting identities to the world. On the one hand, Salinas was rather successful at marketing Mexico’s economic and political reform to external audiences and to Washington’s international bureaucracy. On the other hand, Salinas was skilful enough to use the instruments of the regime in seeking political support such as patronage, compensation for interest groups and discretionary intervention that would allow him to extend his political control over key policy decisions. In a complementary approach, Smith (1998) argues that the struggle over the control of monetary policy increased as the political and economic reform started to shatter the basic pillars of the regime. Consequently, the governing coalition around the Party and the bureaucratic groups started to fragment, to disperse and to act primarily for their own political survival. 3.1.4. The political character of the 1993 reform Prior to 1993, the Salinas reform group had no intention of granting autonomy to the central bank (interview with a former SHCP-Banxico official, January 2007). On the contrary, Salinas’s economic team believed that control of monetary policy should be retained by the Ministry of Finance for as long as was possible. An autonomous central bank could be seen as consistent with the economic reform agenda;

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yet, in the early stages, it would have limited the political control of key economic instruments and it could also have affected the wider restructuring agenda. The Salinas administration did not conceive the central bank reform as a key element in the economic reform (interview with a former SHCP official, August 2005). The objective was to legitimise the stabilisation programme rather than to establish credibility.34 The autonomy of the central bank thus had to wait until the government had succeeded in attaining single-digit inflation and a budgetary surplus (interview with a former Banxico official, September 2006). Furthermore, an autonomous central bank would only be possible once there had been fiscal reform. Additionally, the driving force behind Salinas’s economic programme upon his assumption of power in 1988 was a small nucleus of agents of holders of highly mobile capital drawn from the brokerage houses and newly privatised banks, the large export firms and an ever-deepening foreign capital base (Alba Vega, 1993; Elizondo, 1993; Garrido, 1993, 1994; Mansell Carstens, 1994). This ‘technocratic faction’ enjoyed disproportionate formal influence in Mexico’s peak business organisation, and they did not want to lose this unless absolutely necessary. Granting autonomy to the central bank would be a stepping stone to ensuring that they did not (Gil Díaz and Carstens, 1996, 1998). Two pieces of evidence support this argument. If Mexican reformers wanted to create a totally independent central bank, they had all the incentives, reasons and possibilities to do it. They had all the political elements to create the reform, including control of the House and the Senate; and the cabinet and the reform team were highly prepared and motivated to do it. More importantly, they had an international community with its eye on them who very much wanted an autonomous central bank. Nevertheless, they did not choose to go that far to please the international community, commercial bankers and investors, but instead continued their path of reform according to plan.35 The Mexican reformers were careful when designing rules which afforded them some room for manoeuvre as long as they remained in office.36 On the other hand, when considering granting more independence to the central bank, the reform team faced the dilemma of granting the control of key economic instruments – the very ones that control the speed of the economy and can drive it into recession or inflation – to a body that was not part of the cabinet or part of Salinas’s inner circle. Put simply, Salinas and his inner circle did not trust the central bank to be a co-operative actor once independence was granted. Therefore, Salinas’s proposal to grant autonomy to the central bank came as a surprise.

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When Salinas released the proposal in May of 1993, the idea of granting more autonomy to the central bank was presented as the most important monetary decision in decades, a permanent renunciation of the inflationary past and the crowning measure of a decade-long effort to control public finances (Ortiz, 1994; Secretaría de Hacienda, 1993). The 1993 proposal presented the central bank for the first time in Mexican history as ‘an institution within the state with an autonomous character’ (Banco de México, 1993, Article 1). The proposal represented a huge step towards equipping the central bank with more policy-making capabilities. On 18 May, the proposed central bank statute was readily approved by the House, with the symbolic modification of one word. Despite considering granting more independence to the central bank, the intention of the reform groups was to maintain control of monetary policy. This can be shown through an analysis of the degree of autonomy of the central bank depicted in Figure 5.1. The 1993 reform was based on two main objectives. First, the new law granted the bank a legal mandate to achieve price stability above all else (Banco de México, 1993, Article 1). Second, this mandate was complemented by the legal duty of ‘facilitating the sound development of the financial system’ (Banco de México, 1993, Article 2). Although this brought the reformed Mexican central bank into line with practice around the world, it was not backed up by explicit rules to resolve disputes between the central bank and the Executive Branch, rules that characterise laws governing central banks in many

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Central bank autonomy in 1993

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other countries. As a matter of fact, the finance ministry retained decisive control and power over a wide range of policies, including the exchange-rate policy. The central bank’s ability to determine interest rates independently of Executive Branch policy was seriously and deliberately constrained. The provisions were not intended to provide more autonomy to the central bank, but to restrain the central bank from acting contrary to cabinet expectations. Literally, these clauses were intended to prevent intervention of the central bank in the monetary policy (interview with a former Banxico official, September 2006). In many ways, the central bank was legally constrained to increasing its lending to the Executive Branch. But it was also legally constrained as regards appointments, removals and its two basic mandates (cf. Banco de México, 1990). The composition of the bank’s governing board was also substantially changed. Under the 1985 statutes, the board had a cosmetic nature, being composed of officials from various government agencies and social sectors, who met on an irregular basis. They could be removed from their indefinite appointments at the president’s discretion. In contrast, under the new law, there were only six board members (called governors), appointed for fixed terms (six years), with staggered renewals, and congressional approval for both appointments and dismissals. More importantly, a governor could be removed on grounds of ‘grave fault’ or for failing to comply with the decisions of the exchange rate commission (Banco de México, 1990). This is actually a weakly worded provision that placed enormous limits on the independence of the central bank, and it confirms the reality of the reform: at the end of the process, the reform team was still in charge of monetary policy. Miguel Mancera, president of the central bank from1982 to 1998, was appointed as governor of the newly created Banco de México. The rest of the vice-governors comprised a group of officials coming from the finance sector of central government, such as Francisco Gil Díaz (former Under-Secretary of Finance) and Guillermo Prieto (Chief of Regulation, National Banking Commission) or from the central bank itself, such as Marcos Yacaman (former Chief of Research) and Ariel Buira (Director of International Organisation). The decision to include people from the finance ministry, even when the central bank was full of personnel with proven capacity for the task, illustrates the reform team’s intentions to control the decisions at the very top of the newly created body. The possibility of removing the central governor for failing to comply with the decisions of the exchange commission confirms that the priority was to retain control of monetary

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policy, rather than shaping real institutional autonomy for the central bank.37 Salinas’s group wanted to use this opportunity to design a central bank authority so that it would be entirely congruent with his own policy preferences. In this way, they could enjoy great discretion in all policy matters. A fully independent bank would make it impossible for them to manage economic policy at their will. These controls were not a new event in Mexican history. As shown before, Mexican presidents decided consistently to restrain the central bank and its directors’ role vis-à-vis the finance minister and the president (Maxfield, 1997: 106). The central bank was in charge not of the monetary policy, but of supplying the necessary information to the finance ministry for decision-making; yet the central bank was granted a permanent, constant structure and an extensive institutional supervising authority. Thus, political aims and national priorities shaped the central bank and its relationship with the rest of the government. Nothing suggests that the reforms of the 1990s would be different. The new, liberal character of the economy needed a new institutional relationship between the central financial bureaucracy and the central bank. But it also altered the roles of the Ministry of Finance and the central bank. For the bureaucrats in the central bank, the new context offered a long-awaited opportunity to gain exclusive control over monetary policy. Salinas, on the other hand, envisaged the autonomy as a signal that the liberalisation reform would not be taken back. Nevertheless, although the signal might have been sufficient for foreign investors, it also needed to be sufficient for the bureaucrats in the central bank. They needed further guarantees that decisions such as the nationalisation of the banks and the end-of-the-term devaluations would not happen again. 3.1.5. The consequences of the 1993 partial insulation Bureaucratic groups in Mexico are generally more politically active during election years. Even during the long PRI tenure, elections gave opportunities to political groups to rebalance power. In the sexenial cycles, bureaucratic teams typically fragmented near the end of the presidential terms, as rival cliques competed for sympathy in the following administration (Garrido, 1982). In 1994, an early succession game exposed contradictions and differences between front-line actors. Salinas tried to maintain the unity of his group right up to the very last days of his presidency. However, the 1994 political disaster in which the peso was devalued changed all the political aspirations of this group.

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Early in his administration, Salinas started considering the names of possible successors. This early succession game was narrowed when he short-listed three members of his first circle as possible ‘heirs’: Manuel Camacho, chief of the Mexico City government, Pedro Aspe Armella, Finance Minister, and Luis Donaldo Colosio, Secretary of Social Development (Castañeda, 1999; Centeno, 1996). These three played an essential role in Salinas’s cabinet and its reforms, and they were the key policymakers in the political, economic and social arenas, respectively. Once unveiled, the name of Luis Donaldo Colosio as the next PRI candidate for the presidency raised a few eyebrows, especially in the financial sector of the government (Centeno, 1996; Hernández Rodríguez, 1994, 1998). Concerns were expressed by the hardcore economists of Salinas’s inner circle, who believed that Colosio had links with the traditional sector of the Party and that his lack of rigorous economic training made him a potential threat to the prevailing economic policies, a fact that would send mixed signals not only to foreign investors, but also to the bureaucratic groups inside the government (interview with a former member of Banxico, August 1995). In this context, bureaucrats at the central bank wanted to protect monetary decisions from politicians and the bureaucrats at the Ministry of Finance, and they took this up as part of their personal agenda (interview with a former SHCP-Banxico official, January 2007). The 1993 reform created an opportunity for central bankers to reclaim their exclusive authority over monetary policy. During the whole election year of 1994, they acted towards this end. On the other hand, bureaucrats at the finance ministry tried to maintain that authority over the monetary policy for themselves. This argument bears direct relevance to how we interpret the dramatic events surrounding the peso crisis of 1994–95. It is beyond the objectives of this book to analyse the reasons and causes of such a complex phenomenon as the 1994 peso crisis; the central focus of the research is the political struggles behind agency creation. Yet this event clearly illustrates disputes over the control of the monetary policy and the consequences of the partial insulation. Also, evidence supports the view that the appropriate policies to preserve investor confidence were not taken.38 More importantly, a series of contradictory decisions, taken as a consequence of the lack of co-ordination between the different teams at both the newly autonomous central bank and the finance ministry, resulted in unexpected, catastrophic consequences. The first battle for the newly autonomous central bank came sooner than the reformers had anticipated. Even before the ink was dry on the

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new legislation that granted independence to the central bank, the political game put the newly transformed autonomous body to the test. The unceasing political instability that characterised the presidential election year of 1994 also fuelled economic chaos. The rise of the guerrilla Zapatista movement, together with high-level political assassinations and an open battle with former President Salinas in 1995, directly affected the embryonic economic reforms and NAFTA.39 In that year alone, the country’s foreign reserves plummeted – from almost US$30 billion in January 1995 to just over US$6 billion in December – making a massive devaluation of the currency necessary (Banco de México, 1994).40 Contrary to any orthodox expectations, the new central bank decided to pursue an expansionist policy towards the economy (Edwards and Naim, 1997). Throughout the whole year, the central bank hesitated to raise interest rates, fearing a weakening of the Mexican peso and the incipient banking system, instead of injecting large amounts of liquidity into the economy.41 According to many decision-makers at that time, the decision was justifiable as a means of counteracting the drop in foreign reserves that took place after the guerrilla uprising and following the murder of the PRI’s presidential candidate Colosio in March (Gil Díaz and Carstens, 1996, 1998). In the opinion of former governors and deputy governors of the central bank, since ‘the government’s policy was one of maintaining exchange rate parity at all costs in the hope of riding out the storm, any rise in interest rates was deemed unacceptable’ (Boylan, 2001: 21; see also Gil Díaz and Carstens, 1996). Throughout 1994, the central bank and the Ministry of Finance publicly disagreed over monetary policy, and interest and exchange rates (Boylan, 2001; Gil Díaz and Carstens, 1996, 1998). Whatever the reason and the causes, the net result was that the central bank failed to uphold a key element of its mandate: conserving a pool of international reserves that could guarantee the stability of the currency above all else. These events reflect an unintended consequence of the partial isolation strategy of the Salinas reform group. Given a sufficiently threatening political environment, it was quite easy for the Salinas group to use a partially autonomous central bank as a means to achieving its political ends, while preserving the control of the monetary policy (Dresser, 1998). While the partial isolation strategy allowed the Ministry of Finance to maintain a ‘back-door influence’ on the central bank, the latter sought to assert its independence by claiming the right to control monetary policy (interview with a former Banxico official, September 2006). The finance ministry and the central bank also disagreed publicly

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over exchange rate policy at several points in the following years, again reflecting the unresolved battle over both the central bank’s ability to act independently of the Executive and its control over monetary policy, a consequence of the central bank’s new status. The 1994 peso crisis posed a major challenge to the reputation of the recently transformed central bank. Below a certain level of crisis, the newfound autonomy of the Mexican central bank appeared to be meaningless and useless with regard to the needed credibility. As a matter of fact, the partial autonomy of the bank contributed to the crisis (Edwards and Naim, 1997), because once the new institutional framework was in place, it pitted two conflicting groups in the arena of monetary policy and interest rates against each other.

3.2. Declaration of independence Contrary to Carlos Salinas, Ernesto Zedillo did not create a strong, compact team of his own, even after the 1994 political and financial crisis (Hernández Rodríguez, 1998). The 1994 succession game, the cabinet shake-up in late 1994 during the peso crisis and the battles with Cordoba Montoya, Head of the Office of the Presidency, during the campaign and with Salinas at the beginning of Zedillo’s administration, limited the number of close collaborators to hand. He could not use people in Salinas’s inner circle, even less so the people who had been mentioned as possible candidates, such as Pedro Aspe. In this context, he appointed Guillermo Ortiz as Finance Minister after Ortiz had a brief stint in the Ministry of Communication. Still, Ortiz had to rely on renowned Salinists, such as Rogelio Montemayor, Patricio Chirinos or Otto Granados. Coming from the ranks of the central bank, Ortiz had a completely different perspective about the scope of the autonomy of the bank. All the same, he was clear that the Salinas group had sacrificed central bank autonomy rather than relinquishing control of interest rates and credit in the 1994 electoral year, hurting the bank’s reputation and creating a problem that would turn into a cause of the crisis (Interview with a former SHCP-Banxico official, January 2007; see also Dresser, 1998; Sachs et al., 1995). More importantly, Salinas’s team decision had provoked a critical situation when it failed to secure key elements of the bank’s mandate in the 1994 crisis, a mistake that Ortiz was determined to amend (interview with a former Banxico official, September 2006). Wanting to recover the credibility on the monetary policy, Zedillo granted Ortiz carte blanche to reform the central bank.

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In the 1997 reform, with the blessing of the president, the control over monetary faculties was completely conferred to the central bank, together with a new legal status that granted total autonomy (Article 1). In this sense, the bank was not only in charge of monetary policy, but it also acquired the executive and legal faculties to enforce its autonomy. This included the capacity to decide over its own budget without consulting with the Ministry of Finance. The staffing of the board was changed and the clause previously hanging over the president of the bank was removed. The head of the board was renamed as governor. Complementing the staffing capacities which limited the institutions from renovating its staff, a closed civil service within the central bank was created. All these amendments enhanced the previously merely imitated capacities of the central bank (Figure 5.2). This reform conferred, in addition to a new autonomous status, a new managerial autonomy to the central bank – an overall enhanced autonomy, as we defined it in previous chapters. Another element that helps us to understand how the evolution of the central bank is a unique story is an analysis of the central bank vis-à-vis other similar autonomous bodies in the economic sector. More importantly, this story exhibits the interplay between politicians and bureaucrats. Early in the Zedillo administration, a group in the finance ministry started to design a strategy to set a number of autonomous bodies under the influence of the ministry. This dynamic affected the creation of other independent bodies. For instance, the financial crisis of 1995

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The second Banxico reform and the finance sector cluster

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created pressures for the creation of an autonomous Comisión Nacional Bancaria y de Valores (CNBV) to complement fiscal discipline and rally private sector support.42 In this case, the finance ministry group opted for the same strategy as the one followed with the central bank, formally providing a limited autonomy, yet retaining control of decisions over the banking system (interview with a former SHCP–Banxico Official, January 2007). The privatised banks had turned into a financial burden after 1994, as they could not operate without subsidies. Two constitutional reforms were passed to increase central bank autonomy, and also to increase social participation in the banking system.43 The private groups entering into the banking markets were relatively inexperienced, although they were carefully screened. The reform would increase the number of agents within the business sector with enough clout to support the privatisation process. Others came out after many of Mexico’s state-owned firms, such as Telmex (the national telephone company), steel mills and the country’s commercial banks, were sold off (Aspe, 1992; Gil Díaz and Carstens, 1996, 1998). As happened with the central bank, events tested central bank autonomy immediately. The misuse of the banks’ capacities eventually led the government to intervene with all its might. This intervention resulted in the creation of the Banking Fund for the Protection of Savings (Fondo Bancario de Protección al Ahorro, FOBAPROA), renamed later as the Institute for the Protection of Saving (Instituto para la Protección al Ahorro Bancario, IPAB) and the Sistema de Administración de Bienes Asegurados (SABA).44 These two agencies were created after a chain of events arising from the 1994 crisis, and were granted partial autonomy. When the opposition in Congress wanted to obtain some control over the FOBAPROA’s decisions, further autonomy was granted, creating the IPAB and literally freezing its institutional design (interview with a former Banxico official, September 2006). Another case involved the Sistema de Administración Tributaria (SAT). This body was to provide autonomy for the administration of the federal government’s revenues (Secretaría de Hacienda, 1993). The idea had similar origins to the 1993 central bank reform. In this case, the reform team at the Ministry of Finance wanted to have an independent tax administration body, as that was seen as perfectly complementing the central bank. The events of 1994 delayed this project until the new government came to power (interview with a former Banxico official, August 2005). The creation of SAT also created friction between the Hacienda’s sub– ministry of revenue and the new SAT that now claimed its authority

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over tax administration. As expected, with the creation of SAT, the sub-ministry of revenue had become redundant. This also created a conflict between the bureaucrats in the ministry and the bureaucrats in the autonomous body. Late in the Zedillo administration, the conflict between these two entities resulted in the dismissal of the two officials in charge of them, although no further reforms in these bodies were undertaken.45 These cases support the argument about the role of political forces in the creation of the central bank autonomy and confirm a constant strategy of institutional design coming from the Ministry of Finance. Additionally, this reveals a learning process both in the ministry and inside these agencies. Decisions over partial isolation created, and in other cases increased, struggles between groups for control over these institutions. Rather than stemming from technical/efficiency reasons, it was political conflict that shaped the different levels of autonomy in the central bank and other agencies in the government’s finance sector.

Final remarks This chapter has covered several critical points for my argument. First, I reviewed the literature on independent central banks. On analysing it, it is not difficult to affirm that central bank autonomy has achieved a quality in contemporary life which is almost taken for granted, with little questioning of its logic or effectiveness and no examination of the motives of politicians behind its creation. Scholars have produced a large literature attempting to justify both the benefit of independent central banks and the reason behind governments creating autonomous central banks that ignore all political motivations that shaped the Mexican case. The analysis of the evolution of reforms granting autonomy to the central bank in Mexico is thus of special interest, not only in empirical terms, but also theoretically. This chapter showed first how the mushrooming of central banks around the world is strongly related to a reigniting paradigm disseminated both by epistemic communities and cognitive institutions. International organisations played a critical role in pushing this element forward in the reform agenda of different countries. In the case of Mexico, as with other Latin American countries undergoing profound reforms, economic policies were shaped hand-in-hand with the interaction of international forces. Nevertheless, this reform, endorsed by powerful epistemic communities, faced the discretion of domestic policymakers.

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What is shown here is that the creation of independence for Mexico’s central bank did not arise automatically from ideological or technical reasons, but rather from bureaucratic politics and the historical norm of using the central bank for political purposes. Incentives to create central banks in emerging markets might stem from the same basic forces as in established economies, but they are of considerably different character and magnitude, as political groups see institution building as not only a means of political survival, but also as a way to gain more power and defeat rival groups of politicians and bureaucrats. The history of the Mexican central bank shows the ways in which the president shaped its capacities according to the development and political necessities of the moment. The 1993 reforms show how politicians wanted, on the one hand, to please all the international forces and the international communities they were themselves members of, while, on the other hand, maintaining some degree of control over central bank decisions. A set of contradictory and erratic decisions resulted in a gradualist approach that, under the new political and institutional scenario, confronted the groups in the central bank and the finance ministry concerning the control of monetary policy. Bureaucrats on both sides asserted their authority. As shown, this struggle might not have been the main reason for the peso crisis in 1994 but was clearly a contributing factor. The 1993 reform represents a new equilibrium in the relationship between the Ministry of Finance and the central bank. As a consequence of the political events and the cabinet shake-up after the 1994 crisis, Zedillo appointed a bureaucrat coming from the ranks of the central bank as Minister of Finance. Once in office, he started a second stage of reform, raising the automomy of the central bank. As confirmed with the rest of the regulatory agencies in the sector, Guillermo Ortiz took it on as a personal crusade to provide the central bank with further autonomy. But that was not necessarily the case with the other agencies in the sector. Once he had amended the mistake, Guillermo Ortiz could return to his original office, heading a now fully autonomous central bank. This chapter also showed how autonomy is a dynamic political process. The idea of cumulative incremental reform, in which achievable initial measures generate more favourable conditions, is not necessarily a sign of successful reform. This does not reflect the way in which delegation theory says autonomisation takes place. The case of the Mexican central bank shows an alternative picture. This chapter showed how the creation of an independent central bank encountered

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mounting distortion and rent-seeking along the way. The evolution of this autonomous body was incremental, mainly driven by internal bureaucratic interests. In sum, the Ministry of Finance and the central bank were characterised as enjoying a symbiotic relationship – almost as identical twins. Until a person coming from the central bank took over the Ministry of Finance the interest of the smaller brother thrived over the big brother. This not only proves how, even in cases where bureaucratic groups seem to agree in means and ends, conflict could shape different degrees of autonomy, but it also highlights the political character of autonomy, which can trigger political conflict even between sister bureaucratic groups who look to gain more power as a way of political survival. Finally, I have demonstrated that the analytical tools presented in Chapter 2 offer a suitable methodology to analyse the creation of autonomous agencies. This methodology helps to trace the actors involved in the process of creation and to identify both their actions and reactions. It also illustrates how different levels of autonomy result from conflict rather than a calculated technical design. The bi-dimensional index of autonomy has proven to be useful in understanding the real scope of each reform and facilitating their appraisal through comparisons over time.

6 The Federal Telecommunications Commission

Introduction Historically, telecommunications have played a crucial role in almost every country’s development. Telecommunications are central to modern liberal economies. Although regulation has been a common concern in the study of telecommunications and the focus of virtually alltheoretical work in this area, a political analysis of the genesis and evolution of regulators is consistently neglected. As we will see, politics plays a crucial role in regulating telecommunications, and like the autonomy of the central bank, politics is an important but missing subject of analysis in the literature. During the last three decades, governments throughout the world have displayed growing optimism about the prospects for marketoriented reforms in the telecommunications sector. From the United States to Europe, governments implemented reforms which dismantled monopoly systems by breaking up traditionally vertically integrated enterprises (Levi-Faur, 1998; Ramamurti, 1996). Governments have also implemented a variety of changes in regulations as a consequence of technological changes (Levy and Spiller, 1994). Liberalisation in the telecommunications market took place on the assumption that it would increase economic efficiency in the sector as well as promote social welfare (Chevallier, 1996; Fine, 2000; Laffont and Tirole, 2000; Thatcher, 1999a, 1999b, 2000, 2001; Vickers and Yarrow, 1989).1 Mexico was no exception – communications have played a central role throughout each different historical period of Mexico’s development.2 Telecommunications became even more important during the 1990s, in the passage from a relatively inward-looking economic strategy to a more open, privatised economy. The reform was 135

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initiated when the national telephone company Teléfonos de México (Telmex) was rapidly privatised. This continued until the mid-1990s, when state-owned television channels were also privatised. Existing studies have confirmed that the development of telecommunications in Mexico has been less than ideal, highlighting poor regulation that leaves consumers and businesses paying above-average prices for telephone calls (OECD, 2005). To critics, Telmex’s market power illustrates the consequences of privatisation in the absence of proper regulation. In a country with an enormous gap between rich and poor, telecommunications companies make a profit of around US$27 million per day, while one-quarter of the population survives on less than US$2 a day as of 2007 (Lunhow, 2007). Telmex and other telecommunications companies (including television corporations) have exploited the privileges of being over-protected industries, weakening the regulatory power as the power of businessmen in the telecommunications sector expanded. The normative literature on telecommunications regulation argues that competition increases efficiency, spurs technological innovation, helps to reduce cost and stimulates demand.3 Approaches based on the analysis of economic incentives affirm that privatisation and liberalisation must be accompanied by a clear, strong regulatory and monitoring structure that ensures fair competition and telecommunications development (Ferejohn and Shipan, 1989; Horwitz, 1989; Noll, 1983). Nevertheless, the situation in Mexico challenges common approaches that endorse liberalisation as a trigger of economic efficiency and as a means to reduce inequality. Nevertheless, the degree of success of telecommunications regulators varies from country to country – in some cases, with opposite results. It is argued that different regulatory policies are consequences of political and economic institutions (Levy and Spiller, 1996b; Mariscal, 2001, 2002; Petrazzini, 1995; Vogel, 1996). Hence, prominent recent studies have analysed the political factors that determine differences in regulatory policy in the telecommunications industry (Levy and Spiller, 1996b; Mariscal, 2001, 2002; Vogel, 1986). In this vein, the development of institutional regulatory bodies reveals a process constrained by the nature of the domestic political context, policy institutions and rent-seeking (Braeutigam, 1989; Horwitz, 1989; Noll, 1983, 1989). The internal composition of the political system determines the nature and scope of regulation.4 It is thus interesting to see that, although regulation has been a common concern in the study of telecommunications, a political analysis of

The Federal Telecommunications Commission

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the genesis and evolution of regulators is consistently neglected.5 Suboptimal regulatory authorities are the result, to a large extent, of policy processes that have not been able to cope with powerfully entrenched political and private interests. It is important to bear in mind that the degree and nature of regulation is a choice – not a prerequisite to privatisation – available to both politicians and policymakers; it is a political act. Hence, the political dimension is a key element in explaining both the evolution of the telecommunications market and the weakness of the regulatory authority for the sector in Mexico. Previous studies have mainly focused on the process of privatisation and the role played by the telephone company Telmex (see, for instance, Baumol and Siclak, 1994; Brock, 1994; Wenders, 1990). Little attention has been paid to the genesis and further development of the regulatory authority. In contrast, this chapter provides an explanation for the poor institutional design of the regulatory authority. This chapter thus reviews the politics behind the creation of the Comisión Federal de Telecomunicaciones (COFETEL) in the context of opening up Mexico’s telecommunications market through a politicscentred approach. This chapter emphasises that, for a deeper understanding of the development of the telecommunications regulators, it is necessary to analyse not only the privatisation process but also the political intricacies behind this process. This is consistent with previous studies on regulatory policy which stress that when analysing regulatory policy, it remains critical to look into the political context (Horwitz, 1989; Vogel, 1996). Nevertheless, this chapter goes further, including political conflict as a means to explain the creation and further evolution of the regulatory authority for the sector. At the beginning, policymakers deliberately neglected the role of regulation in order to establish a Mexican business class. The next administration decided to set up a regulatory framework together with a regulatory authority. However, fears of capture and conflict with the regulocrats of the sectors led to limiting the autonomy of the newly created regulatory authority. The last administration decided to remove regulatory constraints, but to do so in exchange for political favours. The structure of the chapter is as follows. I start by providing a snapshot of the liberalisation in the telecommunications sector in Mexico. Second, the chapter analyses the enactment of the 1995 Telecommunications Law and the creation of COFETEL. Finally, the chapter briefly analyses the further reforms of the Telecommunications Law and the evolution of COFETEL in recent years.

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1. Privatisation without regulation During the 1980s, Mexico’s government-owned telecommunications monopoly had serious problems in coverage, service quality and reliability. These were caused by the budget of the company being determined by considerations other than the efficient expansion of the company (Aspe, 1992; Mariscal, 2001, 2002). By the late 1980s, public investment in the sector had decreased; more than 10 million houses lacked a telephone (Lunhow, 2007). Further, it became clear that the telecommunications infrastructure of the country was very fragile and that large investments were therefore necessary after the devastating earthquake that hit Mexico City in 1985. The state-run telecommunications system broke down, which hindered relief activities (Clifton, 2000). To a large extent, Telmex’s operation was used as an instrument of fiscal and employment policy, with a certain disregard for the efficient operation of the company in terms of the quality and reliability of service (Casasús, 1994). By 1989, it was determined that Telmex required an investment of US$10 billion.6 To keep pace with demand that could not be met by the government budget as the country was going through the ‘debt crisis’, it became evident that such resources could only come from the private sector. So the privatisation process was initiated. 1.1. Privatisation and the preservation of a monopoly Many analysts agree that the Salinas reform team saw the telecommunications sector as one of the sectors that would be crucial to privatise (Aspe and Beristain, 1984; Botelho and Addis, 1997; Centeno, 1994, 1996; Centeno and Maxfield, 1992; Mariscal, 2001, 2002; Naim, 1995a, 1995b; Naim and Tulchin, 1999; Noll and Salas, 1997; Przeworski, 1991; Williamson, 1994; Williamson and Haggard, 1994). According to Salinas’s reform team, telecommunications would play an essential role in the economy’s future growth. At the same time, Salinas’s inner circle believed that the government would not have enough financial capacity to invest in the sector (Aspe, 1992, 1993; Salinas de Gortari, 2001). The privatisation of telecommunications therefore became a critical objective for the Salinas administration to create a more open economy (Clifton, 2000; Mariscal, 2001, 2002). Telmex divestment became a symbol to increase the visibility and attractiveness of the privatisation programme. In addition, Salinas’s reform team wanted to privatise the telecommunications sector before his presidency ended in order to reap the political fruits of the accomplishment (interview with a former COFETEL official, September 2006).


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It has been said that privatisation of the national telecommunications industry was a requirement of the so-called ‘Washington Consensus’, in which the World Bank agreed to provide a technical assistance loan of US$22 million for Telmex’s sale, before the privatisation was announced. But the truth is that the case of Telmex is atypical of telephone companies in the rest of Latin America, as it has never been completely nationalised and has always had private investors. Although Telmex had, by 1989, been present in Mexico for almost a century, the government had owned it for little more than a decade, following a takeover in the mid-1970s.7 The aggressive programme of divestiture was not publicly acknowledged until September of 1989, when the government announced its intention to privatise Telmex (Associated Press, 1989). This was immediately perceived as the most important privatisation not only in this administration, but in the history of Mexico and Latin America. Prior to complete privatisation, Telmex was the largest company listed on the Mexican stock market, the second largest company in Mexico and the second largest telecommunications company in Latin America. For economic, political and symbolic reasons, the Salinas inner circle would lead the whole process themselves. As with other privatisations, Pedro Aspe, the Minister of Finance, was personally put in charge of the divestiture process. The administrative control of the company was transferred from the Secretaría de Comunicaciones y Transportes (SCT) to the Treasury Ministry (SHCP), which was overseeing all of the privatisation projects at the time (Aspe, 1992; Noll and Salas, 1997). It has been said that Aspe had a personal career stake in building a consensus for the privatisation, since, being a strong pre-candidate for the next presidency, success could give him some renown and finally secure him the candidacy (interview with a former COFETEL official, September 2006). The SCT would play a secondary role in the process of privatisation. In the beginning, many discussions took place and different privatisation plans were considered. The prospects for telecommunications reform were examined in this larger economic and political context. One of several options available to the reform group was maintaining a vertically integrated firm in the market (Botelho and Addis, 1997; Mariscal, 2001, 2002; Noll and Salas, 1997). The option of splitting Telmex into regional companies was also debated. The Ministry of Communications and Transport and the Ministry of Trade examined alternatives to dividing the company vertically. Jaime Serra Puche, the Minister of Trade, favoured the division of the company and more

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competition for the telecommunications sector (interview with a former SCT official, June 2004). Moreover, many international investors made explicit their preference for dividing Telmex regionally (Noll and Salas, 1997). Dividing the company was perceived as risky, as it might have undermined the economic efficiency criterion in favour of maximising the proceeds of the sale of the company. In addition, the reform team was trying to maximise the probability that the new companies could survive and grow without governmental subsidies, at least in the midterm. The privatisation strategy was created in such a way that newly privatised companies could operate effectively without monetary help from the government.8 The crux of the plan was that the new private owners of Telmex would inherit a de jure monopoly in domestic and international long-distance markets.9 Other countries like Brazil and the United States broke up their telecommunications companies into a number of competitive firms. But Salinas’s team decided to sell Telmex’s monopoly intact and pass on the monopoly to a single beneficiary. Essentially, it was decided that, in order to obtain the most profitable bid, it was necessary to guarantee that the sold company would maintain a monopoly in order to attain profitability in the middle term (Aspe, 1992; Clifton, 2000; Noll and Salas, 1997). Yet, the government could have obtained a higher return by selling Telmex in a different, disaggregated way.10 The cash that was to be obtained for the privatisation at that moment would help the reduction of the national debt and accelerate the decision to sell. Nevertheless, the reform team decided to privatise the company as a whole for three reasons. First, this would allow receiving higher bids for the company. Second, the policy context of a transition to a new development strategy led policymakers to choose a path of reform which minimised political resistance and maximised support from key interest groups (Mariscal, 2001, 2002). Third, this way would allow accomplishing a series of political aims not necessarily directly connected to the privatisation itself, such as the consolidation of a Mexican business class, to signal the liberalisation of the Mexican economy, and changing the relation between government and unions. These three elements were equally important and interconnected. Regarding the first point, the Constitution imposed a series of convenient limitations that helped the aims of Salinas’s reform team. Articles 25, 28 and 134 clearly outline the rules for public bids, consequently establishing the foundation for any privatisation. Article 134 explicitly states that ‘the government needs to assure the best condition


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regarding price, financing and opportunity’ (para. 2). In addition, dividing a vertically integrated Telmex was potentially problematic: it could have resulted in the multiplication of functions inside the Telecommunications and Finance ministries. In a hectic administration with a large privatisation agenda, this would have been extremely complicated. However, leaving Telmex as a monopoly would limit the number of potential buyers. The urgent need to sell Telmex led to selecting the option of a vertically integrated company, since this would take less time to implement (Mariscal, 2001, 2002). Second, privatisation and labour reorganisation appeared as a single aim. The privatisation of Telmex offered a great opportunity to weaken the Confederación de Trabajadores de México (CTM), the largest trade union in Mexico, and to curtail the power of its founder and leader, Fidel Velázquez. Preparing for privatisation required protracted and farreaching changes, both in Telmex’s labour contract, later codified in the Convenio de Concertación of 1989. As a symbolic act, the privatisation of Telmex was announced at the National Assembly of Mexico’s Telephonists National Union (Sindicato de Telefonistas de la República Mexicana, STRM).11 Although trying to minimise political resistance from potential blockers outside the government, such as labour unions, the reform team found resistance inside it. Salinas became aware that the telecommunications minister, Andrés Caso Lombardo, who was also the president of Telmex’s board of directors, was delaying the process of privatisation (interview with a former SCT-COFETEL official, August 2005). The company’s finance director, Carlos Casasús, did not oppose privatisation but lobbied against the break-up of the firm. Neither Lombardo nor Casasús were part of Salinas’s inner circle (Hernández Rodríguez, 1994, 1998). Salinas therefore removed Caso Lombardo as board president and appointed Pedro Aspe instead. With Pedro Aspe as the head of the board of directors, possible opposition to privatisation within Telmex’s bureaucracy was neutralised. Later, Caso Lombardo was removed as telecommunications minister as well, and Emilio Gamboa Patrón, a close collaborator with Salinas and former head of the Office of the Presidency with Miguel de la Madrid, was appointed. Thus, in the end, SCT’s role amounted to one of validating the decisions taken by SHCP; the head of SCT was merely a witness of honour (interview with a former SCT official, June 2004). In addition, Salinas’s reform team obtained the support of the Telephone Company Workers’ Union, headed by Hernández Juárez. This support was secured after giving the union 10 per cent of the firm’s shares – one of the reasons that

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increased the price of the company – and the promise of no layoffs.12 ‘I wanted the initiative to move forward with them, not against them’, Salinas has explained (Salinas de Gortari, 2001: 410). This allowed union leaders to consolidate their control over the largest private company in Latin America, but it also helped to weaken the power of the opposing Union Federation CTM and to limit its resistance.13 The privatisation was completed by December 1990, just one year after it was announced. Grupo CARSO, Carlos Slim’s company, in a joint venture with Southwestern Bell and France Telecom, won the bid, acquiring a 27 per cent stake in Telmex and effectively giving it control of the company.14 They paid US$1.76 billion (representing almost US$1489 per telephone line), the highest ever paid for a public enterprise since the inception of the privatisation programme, the largest that had taken place involving a service sector company. This group paid 5 per cent more than the second highest bid by the group headed by Roberto Hernández (Aspe, 1992, 1993; Rogozinski, 1999; Salinas de Gortari, 2001). For Salinas and his team, Telmex was a model of privatisation for Mexico, Latin America and the rest of the world. In the words of Salinas himself, ‘it was a privatisation of enormous significance implemented impeccably’ (Salinas de Gortari, 2001: 415). With the sale to Grupo CARSO, several important political goals were accomplished. First, to sway the public’s opinion, workers’ rights were guaranteed and Mexican national capital majority control was also guaranteed; the Mexican partner maintained 51 per cent while the international operators maintained the remaining 49 per cent. Second, it was an opportunity to consolidate a Mexican business class necessary for a liberal economy. Third, as has been expressed by other authors, the privatisation generated new resources that were channelled towards lubricating corporatist relations emerging from the telephone workers’ union and a transformation of traditional state–labour relations in Mexico (Clifton et al., 2006). At the end, the privatisation of Telmex helped to weaken the political power of old-guard union leaders. In addition, the rapid and successful privatisation of Telmex helped to accomplish other divestitures in the telecommunications sector. The quasi-monopoly of Televisa in the Mexican television industry was broken in 1994 when the Salinas administration privatised a media package that included Channels 7 and 13, as well as a chain of film theatres. The winning bid was made by Ricardo Salinas Pliego, CEO of the electronics manufacturer Elektra and the furniture chain Salinas y Rocha, both businesses founded by his family. After being dominated by Televisa for 23 years, and despite the giant company’s financial successes, TV Azteca, a rival company, was firmly established as a competitor.


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1.2. Political criteria for privatisation and conflict of interest Conflict of interest and corruption were hailed by many critics as key factors which would help to explain the liberalisation of the telecommunications sector and the privatisation of Telmex in particular. The selling of the monopoly intact has also been criticised because competition was barred for the first five years. Corruption, favouritism and conflict of interest are not new elements in contemporary Mexico.15 Nevertheless, these have been difficult to prove in this instance, especially when many of the corruption controls and detectors were not wholly in place at that time.16 While evidence of corruption is notoriously hard to obtain, it cannot be denied that Carlos Salinas and Carlos Slim had struck up a friendship by the 1980s.17 Carlos Salinas always saw Carlos Slim as the country’s brightest young businessman (interview with a former COFETEL official, September 2006). Hence, Carlos Salinas saw the privatisation of Telmex and Carlos Slim’s role as key elements for his modernisation agenda. Contrary to popular belief, Mexican politicians tend to base many of their decisions on a contemporary form of Mexican nationalism. There is a common trend, either for ideological, historical reasons or political constraints, to protect strategic sectors from foreign control, despite Mexico’s turn to open markets, the signing of the NAFTA and the inward foreign investment boom to Latin America in the 1990s.18 This differentiates Mexico from many large Southern American countries that opened themselves to a greater extent to inflows of foreign investment. Salinas saw in his privatisation plan a way to encourage the development of a powerful Mexican business class. In the context of economic reform, a new national business class emerged, while others were consolidated. Salinas personally wanted the control of Telmex to remain in Mexican hands, preferably remaining with the ones he knew best. In this sense, Telmex and its strategic shareholder, Mexican entrepreneur Carlos Slim, would consolidate his business, establishing a Mexican business class, guaranteeing that Telmex profits would be taxable in Mexico.19 On his modernisation agenda, Salinas planned to promote the creation of major business groups. He has admitted: ‘[D]uring my administration, without doubt, economic stability, deregulation and privatisation encouraged the development of a powerful financial and business consortium’ (Salinas de Gortari, 2001: 477). Their formation was seen as critical in stimulating the economy. Businessmen were not new in Mexico; they had operated for decades.20 Nevertheless, this business class was far from being consolidated and needed to strengthen its

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presence before the liberalisation and open economy started to operate. Otherwise, it would be difficult for them to deal with the challenges of competitiveness and globalisation.

1.3. The politics of no regulation An important shortcoming of the privatisation of Telmex was that the implementation of regulation mechanisms was overlooked. Despite the privatisation of Telmex, bureaucrats in the telecommunications sector stated their intentions to retain regulatory control, since, after the privatisation, the government’s role would essentially be to regulate and supervise the telecommunications industry. According to people familiar with closed-door negotiations, Salinas looked to cut a back-door deal with Mr Slim. Mr Slim was reluctant to accept greater competition in the sector while also having to pay a big price for acquiring Telmex. Salinas and his team decided in the end to let him circumvent the country’s regulators (interview with a former COFETEL official, September 2006). This led to the postponement of the creation of regulatory structures (Mariscal, 2001, 2002). In fact, when a draft of the law was presented, the Ministry of Finance objected to a chapter devoted to the creation of an independent and accountable telecommunications commission (interview with a former COFETEL official, September 2006). Consequently, Telmex won the only nationwide concession, while rival companies were forced to settle for concessions that were limited to a minority stake in the fixed-line business. This eventually provided Telmex with a great leverage over the market, which could be felt even in other industries.21 Instead of creating a regulatory framework together with a regulatory authority for the recently privatised telecommunications sector, Salinas’s reform team decided to create what they called a Telmex Certificate of Concession. This was a legal contract between the government and Telmex, fixing the rule of its concession. It was not codified by law. Lacking a regulator, the contract established the rules for its activity. Among them were rules regulating the relationship of Telmex to other activities in the telecommunications sector, such as interconnection with other providers and with consumers, price rates and obligations. Also included were the standards for expansion and service quality, such as a rate of expansion of telephone lines of 12 per cent per year. On the other hand, Telmex was allowed to enjoy a five-year monopoly, regulation has to wait consequently. Figure 6.1 depicts the lack of a regulatory authority after the privatisation of Telmex.


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1

Political control

No agency

0 OAD

Figure 6.1


+Budget

COFETEL creation

In sum, the idea of minimising political opposition and accomplishing a series of political goals created, to a significant degree, the decision to maintain a dominant firm in the telephone market and to postpone the creation of governance structures to regulate telecommunications. However, the reform team did not envisage the potential problems – both in terms of price costs and political conflict with the bureaucrats – that the lack of regulation would bring later on. Consequently, this weakened the regulatory framework and consolidated the dominant position of Telmex in the telecommunications market.

2. The COFETEL and the new Federal Telecommunications Law In late 1994, the Zedillo administration started locked in struggles along with deep economic and political issues. As a result of the new political context, the speed and scope of the government’s reform agenda was reduced even further. Faced with very little political capital to introduce major reforms, and with the need to tighten the budget once again in order to limit the damage of the economic crisis, the Zedillo administration chose to minimise its reform agenda and to concentrate on stabilising the economy. Nevertheless, Zedillo’s reform team decided to continue the reform of the telecommunications sector. By then the debate about privatisation had practically ended, but the debate about regulation and its

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authority was far from over. As competition was scheduled to begin in 1996, they focused on creating a regulatory framework for the sector (Noll and Salas, 1997). The reform team also agreed with the idea of enforcing investment commitments while also increasing the value of assets that had yet to be sold, thus favouring greater returns for a financially exposed country (interview with a former COFETEL official, August 2005). 2.1. Regulating the telecommunications market After the privatisation of Telmex and then the liberalisation of the telecommunications sector, Mexico attracted a great number of potential investors in the sector. Many saw the Mexican telecommunications industry as one of the most promising in the world.22 It was also well known that Mexico was one of the most deregulated telecommunications sectors in the world. Mexico started to take steps towards the liberalisation of long-distance phone services and, later, of local services. Together with this, it was expected that another set of services would be totally liberalised (interconnections, radio calls and so on), as a large expansion of the industry. Competition was anticipated and regulation was desperately needed. Consequently, it was necessary to transform the Telmex’s Certificate of Concession into a real regulatory law and to guarantee the investment of the other companies operating in the telecommunications industry (such as mobile services). The new team at the SCT worked fast to get a draft of the law before the deadline and received the approval of the president in 1995. A Congress still dominated by the PRI passed the Federal Telecommunications Law later that year, where the main element was the creation of a regulatory authority, the Federal Telecommunications Commission (COFETEL). Similar to the privatisation process, to avoid controversies the 1995 Telecommunications Law (Ley Federal de Telecomunicaciones) was drafted with the help of experts. According to the SCT, the Federal Telecommunications Law aimed to provide transparency and reduce the opportunities for favouritism or corruption by the authorities in granting licences to operate (Secretaría de Comunicaciones y Transportes, 1996). The law also gave the Competition Commission the responsibility to determine whether certain markets with insufficient competition required stiffer regulations, to be issued by the Ministry of Communications and Transport. The new regulatory framework also set the stage for opening the local service market to competition (Secretaría de Comunicaciones y Transportes, 1995, 1996).


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The law created established technical and market conditions for competition, and the general principles for effective regulation, albeit in a very general fashion. A closer analysis of the law reveals this did not establish the institutional infrastructure for its own effective implementation. This would have required both a strong authority and the issuance of secondary regulations aimed at promoting competition. As can be seen in the analysis below, the newly created COFETEL was unable to make decisions counter to the entrenched interests of the dominant players. The review of the process of creation helps shed new light on how political forces steered the outcome away from an ideally competitive one. 2.2. Struggles for regulation During Zedillo’s administration, Carlos Ruiz Sacristán was appointed Minister of SCT after Guillermo Ortiz left to work at the Ministry of Finance. Previously, Ruiz Sacristán had worked at the central bank and the Ministry of Finance. From 1974 to 1988, Ruiz held positions of increasing responsibility at the Banco de México. His experience also included service as a director on the boards of several financial institutions and other public companies and commissions. Although he had extensive experience in the public sector, it was not in transportation or telecommunications. So, from the beginning, he was seen as an outsider by the rest of the officials at the SCT (interview with a former COFETEL official, August 2005). As shown in Chapter 4, cabinet ministers were traditionally appointed from within the ranks of the same ministry. In the case of the SCT, the minister was customarily appointed from within the Transport, Infrastructure and Highway Sub-secretariat rather than the Telecommunications Sub-secretariat.23 This created a sort of independence for this last branch, as the sub-secretariat worked relatively independently from the rest of the ministry and bureaucracts gained autonomy over decisions in the telecommunications sector. At the time of privatisation, the office in charge of regulating the industry was the Sub-secretariat of Communications and Technological Development in the Secretariat of Communications and Transportation. As a consequence of the 1995 Telecommunications Law, this sub-secretariat started transferring some of its functions to COFETEL in August 1996. Then the formation of the regulatory agency created two groups inside the government that were in open conflict. On one side was a group of bureaucrats with a solid career in the sector who had

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previously been in charge of regulating the state-owned companies. This included Javier Lozano, advisor of the Secretary, then DirectorGeneral of Telecommunications and then Sub-secretary of the same sector. On the other side was the reform team, backed up by members of Congress and stakeholders. The first group firmly believed that the telecommunications sector needed a strong and solid regulatory framework. The second group was more concerned about setting up the rules for concessions and wanted an independent regulatory body which could issue licences and concessions without the review of the ministry (interview with a former COFETEL official, August 2005). The first group wanted a regulator subordinate to the SCT, to minimise the possibilities of capture (interview with a former COFETEL official, August 2005). They thought, correctly, that a regulator could only be made autonomous after strengthening the regulatory framework and the faculties of the authority. Members of the commission wanted greater autonomy with both technical and operational capabilities (interview with a former COFETEL official, September 2006). This group was more concerned about the possibility of the capture of the regulatory authority, claiming that, according to the Federal Telecommunications Law, the commission should be a decentralised organ of the SCT, but it was hierarchically subordinate to the ministry (interview with a former SCT-COFETEL official, August 2005). COFETEL regulatory responsibilities arose from the struggle between these two opposite groups, resulting in a rather amorphous, nebulous design. In 1995, the Ministry of Communications and Transportation drafted the decree creating COFETEL. COFETEL was intended to be an independent agency in charge of telecommunications regulation and gathering public information. It was finally established in the 1995 Federal Telecommunications Law. The 1995 law established that COFETEL should regulate telecommunications networks, including satellite connections, as well as the allocation of spectrum. According to the law, this was intended to serve as an example for other nations (Secretaría de Comunicaciones y Transportes, 1995). It provided the government with guidelines to be followed once competition began the following year. It also recognised the importance of the private sector and the participation of foreign capital in the development of a strong telecommunications infrastructure. Among other functions, it was to produce technical plans and auction the use of the radio-electric spectrum, as it is called in Mexico.


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According to this law, COFETEL should have been an autonomous agency with operative independence. In fact, COFETEL became highly bureaucratic and obtained a mandate to produce technical plans and to auction off the radio-electric spectrum, along with other developmental functions. Although it obtained an enormous budget, it had no legal status to negotiate its own budget, which was allocated through the Ministry of Finance. A detailed analysis of the law shows that COFETEL, although separate from the SCT, was not completely autonomous because its budget, sanctioning functions and power to grant licences to operators all remained under the control of the SCT. COFETEL’s main functions then were implementation and co-ordination of the law, spectrum management and auctions. The Secretary of Communications and Transport retained a broad discretion over the regulatory authority until 1995. On analysing the law, almost 70 per cent of the legal provisions and faculties of the regulator remained with the Ministry of Telecommunications or were shared with it, including the integration of the board. The Telecommunications Law allowed authorities to establish specific or asymmetric regulatory operators that have been declared dominant by the Federal Competition Commission (Secretaría de Comunicaciones y Transportes, 1996). The scope of such regulations may include tariffs, quality and information. The process of transition to new political and economic institutions placed constraints on policy choices, as the legal powers remained in the ministry as well as in the judicial branch through judicial review. The Ley Federal de Telecomunicaciones was originally designed to regulate networks, not services and licences, and it was not meant to empower the regulator. According to the law, the ministry was in charge of designing telecommunications development policies, as well as some regulatory and administrative duties; COFETEL was only responsible for the elaboration of the technical report for decision-making and to ‘give its opinion’ regarding regulation and changes to laws, as well as new concessions and sanctions. COFETEL would not be responsible for granting concessions or penalising operators; instead, it would remain limited to providing the SCT with opinions with regard to such decisions. This ambiguous status of COFETEL vis-à-vis the ministry, together with a confusing and obscure legal regulatory framework, created a large conflict between the two bodies, due to a sort of double regulatory authority in the sector. This also resulted in numerous inefficiencies and costly administrative structures. For instance, both bodies have, together

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and separately, been unable to implement asymmetrical regulation rules to challenge the dominant position of Telmex. Conflict between them has resulted in the failure to produce basic regulatory resolutions. By itself, the law was very general in many areas and did not give the authority a precise enough mandate. It did not create the conditions to guarantee its satisfactory implementation (see Secretaría de Comunicaciones y Transportes, 1995). As can be seen, the ministry retained the main regulatory responsibilities while the technical and administrative tasks were transferred to COFETEL, shaping the regulator into a semi-autonomous agency with limited faculties. Figure 6.2 graphically summarises this, depicting how, despite having legal independence, its faculties were severely constrained. In addition, COFETEL had no clear mechanism for resolving disputes. This means that its powers, faculties and responsibilities can be (and have in fact been) disputed in the courts. The commission’s structure was also inadequate; by establishing four commissioners, problems arose when votes were evenly split. Another factor hampering its autonomy and effectiveness is that the president had the authority to appoint its commissioners without fixed tenure. Commissioners could also be removed by the minister at will, making them clearly subordinate to him. This was confirmed with the appointment at COFETEL of Carlos Casasús. A former finance director of Telmex, he was appointed president of the commission. His appointment as head of COFETEL was controversial from the beginning because

1

Political control

No agency COFETEL

0 OAD

Figure 6.2


COFETEL during 1995

+Budget


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he had previously been a top-level official at Telmex while it was stateowned (interview with a former COFETEL official, September 2006). He was also criticised for being slow and unresponsive to the demands of the Supreme Court. This situation led to many critics derisively labelling COFETEL ‘Cofetelmex’, not only for its poor regulatory performance of the company, but also because its staff members were almost exclusively former employees of Telmex. The reform team, on the other hand, was more than pleased with Casasús’s appointment. But the struggle for the regulatory control of the telecommunications sector was far from over (interview with a former SCT-COFETEL official, August 2005).24 Solid, dependable regulation that is protected from corruption depends on autonomy. Constraints on autonomy arise from conflicts. Yet another piece of evidence of the constraint on autonomy is the fact that the commission was created by a low-ranking statute in such a way that it could be modified single-handedly by the Minister of Telecommunications. After more than six years without proper regulation, the creation of a strong regulator was expected at this time. However, the resulting regulator was rather disappointing. In sum, COFETEL was born as a mellow, toothless regulator that spent more time struggling with other authorities than focusing on regulating the sector. 2.3. Conflict deepens Deeply engaged in struggles, the telecommunications sector, and more specifically Telmex, enjoyed a long period without substantive competition and without proper regulation. In the period from 1990 to 1995, it operated without regulation, and it was not until 1997 when other segments of the market, such as local and radio calls, were opened. The delay in creating a telecommunications regulator allowed Telmex to gain influence. One way it did this was to agree to help the government control inflation after the 1995 crisis by adjusting its prices. In return, Telmex secured restrictions from the regulator on price levels for subsequent years (Comisión Federal de Telecomunicaciones, 2004). The Secretary of Communications, who drafted the decree creating COFETEL, claimed that critics of Telmex had demanded an independent agency, but that Telmex had opposed it (interview with a former COFETEL official, September 2006). Table 6.1 summarises this timetable. In April 1998, Carlos Casasús resigned as head of COFETEL after a long dispute with the sub-secretary of the SCT, Javier Lozano, over the responsibilities of COFETEL and its role in regulating the sector. Javier Lozano was appointed in Casasús’s place as head of the commission. Records

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Table 6.1

Telecommunications sector timetable

Privatisation Liberalisation (mobile)

Valueadded

Creation of COFETEL

Liberalisation (local)

Liberalisation (long-distance)

Liberalisation (international)

1990

1990

1995

1997

1997

1997

1990

detailing the political disputes between COFETEL and the SCT remain sealed. According to an interviewee, the head of the SCT, Carlos Ruiz Sacristán, used these disputes as a pretext to force Casasús to resign and to appoint Lozano, who wanted to take over COFETEL (interview with a former COFETEL official, August 2005). With Lozano’s appointment, all of the functions that were part of the SCT passed over to COFETEL. As soon as Lozano took over COFETEL, he decided, in contrast to his predecessor, to consolidate the regulatory faculties of COFETEL. According to them, these reforms will minimise the probability of capture by Telmex (interview with a former COFETEL official, September 2006). From a formalistic approach, this decision could sound counterintuitive, especially to those who believe in delegation and autonomy as a way of strengthening regulators. In a country lacking an independent regulatory tradition, the possibility of capture of the regulator is high.25 In this sense, regulatory agencies that are not politically and legally consolidated can be captured by the interests of those who are supposed to be regulated. In Mexico, the regulatory framework for the telecommunications industry was also poor. For those wanting to strengthen the regulatory framework, capture became a grave concern. Lozano knew that a mellow, toothless regulator was easily capturable. So, when he was in the sub-secretariat, he tried to retain as many of COFETEL’s functions as possible under the jurisdiction of the ministry, to avoid the possibility that its decisions were taken to benefit the regulatees (especially Telmex). He and his team started a personal crusade to strengthen regulation under the umbrella of the ministry. Once appointed in COFETEL, he knew which faculties needed to be strengthened. Yet he also knew that Telmex might block any legal reform of the regulator that would potentially be harmful to Telmex. Lozano then tried to consolidate COFETEL’s regulatory character through a statute reform (interview with a former COFETEL official, September 2006). Nevertheless, his plans could never have taken shape, since they found resistance, not only from the regulatees (mainly Telmex), but from the ministry as well (interview with a former SCT-COFETEL official, August 2005).


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An example of this unfolded in 1997, when COFETEL issued a Declaration of Dominance to Telmex.26 After a dispute with the ministry over the relevant information to support the resolution, the courts – ten years later – found in favour of Telmex because the data were no longer current. The length of time it takes to resolve these kinds of disputes has delayed other important regulatory decisions.27 During the struggles between bureaucrats in the SCT and COFETEL, Telmex consolidated its position in the telecommunications market. One especially effective method was through the existence of significant barriers to entry.28 The period from 1994 to 2000 has been declared the most profitable period in Telmex’s young history (Teléfonos de México, 2000). Furthermore, interconnection, or the physical linking of a carrier’s network with equipment or facilities not belonging to that network, has been characterised by disagreements and legal disputes between companies, and between companies and the authorities. By law, parties are allowed to determine interconnection prices themselves. In the case of failing to reach an agreement, the ministry (not COFETEL) determines the rate of interconnection. This has not only caused lengthy legal disputes, it in fact resulted in the establishment of a dispute resolution panel within the World Trade Organization (WTO) and problems with the US government. This is consistent with the findings of other authors. For instance, Mariscal and Kuhlmann (2008) affirm that, regardless of its legal status, ‘the regulatory agency is not autonomous, since it depends on the ministry for the day to day [sic] decisions. Moreover, the regulatory agency COFETEL is not endowed with mechanisms to provide a transparent and inclusive decision making process’ (2008: 2). According to their measures, the authors claim that Mexican regulatory agencies have not necessarily had a satisfactory performance in terms of institutional strength.29 This is a consequence not only of the regulator having a poor institutional design, but also because of a poor legal framework that does not empower it sufficiently. This situation persisted for more than a decade.

3. The Ley Televisa and the ‘new’ COFETEL During Vicente Fox’s administration two very important amendments to the radio and television broadcasting legislation were enacted. In 2002 new rules in the Federal Law for Radio and Television were created. The most important change focused on the payment of ‘fiscal

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times’ that the broadcasters have to pay to the state, which had been in existence since the enactment of the previous law in 1969. Before the law was enacted, a Televisa-led interest group started a series of negotiations to change the rules that had been in force since 1969. Existing legislation obligated broadcasters to make 12.5 per cent of the daily broadcasting time available to the state, as a payment for the use of federal concessions.30 At the dawn of the current century, the federal government believed this ‘tax’ illustrated ‘the vestiges of authoritarianism’ that needed to be removed in the new democratic environment. The truth is that Televisa, together with other important broadcasters, were not only interested in reducing the ‘fiscal time’ paid to the government, but also in changing important limits to the renewal of the concessions. This would also start a new relationship between them and the government. Even when the government never had enough capacity to cover all three hours with its own production, broadcasters must make this time available, with no fixed hours and was not cumulative nor could be deferred. Concessions, on the other hand, needed to be renewed through a hard and long process. Then, political control was exerted in two ways, through fiscal time requirements and through the process of renewal negotiations. After much pressure from the broadcasters, in October 2002, the new law was finally passed. Then the new law changed the 12.5 per cent to 1.25 per cent (equivalent to 35 minutes) of airtime for broadcasting recorded clips of between 20 and 30 minutes from the federal Executive Branch. In the same token, concessions due to finish before 2004 may be filed for renewal before the terms expire. The 90 per cent reduction in government airtime was not beneficial for the government. First, the new 1.25 per cent of the time was divided in short clips exclusively for the federal Executive Branch, leaving the other branches out. Second, any additional time needed to be bought from the broadcaster. This resulted in doubling the federal government’s publicity expenditures in just one year.31 Critics at the most important newspapers in Mexico reacted almost immediately, speculating that the reform project was drafted in Televisa’s offices.32 Government officials came out in defence of the new law. No doubt, the new law put broadcasters in a brand new position visà-vis the government and helped to consolidate their position in the market together with a new political status and negotiating power. For the government, this new law was a new opportunity to develop new clientelistic relations. This was just the beginning.


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3.1. The politics of capture: the Ley Televisa In November 2005, an amendment was introduced to the Federal Telecommunications Law by a PRI legislator in the Chamber of Deputies.33 Ten days later, in record time, the bill was voted on in the plenary meeting of the Lower House without further discussion or debate. On the very day of the beginning of the last year of the Fox administration, the Chamber of Deputies passed the bill in only seven minutes on a vote of 327 representatives from all parties and immediately turned over to the Senate. The Senate would approve the law just a couple of months later. Two laws were substantially amended. The Federal Radio and Television Law was amended, supposedly in order to broaden the scope of the previous law and to regulate the use and exploitation of the national public good represented by the radio spectrum (Secretaría de Comunicaciones y Transportes, 2006). The Federal Telecommunications Law was also amended primarily to extend its scope as a regulatory body to include radio and television. To accomplish this, the organic powers previously held by the General Office of Radio and Television Systems at the Ministry of Communications and Transportation were transferred to the Commission. The Federal Radio and Television Law established that the commission would be a decentralised body of the Federal Public Administration. It also provided that this regulatory body would have technical, operative, expenditure and management autonomy for the purposes of reviewing, regulating, promoting and supervising the efficient development of telecommunications and radio broadcasting. The ‘new’ COFETEL would be composed of five commissioners (including the president), appointed by the head of the federal Executive and approved by the Senate (Secretaría de Comunicaciones y Transportes, 2006). The term in office for the commissioners would be eight years, renewable when the terms were staggered. The president of COFETEL would be chosen by a vote of the commissioners and would remain in his position for four years (renewable for one additional period). Although the president of COFETEL is in fact another commissioner, he has a tie-breaking vote (Secretaría de Comunicaciones y Transportes, 2006). It was also told that the law would reinforce COFETEL’s faculties to regulate the broadcasting sector, including pay-per-view television, and increase its responsibility regarding the radio spectrum (Secretaría de Comunicaciones y Transportes, 2006). Yet, in a detailed account of the content of this reform, the new law reinforced the already

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consolidated TV corporations by restraining competition conditions and not resorting for public bidding on offering telecommunications services. The changes included the provision that broadcasters wishing to offer telecommunications services over their current licence bands had to request a separate operation permit from the SCT (Secretaría de Comunicaciones y Transportes, 2006). On the surface, these reforms seemed to break with the previous trends in telecommunications regulation, by strengthening the regulatory authority rather than granting it more autonomy. However, journalists, academics and experts alike were amazed not only by such a quick voting process of the law. After a review, critics agreed that the bill did not benefit competition, but rather the concentration of private television strengthened the market and political power of these TV networks. As a matter of fact, with the election of Vicente Fox as Mexico’s first opposition president in 2000, many critics doubted that a change in the telecommunications sector could be possible. This idea was confirmed when Pedro Cerisola, a former Telmex employee, was appointed as Minister of Communications and Transport at the start of the Fox administration. Cerisola rarely moved against Telmex or the main television broadcasters. Reforms to the law confirmed that, despite the control that the SCT still had over COFETEL, the telecommunications companies wanted fewer regulatory constraints on their activities. This law helped to consolidate the already dominant position in the market of some operators. Apparently both Televisa and TV Azteca pressed very strongly in favour of a quick approval of the law. And scandal struck when it was noticed that the computer file containing the bill was actually drafted in a Televisa computer. The new radio and television law (known locally as LEFERyT) was then nicknamed as Ley Televisa.34 The bottom line is that it offered truly scandalous concessions to two of the largest national television networks, as well as changes in the status of the regulatory authority, minimising its monitoring and regulatory capacities.35 This started a political scandal that almost doomed the law.36 By 2007 reforms also represented a change in the status of the telecommunications regulator. Although it is less independent (according to the Mexican legal doctrine), the control of those faculties did not get passed on to the ministry. As a matter of fact, the ministry lost control of over almost 25 per cent of the faculties that it previously held. Instead of representing more autonomy, these faculties translated into a big controversy: the formation of the new board was completely under


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1

Political control

No agency COFETEL 1996 COFETEL

0 OAD

Figure 6.3


+Budget

COFETEL during the 2007 reforms

the control of the Telecommunications Committee in the Congress. This chamber was in turn under the control of the regulatees that looked to appoint more sympathetic members to the board of COFETEL. A graphical representation of this new status can be seen in Figure 6.3. Allocation of the spectrum has always been a big source of conflict and inefficiency in the Mexican telecommunications sector. It was in fact not until 2005 that the first open auction in almost a decade took place. Needless to say, this raised the price of the spectrum, reduced the incentives and innovation, and became a source of conflict and uncertainty. Although it is legally impossible to commercialise the spectrum, the lack of spectrum auctions created a speculative secondary market. Given the limited responsibilities of COFETEL, sales in the secondary market were rarely punished. Although formally autonomous, COFETEL remained as a decentralised body of the telecommunications ministry, with the capacity to issue resolutions under the supervision of the ministry, but without the faculty to grant licences for either the televisual spectrum or the telephone industry. But interference soon arrived. In 2007, the new COFETEL announced the programme for public auction of frequencies for mobile telephony and Wi-Max. The ministry decided to modify the auction, arguing that COFETEL did not have the authority to do so. The reason behind the ministry’s reversal was not only the duplication of responsibilities, but also the ministry reviewing COFETEL’s actions, as it was afraid of favouritism in the public bids.37 The ministry backed down five months later, reissuing the original programme.

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Tensions between the ministry and COFETEL and other incumbent bodies (such as the anti-trust commission) have never been made public. Nevertheless, as they have failed to reach agreement on several issues, courts have had the final word on many disputes. As a consequence of this conflict, there have been frequent resignations by top-level members of staff in both organisations, and they have moved intermittently between both the ministry and COFETEL. According to the one remaining COFETEL director, José Luis Peralta, up to 40 per cent of the regulator’s decisions were behind schedule because of conflicts (Lozano, 2006b). Until 2006, commissioners were never officially removed. Yet, after a long public scandal concerning favouring dominant television concessionaires,38 COFETEL was rendered virtually inactive because three important board members resigned en masse over disagreements about forthcoming laws that would alter the balance of power between the commission and the ministry. Immediately after the bill was introduced to Congress, another four top bureaucrats resigned, citing differences over the planned reforms. Only COFETEL’s president, Jorge Arredondo, remained at his post, after Abel Hibert, Clara Luz Álvarez and Salma Jalife all resigned, having failed to resolve fundamental differences over COFETEL’s mission as embodied in the new law. As the new law required appointments to be ratified by Congress, Vicente Fox delivered to Congress a new list of candidates with nominations such as Héctor Osuna Jaimes, Ernesto Gil, Eduardo Ruiz and Gerardo Francisco González. The first attempt to appoint the new COFETEL board members fell through because one refused to accept the position and, on 31 May 2006, Congress rejected the others in a plenary vote. Osuna was already president of the Upper House’s Transport and Communications Committee and a promoter of the new law. He was believed to be the favourite for COFETEL’s presidency, preferred not only by the president, but also by the telecommunications companies. This was an extremely controversial choice, since he was known to back reforms to the radio and television law, which are popularly considered to be overly beneficial to dominant television companies (Lozano, 2006a). The appointments were delayed pending further analysis. Progress on several key issues, such as licences and concessions, depends on decisions by the COFETEL board. Because this is true, the government’s delays in appointing new members have drawn repeated criticism from many executives in the telecommunications sector. Some executives claim that they have even suspended large investments because of this crisis (Lozano, 2006a).


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In the end, a board was appointed in 2006. But the Senate objected to the new appointments, which led to yet more controversy. Ever since, the law and the appointments have been the subject of great scepticism. Later that year, a group of senators filed a lawsuit claiming that the new appointments were unconstitutional. The members of the board opted for an amparo. In the spring of 2008, the Supreme Court finally found against the second appointments.39 In any case, COFETEL and the framework to regulate the telecommunications market remain in a fragile position. In this case, it is not only regulatory matters that have been affected. Also, in 2007, a critical Supreme Court decision removed the Senate’s power to confirm COFETEL commissioners, on the grounds that COFETEL is, as a body within the SCT, part of the Executive Branch and not a true autonomous agency.

3.2. The most recent chapter of this story As a consequence of the 2006 reform and 2007 Supreme Court resolution, President Felipe Calderón (2006–12) published a new statute for COFETEL in late 2008. As a way to end the controversy, Calderón tried to empower the regulatory faculties of the SCT and strengthen its oversight authority. This would result, as predicted, in a likely de facto reduction of COFETEL’s autonomy. The SCT will recover substantial faculties. This could be confirmed with a series of subsequent events. In June 2010 SCT Secretary Juan Molinar announced that Mony de Swaan would be named Presuident of COFETEL by President Calderón to COFETEL after Hector Osuna stepped down. Increasing tensions between the SCT and COFETEL put Osuna between a rock and a hard place. He finally decided to resign. The idea of appointing de Swaan was to push for the commission to vote him into the chairmanship. As a chairman, he was expected to create greater co-ordination between the ministry and COFETEL and likely abolish the ‘double window’ whereby telecommunications regulations have had to be approved by both the SCT and COFETEL. COFETEL has in the past clashed with the SCT over policy changes and has been slow to improve competition in the market. Just to illustrate this point, in the period since the issue of the Ley Televisa it was confirmed that Slim’s company dominates the telecommunications industry, with 70 per cent of the wireless market held by his America Movil, while Telmex controls 80 per cent of the fixed-line market. De Swaan’s appointment to the SCT, a man with a ‘brief but intense’ background in telecommunications issues and as ‘having carried out in a

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distinguished manner professional, public service, or academic activities substantially related to the telecommunications sector’, as described by the Secretary Molinar, was political. The president’s intention behind the appointment of de Swaan as chairman was to recover control over the regulatory policy in the telecommunications market, especially after the Ley Televisa episode that weakened COFETEL’s performance and credibility. Legislators had criticised de Swaan’s nomination, citing his relative lack of experience in the industry. Then, political parties that took part in drafting Ley Televisa threatened to file suit to block de Swaan’s appointment on the grounds that he does not meet the legal qualifications. Mexican lawmakers approved a move to present a constitutional charge against the appointment of de Swaan at the end of June 2010. The appointment allegedly goes against Article 9 of the Federal Telecommunications Law, in that de Swaan does not meet the requirements necessary to head up the regulatory body. Nevertheless, later in July, the five commissioners cast secret ballots to select their chairman for the next four years and elected Mony de Swaan. It has been stated that de Swaan was backed by Rafael del Villar and Gonzalo Martinez, the two commissioners seen as the most supportive of stricter regulation (interview with a COFETEL official, September 2010). The new head of the telecommunications regulator pledged to work closely with the communications ministry to increase competition and improve infrastructure in the sector dominated by Telmex. ‘This is an independent body that has to work in a coordinated and collaborative way together with the ministry’, de Swaan told a news conference (Reuters, 14 July 2010). He also promised that COFETEL will be more aggressive. After years of delay, COFETEL started tendering the spectrum for wireless operators to expand their services, and de Swaan said additional frequencies could be put on the auction block later in 2010. This was greeted by a sigh of relief, given that it has taken years to organise and carry out this auction after numerous setbacks. The average period it takes to carry out a spectrum auction in Mexico is 4.3 years. Since 1997, Mexico has carried out half the amount of auctions that the United States has in the same time period. As announced by de Swaan in August 2010, COFETEL decided to auction 30 MHz of the spectrum in the 1.7–2.1 GHz band, called Auction 21. Following several weeks of controversy and speculation, COFETEL decided to grant the band to a consortium comprised of mobile


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operator Nextel and broadcast giant Televisa.40 The Nextel/Televisa bid had been controversial as the companies offered 180 million pesos (US$14million),41 a fraction of the US$400 million that rivals America Movil (NYSE: AMX) and Telefonica (NYSE: TEF) offered for another slice of the mobile spectrum. The SCT said in a statement that more than 60 lawsuits were presented throughout the auction process. Criticism came not only from rival operators; legislators requested that the SCT and COFETEL declare Auction 21 invalid, arguing that awarding the spectrum to the Nextel/Televisa consortium would go against Article 28 of the Constitution, which requires the efficient use of the spectrum, the social use of licensed assets and the avoidance of monopolistic behaviour. This episode suggests that the struggles between regulators, politicians and operators have become even more sophisticated, continuing to move the government institutions further and further away from any optimal design that might have been envisioned at the planning stages. As affirmed by Guerrero (2010), politicians no longer aim to control the media but still maintain close ties with the media. Especially among lawmakers this has created a whole new matrix of clientelistic relations. Hence, operators have found resistance on the part of those who want to strengthen and consolidate the regulatory framework in favour of the businesses in the sector and who operate both in COFETEL and the ministry. They have then tried to reform the law and soften the regulator by lobbying in top political spheres, including the Congress and even the Office of the President. Then, Calderon’s decision to appoint de Swaan as chairman of COFETEL, and with him, try to recover the control of the regulatory policy of the telecommunications sector, and consequently reduce COFETEL’s autonomy, is also a way to try to put some order in a market with powerful interest groups who are capable of buying anyone’s will. It is expected then that COFETEL and the SCT will be under fire for the next few years.

Final remarks At the heart of a new liberal paradigm, political criteria and political conflict have shaped the architecture of the regulator for the telecommunications industry. Conflicts of interest and corruption were hailed by many critics as key factors which would help to understand this process, especially in regard to the privatisation of Telmex. Persistent problems of clientelism, executive–union relations and political (and personal) criteria in the regulatory decision have cast doubt on

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whether a technical approach is sufficient to understand the setting up of COFETEL. This chapter has conclusively made evident that conflicts among bureaucratic and political groups have shaped the form and the degree of autonomy of COFETEL. As analysed here, the policy dilemma, on early stages, was clearly won by the short-term public finance and macroeconomic goals, and regulation was subordinated to these ends. More importantly, the country’s lack of strong anti-trust laws was systematically neglected in the service of the ultimate objective of building a new business class for the new century. The substantial market power that the telephone company acquired during the privatisation process, together with the policy decision to maintain a vertically integrated firm, itself provided the privatised Telmex with an enormous market power. Hence, Mexican entrepreneur Carlos Slim has consolidated his business, and as the world’s richest person (Forbes Global Wealth Reporter, 2010) has become a leading force in the internationalising ambitions of Mexico and the creation of a Mexican business class. The delayed creation of a proper regulator helped to increase the market uncertainties. The dominant – almost monopolistic – position that Telmex enjoys today is a direct consequence both of the way that it was privatised and the long-term lack of regulation. COFETEL has been widely criticised for not having sufficient autonomy and strength. Many actors have advocated for more independence from the SCT. As shown here, some bureaucrats wanted to provide COFETEL with real regulatory bite and real independence, and they have demanded transparency and accountability in its decisions. Some bureaucrats took this as a personal journey and started pushing to strengthen the regulatory framework. This created two opposing groups with opposite agendas for the regulator. Neither of these proposals succeeded completely, and the institutional result was a mixture of different institutional preferences coming from two groups in conflict who changed or reinforced their positions and modified their strategies. Bureaucrats are, then, neither disinterested officials or self-interested bureaucrats; they are actors trapped in a complex matrix of previous decisions. Many have argued that COFETEL’s independence from regulated companies should be strengthened further to ensure fair and reasonably predictable decisions. Along the lines of what Noll (2000) has coined the ‘regulatory challenge’, policy implications from this analysis consist of setting a regulatory reform and endowing regulatory institutions with autonomy, transparency, competence, openness, and the power to


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enforce judgements and issue sanctions when judgements are not followed. Nonetheless, as shown in this chapter, this is not an easy task. The degree of independence of COFETEL has been severely restricted by constant and intermittent struggles. In fact, later efforts have focused on empowering and strengthening the SCT’s regulatory capacity to return some order to the telecommunications market, even if this results in a likely de facto reduction of COFETEL’s autonomy.

7 The Energy Regulatory Commission

Introduction Energy, especially oil, has played an essential role in Mexico’s economy and its recent political history. It has proved significantly important to the devising of public finances and the development of the country. This sector is also the most important source of public revenue, as oil and related taxes account for more than a third of government proceeds.1 Petróleos Mexicanos (PEMEX), the public oil and gas company, considered to be one of the ten most important oil companies in the world, has literally fuelled both public finance and the development of the country.2 Mexico’s government is highly dependent on oil revenues. The most important national entities in energy are the state-owned PEMEX, and the national electricity utility Federal Electricity Commission, Comisión Federal de Electricidad (CFE).3 State ownership of energy assets is a historically significant characteristic of Mexico’s economy. Mexico’s oil industry was nationalised in 1938. Mexico’s Constitution establishes the nation’s exclusive right to exploit hydrocarbons, provide a public electric power service, manage nuclear fuels, as well as some other related activities. Presently, control over Mexico’s huge energy sector is concentrated under the Ministry of Energy. Oil is historically a politically sensitive issue in Mexico. PEMEX is not only one of the most important public companies, but also one of the most politically sensitive, as it is usually taken as a symbol of ‘Mexican sovereignty’.4 Then, different administrations have found it difficult to reform the energy sector, facing cantankerous opposition from bureaucrats at state-owned companies and highly politicised labour unions. 164

The Energy Regulatory Commission

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While constrained by constitutional restrictions, and strong public sector unions, both presidents Salinas and Zedillo have made significant progress in freeing certain energy areas from the ‘core’ of oil exploration and production. Nevertheless, Mexican presidents have not yet succeeded in implementing the promised free market reforms in the energy sector. Because oil is so central to the Mexican economy, and is a source of revenue for the Mexican government, the story of how the energy industry is regulated provides a fascinating case study for this book. In this chapter, I therefore analyse the failed creation of a regulatory authority for this sector. The creation of the Comisión Reguladora de Energía (CRE) is analysed in the context of important reforms taking place in the Mexican energy sector. First, an example of a failed creation occurred when Carlos Salinas’s administration intended to reform the oil sector in the context of the negotiation of the North American Free Trade Agreement (NAFTA). Salinas was able to move a modernisation plan for PEMEX forward and to resist pressure from the Americans to include oil in the Agreement. Nevertheless, soon after the long restructuring of PEMEX, Salinas and his reform team faced intense bureaucratic and popular opposition to privatise the oil sector.5 As will be shown, in keeping with the central claim of this study that ideal regulatory principles are sacrificed for political considerations, the CRE ended up as a mere advisory body. Second, I analyse Zedillo’s proposal to reform the CRE in the context of the debate of privatisation of the electricity sector. Zedillo also wanted to centralise several separate authorities into one single body. In the end, the administration was unsuccessful in reforming and privatising the electricity-generating companies. Regulation, in this context, was meaningless. Although a regulator for the energy sector does formally exist, in practice this body is unable to regulate. As the reforms in both the oil and electricity sectors were abandoned, the regulator was also doomed to failure. Currently, only the gas industry is subject to partial – and mild – regulation by the CRE. The creation of the CRE illustrates that when opposition to privatisation is strong, the function of a regulator can become meaningless. It also shows the role political opposition can play in undermining the process of agency design. Reform teams could have created the basic structure of the regulator, but this would have proved pointless after the process of reform in the sector failed.

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The creation of the CRE summarises the history of the energy sector in Mexico: a collection of struggles among different forces, at many levels and in many arenas, for the political control of these industries. This case also emphasises that when central governments fail to exercise sufficient control over state-owned companies and when opposing forces are strong, the result may be rather useless, cosmetic institutions. The chapter unfolds as follows. First, I give a description of the basic political structure of the energy sector in Mexico. Second, I provide an analysis of Salinas’s and Zedillo’s reform plans and their inability to move them forward, and, consequently, the failed creation of the regulatory agency for the energy sector in Mexico. Third, I analyse the most recent reforms to the oil sector. I conclude the chapter with some final comments.

1. The Mexican energy sector’s governance structures The institutional design of the Mexican energy sector reflects, in many ways, an amalgamation of the consequences of the political decisions and its historical process (Székely, 1983). The energy industry has been strongly related not only to Mexican development, but also to further the evolution of contemporary Mexican nationalism (González, 2004; Meyer and Morales, 1990; Rubio, 1993). For many, the Mexican energy sector has been a crucial story in the country’s history. In particular, oil has played an important role in the country’s development. In 1938, President Lázaro Cárdenas, after a long and intense dispute with foreign companies and oil workers, expropriated both petroleum and light industries. Since then, the relationship between the energy sector and the political nationalism became strong and the two evolved almost in tandem (Hernández Chávez, 1979; Meyer and Rowan, 1977). On the other hand, the financial importance of oil has made it not just politically symbolic, but a source of political power. It is not strange, then, that the energy sector has been the centre of many struggles, decisions of varied quality or conflicting decisions. As a consequence, energy production capacity has, in many cases, been put at risk (Morales, 1992). For instance, since the period of Desarrollo Estabilizador, oil revenue has been used for subsidies, rather than to promote productive investment (Székely, 1983; Zenteno, 1997). In other cases, it has been used for political support or even populist purposes (Boué, 2004; Meyer and Morales, 1990). The 1970s witnessed a profound change in energy policy, mainly due to the discovery of massive oil fields in Mexico, together with a global oil


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price hike that revived the Mexican petroleum industry. In the beginning, policymakers appeared to have opted for a conservative approach to oil production. Nevertheless, they did not take long to develop a firm belief in economic growth financed by petroleum exports (Levy and Székely, 1983; Meyer and Morales, 1990). Both the Mexican government and international analysts were expecting a longer-lasting boom (Székely, 1983).6 But the plunge in oil prices revealed deficiencies in decision-making and also in the granting of great powers to the oil sector and to PEMEX specifically. In fact, in this context, a large part of the 1980s was devoted to crisis management. The involvement of the government in the Mexican energy sector is by no means single-tiered. Other factors have shaped the institutional governance of the Mexican energy sector. Being massive undertakings, the energy organisations need particular organisation and integration, traditionally achieved through natural monopolies – typically in government hands. Theoretically, PEMEX and CFE are entities responsible to the Ministry of Energy. According to the Ley Orgánica de la Administración Pública Federal, the Minister of Energy has the legal mandate to appoint the head of these companies. The Minister of Energy plays an essential role as the chairman of the governing bodies of each of these companies, and holds important planning and strategic decision-making functions. Although the Minister of Energy is officially endowed with appointment faculties, the president uses his constitutional power to appoint the director of each of these entities directly, sometimes in consultation with other ministers (such as those from Finance and Energy) and the sector’s unions, which are among the most powerful and oldest in Mexico (Teichman, 1995). The Minister of Energy is the formal authority of the energy sector. Nevertheless, there are institutional and informal constraints on his authority. Besides the president himself, the Finance Minister also exercises control over the energy industry. As oil is the primary source of revenue, the finance ministry organises the prices according to budget criteria (interview with a former Ministry of Energy, SENER, official, June 2004). Legally, the direction and the design of strategy are assigned to the boards of directors. The boards of CFE and PEMEX are in charge of determining the course of action needed to accomplish the objectives established by the ministry (Haas, 2001). Seats on the boards are reserved for the Ministry of Energy, plus those of the Ministry of Finance and the Ministry of Public Function (Secretaría de Energía,

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1992, 2003).7 In this respect, the Ministry of Finance keeps a watchful eye on expenditure planning and revenue accrual.8 Representatives of workers have two seats on both boards of PEMEX and CFE. These seats have been a permanent position granted to the union since the time when the PRI needed some control over workers and unions (Hernández Chávez, 1979; Teichman, 1995). The ruling party gave unions seats on the boards of directors of both oil- and electricity-generating companies plus a 2 per cent commission on all contracts, and the right to assign half of all contracts to third parties. The funds were supposed to provide social benefits for workers (Teichman, 1995). In reality, union leaders enriched themselves in exchange for acquiescing to the political leadership and quelling dissidence among the workers (Alonso and López, 1986). Meanwhile, the politicians benefited from the revenues obtained from the royalties of these companies (Meyer and Morales, 1990). The Ministry of Finance has direct legal authority over the companies’ budgets, investments, debt issuances and employee compensation. The Ministry of Energy’s ability to plan is significantly hindered by the virtually item-by-item negotiation of its budget with the Ministry of Finance. Moreover, cash flow generated by its operations is largely controlled, and expenditures are authorised by the Ministry of Finance. As a result of slim access to financial resources, these bodies have usually resorted to alternative sources of investment like bank loans and issuance of debt. Consequently, the Ministry of Finance has the power to regulate tariffs, which is, in effect, an extension of the development strategy that the government pursues at any given moment. Its priorities caused the Ministry of Finance to struggle to gather sufficient funding to bridge the capital and technological gap both with CFE and PEMEX (Boué, 2004; Castañeda and Kessel, 2002). For instance, budget procedures require PEMEX to surrender revenues to the government and rely on annual allocations (interview with a former SENER official, June 2004). Currently, PEMEX pays out over 60 per cent of its revenue in royalties and taxes, and those funds pay for two-fifths of the federal government’s budget (Petróleos Mexicanos, 2008). Nevertheless, the finance agenda has not been compatible with the needs of a financially self-sustained electric power sector. The Ministry of Finance consistently sets tariffs violating the autonomy of state-owned companies, especially PEMEX (Castañeda and Kessel, 2002). In that regard, public policy in the energy industry has not responded to the problems on the public’s agenda, but, rather, it has been a vehicle through which the political elite tackled the threats to financial stability


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and, consequently, the regime’s stability. Proof of this can be seen in the Hacienda’s response to the oil crisis in the early 1980s. The finance ministry’s immediate response to the crisis was to adjust prices upward, with the twin (often incompatible) goals of reducing financial losses caused by low tariffs while, at the same time, taming hyper-inflation (Barbosa, 1992; Castañeda and Kessel, 2002). Often, the finance ministry’s agenda has tended to be incompatible with the needs of a financially selfsustaining energy sector (interview with a former SENER official, August 2005). The Mexican oil industry is also subject to legislation and a variety of operational regulations that are, in many ways, incompatible with its role as an economic entity (Alvide, 1998; Zenteno, 1997). This has created multiple public sector organisations that are wholly or partly responsible for executing the key institutional functions.9 Stakeholders are an important element in the governance arrangement, since they can affect the position of the institution (Boué, 2002, 2004). They are the potential beneficiaries or risk-bearers of the operation of the Mexican oil industry. Both the financial direction of the energy policies and the control over de-concentrated energy bodies have demonstrated their limits. The directors of PEMEX and CFE often had direct access to the president, thus bypassing the Minister of Energy (Teichman, 1995). They have what is called (in Mexican political jargon) Derecho de picaporte (doorknocking privileges); that is, as they have the legal status to act as an entity on their own, they possess the right to ask for a direct audience with the president, or to access directly the upper echelons of the government in order to lobby for their preferred policies. This leaves the Minister of Energy as a mere administrator who carries out policy imperatives (interview with a former SENER official, August 2005). PEMEX and CFE are powerful actors that can also bypass the authority of other ministries. True critical and useful information is seldom delivered (Teichman, 1995). This institutional setting has created a tension between the main actors in energy policy. First, there is a weak minister of the sector who is legally, financially and politically in charge of two of the most powerful bodies. Although the minister is officially endowed with power, his role has been frequently consultative when, sensu stricto, it should have been the conduit of policy imperatives.10 PEMEX and CFE are powerful agents and skilful bargainers who have learned how to use their strategic character. It is important to bear these elements in mind in order to understand better the events that led to the failed creation of CRE.

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2. The CRE’s creation and the 1993 initiative Carlos Salinas started off his time as president by implementing farreaching, free-market structural reforms and by starting to open up the country to international free trade. These included foreign investment agreements allowing private participation in several sectors (Castañeda and Kessel, 2002; Galina and Romo, 2002; Rousseau, 2006). Given the liberal character of his administration, many started to speculate about the likelihood of a divestiture in the energy sector. Also, at the dawn of his administration, Salinas ordered the arrest of Joaquin ‘La Quina’ Hernández Galicia, head of the oil workers’ union, under allegations of arms-smuggling, tax-evasion and murder. The arrest of the oil workers’ union leader, once considered untouchable by Mexican officials, immediately fuelled the idea that Salinas wanted PEMEX to be the subject of the main reform of his administration.11 Knowing the belligerent character of the oil workers’ union, it was not unreasonable to speculate that Salinas planned to get rid of ‘La Quina’ in order to minimise resistance to his plan to reform PEMEX (Teichman, 1995).12 It was planned that the reform of PEMEX would follow a twofold path of action. Salinas and his reform team wanted, first, to recover political and effective control over PEMEX. Given the source of its financial revenue, it was essential to recover control of PEMEX from the bureaucrats, and unions. Second, as part of his political reform, Salinas wanted to create a new labour relationship between PEMEX and the government. PEMEX’s labour union was becoming financially and politically problematic.13 The reform aimed to redefine the nature of the relationship between PEMEX and the government. More specifically, it sought to strengthen the management function. It tried to reduce the unnecessary politicisation of PEMEX and prioritise economic criteria for operation (Rousseau, 2006: 29). On reforming PEMEX, other political aims would be able to be achieved. In the same way as it happened with Telmex, the reform was seen as an opportunity to weaken old-guard politicians and union leaders, who could potentially bring the whole process of modernisation down. The restructuring of PEMEX offered the government the opportunity to reconfigure the relationship between the unions and the government in other industries.14 For the reform team, the previous crisis and the financial debacle during the López Portillo years (1976–82) were caused by an inadequate governance structure in the oil sector and the fact that PEMEX revenue


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went to paying the debt (interview with a former SENER official, August 2005). It was essential to establish tight budgetary control over public firms. The ability of directors to go over the heads of ministers to the president for the approval of ‘extra-budget’ expenditures was widely believed to have been an important source of the problem (interview with a former SENER official, September 2006). In particular, the ability of PEMEX to avoid centralised financial and policy control was of special concern, due to its general economic importance and its contribution to the public purse. Miguel de la Madrid’s reform team decided to limit growth in the oil industry, which in turn limited the oil workers’ union’s growth (see Rodríguez and Vargas, 1996). Nonetheless, no effective governing reforms were implemented, and officials failed to address PEMEX’s political power. Salinas, during his time in the Ministry of Programming and the Budget, devoted much of his effort to managing the crisis caused by the drop in oil prices. Salinas personally believed that it was necessary to reduce the size and influence of PEMEX.15 During that time, subsidies were reduced, but it was acknowledged that efforts to make PEMEX more accountable and productive required a decline in the influence that the workers’ union had over managerial decisions (Rousseau, 2006). At the same time, provisions were taken to avoid the union retaining more than 0.5 per cent of the investment programme in the oil sector (Salinas de Gortari, 2001: 497). During Salinas’s administration, Mexico was at a point where it needed to reinvent the governance structure of its energy sector, especially the oil industry. At the beginning of the administration, both PEMEX and CFE were targeted for reform; priority was given to PEMEX, and a reform team that could handle the reorganisation was staffed (interview with a former SENER official, September 2006). Salinas appointed Fernando Hiriart as Minister of Energy, a person with a proven track record in the energy sector and with proven loyalty to Salinas. He shared Salinas’s vision of the necessity to change the political and financial character of PEMEX and CFE (interview with a former SENER official, August 2005). PEMEX’s reform needed a person familiarised with the sector, but not necessarily an insider from the oil industry who could act against the reform team’s desires. Hiriart appeared as the perfect candidate as he had extensive experience in the electricity sector, although not in the oil industry. In a similar vein, he appointed Francisco Rojas as head of PEMEX. He was a bureaucrat whose career developed in the finance ministry and was Comptroller-General during Miguel de la Madrid’s presidency.

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During Miguel de la Madrid’s administration, Rojas and Salinas were a team focused on the financial reform of PEMEX. Rojas was a trustee of Salinas for this task. Thus, both Hiriart and Rojas were in charge of the reconfiguration of PEMEX, the latter in charge of the restructuring of PEMEX and the former in charge of the reform of PEMEX’s financial scheme, its accounting methods and its labour contracts (interview with a former SENER official, September 2006). Although considered, PEMEX privatisation was not a priority at the beginning of Salinas’s administration. The reform team’s main concerns were about limiting the power of the oil workers’ union and bringing PEMEX’s vertically integrated monopoly to an end (interview with a former SENER official, September 2006). The oil policy was adjusted to this strategy. The main effort was concentrated on ‘easy-to-achieve’ goals, rather than a huge privatisation objective. They aimed to restructure and liberalise the energy sector, focusing on the areas incorporated into production processes. During this period, the challenges the oil sector faced were tackled by reforming secondary legislation that did not affect ownership of the oil resources nor alter the Mexican Constitution (Castañeda and Kessel, 2002; Rousseau, 2006). In 1992, statutory amendments called the Organic Law of Mexican Oil were approved by Congress. The government held the exclusive right to generate, transport and supply electricity for public service (Secretaría de Energía, 1992). The law focused on putting to an end the ‘pyramidal centralised organisation of function and decisionmaking within PEMEX’. Hence, the government restructured PEMEX into several sub-divisions, each with managerial autonomy. The resulting division created PEMEX Corporativo, and four separate operating subsidiaries, including the following: (1) PEMEX Exploration and Production; (2) PEMEX Gas and Basic Petrochemicals; (3) PEMEX Refining; and (4) PEMEX Petrochemicals. This reorganisation preserved the government’s control of the exploration and production processes and allowed the possibility of granting contracts and concessions in other sectors, after constitutional reforms. Salinas’s reform team believed that the abolition of PEMEX’s monopoly would reduce its power and could leave the government bankrupt as a result of losing its main source of revenue. Salinas saw in PEMEX’s reform a way to recover political control over energy policy. PEMEX and its union were powerful actors who could lobby strongly against the government’s reform desires. In his memoirs, Salinas wrote: ‘We fought to keep oil under control of the Mexican government . . . [The rumours over privatising PEMEX] came from a faction that was trying


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to recover the privileges they had unlawfully held for years by controlling PEMEX’s investments program and the right to appoint most of its directors’ (Salinas de Gortari, 2001: 498–499). Bureaucrats and oil workers were afraid that, with the reorganisation, PEMEX would be sold off to private and foreign investors, probably leading to new labour contracts and lay-offs (see Teichman, 1995). Having experienced a fast privatisation of the mining sector the previous year, bureaucrats expected a similar fate for other sectors. The reform of PEMEX in the context of NAFTA negotiations helped to further develop the idea of privatising of the oil sector. In the context of NAFTA talks, the United States wanted to include oil as one of the main elements of negotiation. Salinas has openly admitted this. ‘We resisted the pressure to negotiate over Mexican oil during the NAFTA talks [ . . . ] During the talks I had with the President of the United States, it was definitely agreed that Mexico would only sign the NAFTA if constitutional prerogatives were respected. These were synthesised in non-negotiable restrictions: no guarantee of oil supply; no free market for crude oil, oil derivatives, gasoline gas and basic petrochemicals; no risk contracts, and no foreign investment in the oil industry or in gas stations’ (Salinas de Gortari, 2001: 498). Salinas himself knew from the beginning that a further reform in the oil sector could be problematic, especially in the context of the NAFTA negotiations. It has been said that starting further reforms in the oil sector could be considered once the negotiations for the NAFTA were over (interview with a former SENER official, August 2005). Salinas had control in Congress. Nevertheless, during all these processes, opposition to this project solidified. Salinas’s memoirs contain this claim: ‘In spite of tough internal fighting and powerful international pressure, my administration left a stronger PEMEX, and one still in Mexican hands’ (Salinas de Gortari, 2001: 502). Utility networks (water, energy, telecommunications, transport, communications and so on) have played a central role in the economic development of modern Mexico. There is a common trend resulting from either ideological, historical reasons or political constraints, to protect strategic sectors from foreign control. This held sway despite Mexico’s turning to open markets, the signing of the NAFTA and the inward foreign investment boom to Latin America in the 1990s. This differentiates Mexico from many large South American countries that opened themselves more to foreign investment inflows. But this trend still left some room for privatisation, as long as the networks stayed in Mexican hands. Although never publicly admitted, it has been said that

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Salinas and his team had further plans for PEMEX (interview with a former SENER official, September 2006). An example which confirms that Salinas, in the PEMEX reform, considered competition in the sector is the 1993 creation of the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE). The 1992 Organic Law of Mexican Oil mandated the creation of an autonomous consulting body. The CRE was originally created by governmental decree in 1993 as an advisory body on gas and electricity issues or, more precisely, to help build an electricity market (Secretaría de Energía, 1993). Article 1 of this decree established the CRE as an autonomous body under the umbrella of the Ministry of Energy (Secretaría de Energía, 1993, Article 1). Article 3 set up the CRE as a body with limited faculties, such as research and technical advice (Secretaría de Energía, 1993, Article 3). In this regard, the creation of the CRE in 1993 was a precursor to possible further action (and possible privatisation) in the sector (interview with a former SENER official, June 2004). Considering that Salinas was a powerful president, the faculties granted seem limited, and, in some ways, the CRE looked like an empty shell autonomous body, rather than a powerful regulatory body for a sector that was expecting to be privatised. If he had wanted to create a consulting advisory body, he could have created an institute (the common status for advisory technical bodies), or he could have reformed the Instituto Nacional del Petróleo, granting more faculties, rather than one called ‘Energy Regulatory Commission’. Although formally part of the government, the regulator would have an arm’s-length relationship with the government’s traditional entities, precisely in order to preserve the political control of electricity envisioned in Article 27 of the Constitution. In 1993, the government created the CRE purely as an advisory body on gas and electricity issues – not as a regulator. According to this decree, the functions of the CRE were merely ‘to advise’ rather than regulate (Secretaría de Energía, 1993, Article 3). Concurrently, its faculties were constrained with a limited budget allocated at the Ministry of Energy’s discretion. A graphic summary of this status can be seen in Figure 7.1. This initial institutional design for the CRE is the predictable consequence of the complex matrix of institutional arrangements in the energy sector. The complex institutional setting in the energy sector has limited its regulatory body in many ways. Although it is commonly taken for granted that Salinas could have moved his reform agenda forward as far as he wanted, it is not necessarily true. As has been illustrated in other studies, both workers and bureaucrats tried to resist Salinas’s reform (MacLeod, 2004; Murillo, 2001; Teichman, 1995, 2001). Among


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CRE

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Figure 7.1


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Energy Regulatory Commission in 1993

the ministries, the strongest opponent of rapid divestiture, not surprisingly, was the energy ministry. It had the most to lose, being in charge of the largest block of public industrial companies and would be the ministry that bore the brunt of the divestiture programme (see Teichman, 1995). Bureaucrats in the central government were afraid of a change in privileges and a new labour contract. Immediately after the 1992 reform, PEMEX started personnel cuts which, by the end of the administration, amounted to around 105,000 job losses – half the total of all PEMEX positions. An obvious consequence of that would be the reduction of authority over PEMEX. Hence, they favoured the retention of companies in sectors where there were growing pressures from the finance sector for divestiture (Teichman, 1995). Financial reforms of public companies, particularly sharp cutbacks in expenditure and investment, were resisted by bureaucrats in the energy ministry. Previous opposition was particularly sharp in such sectors as mining and steel. Bureaucrats argued that competitiveness required greater, not less, investment in public companies (interview with a former CRE official, September 2005). During Salinas’s administration, resistance to privatisation from both PEMEX workers and bureaucrats inside the energy ministry became fierce; yet bureaucrats did not take a directly opposing stance. Instead, they altered the flow and quality of information (see Meyer and Rowan, 1977; Rodríguez and Vargas, 1996; Rousseau, 2006; Rubio, 1993). No one wanted to be seen as going against an approved presidential policy (interview with a former SENER official, August 2005). Opposition was

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in response to the pace of divestiture, and never the actual principle of the policy. Bureaucrats couched their objections in considerably less self-interested terms: they claimed that a slower-paced divestiture process was necessary in order to provide more time to modernise public companies and to improve their productivity and financial situation. According to my interviewees, such conditions were important in ensuring the continuity and economic health of former state firms over the long term (interviews with former SENER and CRE officials, August and September 2005). Bureaucrats working in bodies subject to regulation worked in highly specialised fields and had superior technical knowledge, making it difficult to monitor their activities and allowing managers to rationalise bureaucratic goals of self-aggrandisement and expansion using technocratic arguments. A stiffer resistance came from the bureaucrats of the public firms and the Ministry of Energy. Senior and middleranking officials in the Ministry of Finance supported a divestiture programme advocated by finance ministry officials if, and only if, a slower pace was adopted (interview with former SENER and CRE officials, September and August 2005; see also MacLeod, 2004; Murillo, 2001; Teichman, 1995, 2001). This type of sabotage of the government’s objectives was apparently severe enough to force the government to withdraw a number of offers to possibly sell PEMEX (see Meyer and Rowan, 1977; Rodríguez and Vargas, 1996; Rousseau, 2006; Rubio, 1993). This opposition was not necessarily new; during the de la Madrid administration, the energy minister himself opposed pressure from finance sector officials for a number of divestitures, especially in mining (Meyer and Morales, 1990; Teichman, 1995). The Minister of Energy and Salinas clashed publicly over the closing of Fundidora Monterrey (Teichman, 1995). This, together with public confrontations with the workers and their unions, meant that supporters of public companies were powerless to stem the flow of the new policy direction. By the end of Salinas’s administration, confrontations did halt a possible privatisation (or further reform) of PEMEX and, consequently, the creation of the ‘real’ regulator for the sector was postponed.

3. The 1995 initiative and the reform to the electricity sector The first year of Zedillo’s administration was completely dedicated to tackling the consequences of the previous year’s political and financial


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crisis. Direct revenues from the sale of state-owned companies were a major source of government revenue. The funds obtained from the sale of public companies were allocated to an emergency contingency fund to protect against non-recurrent external shocks and a fund designed to reduce the stock of external debt (Presidencia de la República, 2005). In addition, the Zedillo government spent substantial resources on politically motivated investment. These activities put pressure on the public budget and made necessary the divestment of further publicly owned companies. The severity of the financial crisis made it possible to press ahead with the formal privatisation of strategic areas, such as electrical power plants and mines (Rodríguez and Vargas, 1996). After Salinas’s attempt to privatise PEMEX encountered vociferous opposition, Zedillo opted to put off the oil reform plan (Rousseau, 2006). Further, since oil revenue was used to subsidise prices rather than to promote productive investment, PEMEX’s production capacity was put at risk. Still, a reform in the energy sector was needed to stimulate the economy. Zedillo’s teams, headed by Luis Tellez, decided that the most convenient thing to do was to continue with the process of divestment, and therefore the electricity sector was targeted (interview with a former CRE official, September 2005). Zedillo attempted to put in place a comprehensive reform of the electricity sector and of the state-owned companies, CFE and LyFC.16 The government argued that it had no money to invest in modernising the apparatus, especially the generating stations. Therefore, in order to procure that investment, these would be the first object of privatisation (Secretaría de Energía, 1999). In addition, it argued that private owners could provide services at cheaper rates – which ran counter to the experience of previous Mexican privatisation schemes, such as Telmex, analysed before. According to the government, having a relatively high population growth rate, Mexico would need substantial investments in schools and health care. Reducing subsidies to the electric energy sector might counterbalance these growing demands (Rodríguez and Vargas, 1996; Rousseau, 2006; Secretaría de Energía, 1999). Thus the government saw the reform as a way to reduce subsidies, to reduce infrastructure expenditures and to eliminate the need for backstop guarantees (Secretaría de Energía, 1999). In the view of Zedillo’s team, rather than carry out reform in stages, a comprehensive reform advanced by constitutional amendment was needed. Such an ambitious reform seemed impossible, considering the adverse political environment in which the government lacked a qualified majority in Congress. In the beginning, the possibility of reforming

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the sector through secondary legislation was explored. Nevertheless, that kind of reform would not solve the problem of finance and desperately needed investment in the infrastructure of the sector. Given the above factors, Zedillo’s team thought that it would be difficult to gain approval for this in the first half of the government’s tenure. Therefore, efforts were made to deliver the reform in the second half (interview with a former CRE official, September 2005). If Zedillo’s administration was going to succeed in privatising the electricity sector, a new scheme of governance would be necessary. They decided to start by fine-tuning the regulatory framework. The current supervision structure bound the national oil sector to multiple scrutinisers (Secretaría de Energía, 1999). The supervision function over the energy sector had always been exercised by the government through various disconnected offices and agencies. Furthermore, in order to secure the participation of the private sector in any of the areas within the energy sector, the creation of a ‘real’ regulatory body was also necessary. Zedillo himself was a firm believer in the need for a centralised authority for the energy sector as a precondition to possible divesture (interview with a former SENER official, August 2005). In addition, the 1992 reform to the hydrocarbons sector made necessary some additional governance institutions in the energy industry, as had occurred in the natural gas sector. As the gas sector was neither a strategic nor important asset to the energy market, it was a relatively easy industry to reform (Alba Vega, 1993; Rosellón and Halpern, 2001). Within the political and organisational calculus of CFE and LyFC, the preference for fuel oil was easy to understand. First, even though Mexico was rich in natural gas, PEMEX, which was responsible for hydrocarbon production, did not consider gas part of its core business and thus could not guarantee a gas supply to the electric power sector (Galina and Romo, 2002; International Energy Agency, 1996). Even today, gas is considered a poor second cousin to oil extraction at PEMEX (cf. Alvide, 1998). In October 1995, Zedillo’s administration presented the Energy Regulatory Commission Act (Ley de la Comisión Reguladora de Energía) to transform the CRE into an autonomous agency with the capacity to regulate both the natural gas and electricity markets. Congress, still controlled by the PRI, approved a bill to grant the CRE a new status vis-à-vis the Secretary of Energy, making it a decentralised agency with technical autonomy (Secretaría de Energía, 1995, Article 1).17 According to the government’s proposal, this reform was to consolidate functions that had previously been scattered among several agencies (Secretaría

The Energy Regulatory Commission Table 7.1

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Reform to the CRE decree

1993

1995

Article 1. ‘The CRE is an administrative Article 1. ‘The CRE is an autonomous body with technical and operative body under the umbrella of the independence . . . under the umbrella of Ministry of Energy.’ the Ministry of Energy.’ Article 3. ‘ . . . its faculties include: to research, to advise, and to act as a technical consultant.’

Article 3. ‘ . . . its faculties include: to fix the tariff, to verify the services provision, to approve the methodologies, to publish the authorisation [of concessions] . . . in the sector.’

de Energía, 1995). The main reform in its statute can be seen in Table 7.1. The CRE was granted the capacity to issue concessions and permissions, to verify the services provision, to gather information, to approve the methodologies, and to authorise and publish solutions to controversies. In the gas sector, it was granted the authority of setting tariffs and regulating the generation, transmission and delivery of electricity, as well as overseeing the exportation and importation of energy. On a first-sight analysis, the CRE was given considerable powers, considering the small degree of private activity in the industry at the time (Carreón Rodríguez and Rosanvallón, 2003). Before the scope of the regulator’s powers could be fully realised, however, the Constitution itself would have to be altered to permit it. In the legislative debate over the CRE, the different partisan beliefs of the incumbent PRI and opposition PAN legislators became visible. Whereas the former supported the creation of the regulator to monitor development in the sector, the latter expressed their distrust of state intervention by trying to limit regulatory discretion through proposals that would have increased the transparency of its procedures (Cámara de Diputados, 1995). The PRI imposed its majority. In keeping with a tendency in the creation of regulatory agencies in Mexico, the CRE was not granted full autonomy. Although the CRE is granted its own budget, this is allocated via the energy ministry. Staffing, including the appointment of the board, and major regulatory powers are severely constrained and subject to control which, by legal provision, the CRE shares with the Ministry of Energy. This is summarised in Figure 7.2

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Figure 7.2


+Budget

The CRE reform in 1995

For instance, the CRE only ‘participates’ in fixing the tariff for gas and electricity (Secretaría de Energía, Article 3-I). The CRE is responsible only for implementing what the ministry considers best according to the energy policy. At the same time, the CRE only ‘gives its opinion by invitation of the Ministry of Energy’ on the formulation of the energy policy and the government’s energy plan (Secretaría de Energía, Article 3-VI). The CRE has to request the Ministry of Energy to execute and enforce the storage, distribution and delivery of electricity and gas (Secretaría de Energía, Articles 3-VIII, IX, XI). The legal representation for controversy resolution and judicial review cases still remains in the ministry, and the CRE only deals with the related administrative issues (Secretaría de Energía, Article 3-XX). The CRE only ‘suggests to the Ministry’ its ideas for energy disposition and regulations. These dramatic examples reveal how much the authority of the CRE was constrained in favour of the bureaucrats in the Ministry of Energy. Moreover, although the CRE, in principle, has the legal power to regulate the whole energy sector, the only sector that the CRE is in fact able to regulate is the gas sector, since the oil and the electricity sectors still remain public monopolies. The model adopted is mediocre with respect to its scope and ability to reap the benefits of competition. It is surprising that the potential efficiency of the CRE is presupposed to be sufficient to regulate a dominant, state-owned company in charge of access, investment, and the planning and operation of the transmission and distribution lines. This is consistent with another study that evaluated the efficiency and power of the CRE in the gas sector. According to Alvide (1998), the role


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of the CRE has been less than ideal, as the CRE has shown limited power in terms of enforcement, and the controversies and differences with the ministry have been innumerable. Although the only regulated part of the gas market is distribution, it has resulted in problems, as gas production is still in public hands, is a different market not regulated by the CRE and is subject to revenue concerns. In sum, the CRE has discovered how difficult it is not only to regulate the energy sector, but to regulate powerful public monopolies. Therefore, the participation of the government in the energy industry through public companies presents the most reasonable explanation for the weakness of the CRE. In 1997, for the first time in its history, the PRI lost its majority in Congress and, with this, the possibility to approve not only constitutional amendments, but also the capacity to change secondary legislation single-handedly without negotiating with opposing forces. Despite this, and regardless of the experience of his predecessor and PEMEX, at the end of his government, Zedillo decided to announce plans to continue the privatisation strategy and to put the electricity sector up for sale.18 This would create a complicated panorama in which to strengthen and consolidate the CRE. Considering the precedents and controversy of the dominant, vertically integrated agents such as Telmex, one could not expect the efficiency of the regulatory practice to be substantially different. Various countries going for similar reforms in the energy sector opted for a gradual opening up of the electric power sector in terms of userchoice capacity. This would eventually allow them more efficiency in the market, more competition and, above all, less resistance to the reform. Nevertheless, under pressure because of the imminent arrival of an opposition party in the next presidential elections, Zedillo and his team decided to go for a single-step reform. This strategy doomed the reform and, consequently, the regulator. Similar to the PEMEX episode, Zedillo’s proposal for reform of the electricity sector was met with a wave of popular resistance, led by the unions and internal resistance of bureaucrats (Eaton and Reyes, 2000; Teichman, 1995).19 This eventually resulted in scrapping the privatisation plan. The creation of the CRE resulted, then, in an incomplete body, as it became a regulatory authority that has no market to regulate.

4. The 2008 reform Under Vicente Fox, who governed Mexico and headed the National Action Party from 2000 to 2006, there were introduced to a divided Congress some needed reforms. These reforms came after 71 straight

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years during which the PRI had reigned supreme by controlling both the presidency and the Congress. Having backed and financed PEMEX and electricity workers unions, PRI still enjoyed a large amount of control over decisions in the sector. In 2005, President Fox, presented a proposal to reform the electricity sector. This bill did not include a reform to the CRE, yet it is worth mentioning it. Fox’s proposal pretended to change two constitutional Articles to allow private energy companies to invest in the exploration and production of non-associated natural gas. Fox stated that it was ‘very unfortunate for Mexico to sit on billions of barrels of oil’ and yet lack ‘the necessary capital for financing to get the oil out and to use it to reduce poverty’ (Secretaría de Energía, 2005). As was true with his predecessors, Vicente Fox faced a tough road in Congress. In fact, the new democratic environment created a more complicated scenario for reform. Workers, bureaucrats and the parties in Congress had more means to react to the Executive’s proposal. Various counter-proposals were made by the actors in the electricity industry, in accordance with the political affiliation of the incumbent legislators. The original proposal was altered, without any sign of improvement as it succumbed to the pressure of vested interests. Eventually, its consideration was delayed and neglected. In December 2006, Fox’s fellow PAN-ista, Felipe Calderón, succeeded him as president. Calderón, a lawyer who also earned a master’s degree in public administration from Harvard University’s Kennedy School of Government, had been President Fox’s energy minister. In early 2007, President Calderon unveiled an oil reform plan. Calderon’s comprehensive reform of Mexico’s energy sector also focused on giving PEMEX greater freedom to contract work out to private outfits, manage its own revenues and even issue bonds that only Mexicans could buy. A presidential summary of the proposal states that the ‘entity would contribute technical expertise in evaluating the designation of areas for exploration and production, affect the determination of oil reserves, and issue technical findings on projects put forward by Petróleos Mexicanos’ (Secretaría de Energía, 2007). A reform to the CRE was once again not included in the bill. Why was such a reform important? The CRE was supposed to strike a healthier balance between the state and the director of PEMEX, who has traditionally been extremely powerful. Calderón’s reputation as a pragmatist, however, did not help him strike a political deal with the lawmakers. The PRI’s long tenure on political power in the Congress through deeply entrenched, wellconnected economic monopolies, proved difficult for Calderón to


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unravel. Actually, what President Calderón wanted to obtain with the reform was not even near to what he originally proposed on his bill. After a passionate and long debate, the Mexican Congress approved a set of law and reform initiatives in the energy sector. Three laws were amended and four new laws were created.20 On 28 November 2008, the Official Gazette of the Federation published some amendments and additions to the Energy Regulatory Commission Act, as well as new rules, and a Law for Renewable Energies and for Financing Energetic Transition was enacted. Some regulatory powers were also strengthened. After the reform, the CRE could publish regulatory decisions directly, power that was previously exclusive of the Ministry of Energy. However, the approval of these tools still rests with both bodies. New activities came into regulation such as products from the refining of basic petrochemicals and bio-fuels. The amendments to the Law of the Energy Regulatory Commission mainly focus on (1) granting the CRE technical, operative and management control over regulation of the gas and electricity sectors; (2) allowing for the CRE’s participation in the generation and cogeneration of electricity through renewable energy sources, as well as the establishment of financing the same, including electricity generation by wind, solar, geothermal and water sources; (3) providing for sanctions by fine for those who import, distribute or sell electrical equipment or devices that provide false or incomplete information to consumers; and (4) creating the National Program for the Sustainable Exploitation of Energy and the National Commission for Energy Efficiency. Amendments to several Articles of the law that establishes the CRE provide it with greater authority and technical, operational, managing and decision-making independence. Principally, the commission was granted the authority to promote the development of the storage, transportation and distribution through bio-fuel pipelines, an area that has been regulated since 1 February 2008 (Bioenergy Promotion and Development Law). Moreover, it also grants additional authority to regulate the sales of petroleum, gas and basic petrochemicals, as well as the distribution and transportation, through pipelines, of gas, oil and petrochemicals. The most notable change in the regulation presented previously was new rules and tools given to the CRE in the management of renewable energies projects. Previously the commission started managing projects on renewable energies. The Use of Renewable Energy and Financing of Energy Transition Law regulates certain alternative and renewable energy sources, as well as the use of clean technology for the generation

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of electricity as provided by the Supply of Electricity as a Public Service Law which contemplates the involvement of the private sector. This new regulatory tool also empowered the commission to fund and administrate these projects and at the same time include the sustainable factor to all the projects in the energy sector. These new capacities also provided the regulator with the power to dictate environmentally friendly regulations. Nevertheless, the third generation of reform to the CRE did not bring broader powers to the commission, failing to transform it into a ‘proper’ regulator. Although granted more regulatory faculties, the autonomy status of the CRE remained untouched and the regulatory power over CFE and PEMEX are still non-existent. As a matter of fact, the CRE still possesses limited powers that make it, in many senses, more of a research and technical body rather than a regulator. It is worth noticing that the creation of a new regulatory-type institution, named the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH), was also approved. This new agency is meant to be a decentralised entity of the energy ministry in charge of regulating and supervising hydrocarbon exploration and extraction. The new law establishes the objectives, attributions and administrative structure of the CNH. This commission will have the technical capacity to regulate and supervise the exploration and extraction of hydrocarbons. It will take part with the Ministry of Energy in the determination of public policies to restore hydrocarbon reserves.21 Although it is still too early to evaluate the consequences of the creation of the CNH, it is not without consequences to the energy sector regulatory framework. The creation of the CNH confirms PEMEX’s monopoly over Mexico’s oil and gas. It is expected that the CNH will work as a regulator inside a regulatee (PEMEX). Although its power is limited to making recommendations to the energy ministry, it could be an impediment to consolidate CRE’s regulatory powers. Moreover, there is no evidence that the CNH will, first, make effective regulation on PEMEX and, second, that the CNH could not be captured by the regulatees to promote their interests. In the best Mexico short regulatory tradition, it must be expected that the new institution will become just a counterbalance to the intentions of bureaucrats and regulocrats to bring PEMEX and CFE into control.

Final remarks Unsuccessful attempts to privatise different areas of the energy sector have resulted in the creation of an ineffective regulator that literally


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has no market to regulate. These failed attempts at privatisation bear a strong relation to the complex institutional arrangements prevailing in the energy sector. As both the oil and electricity segments of the energy sector are key elements of Mexican nationalism, it is not difficult to understand that it has become a complex matrix of formal procedures combined with powerful unwritten practices inherited from historical political decisions. After nationalist economic development that served as the basis of the country’s economic strategy was terminated in 1982, when technocrats took power and started structural reforms, the greatest resistance to the transformation was inside the state, in the form of bureaucrats and the organised labour movement. Although defeated in other areas (such as mining and ports), both workers and bureaucrats fiercely and successfully resisted privatisation within the energy sector. Neither of the reforms changed the whole political structure of the energy sector or limited the political power of these industries. Hence, failures to reform the energy sector are also strongly related to problems of defective top-down leadership, which made it difficult to deal with a powerful mid-level bureaucracy that saw the reforms as a threat to its power. Even if these reforms did not call for the privatisation of the sector, both workers and bureaucrats perceived that they did. Thus, they reacted in opposition to the reforms. Bureaucrats in the electricity sector acted in similar ways to those in the oil sector, in order to avoid a reform that could have affected their privileges and political status. Both Fox and Calderón administrations presented a proposal to reform the energy sector. Here, in the new democratic environment, workers, bureaucrats and the parties in Congress reacted. Various counter-proposals were made by the actors in the electricity industry, in accordance with the political affiliation of the incumbent legislators. The original proposal was altered, without any sign of improvement as it succumbed to the pressure of vested interests. Eventually, it was proved that the road for reforms in the Mexican energy has been a political zig-zag towards an undelivered reform. The existence of the failure across administrations suggests a systemic problem, a force that warps reform efforts, that is well worthy of careful study to illuminate not just Mexico’s situation but the power of bureaucrats and labour unions to influence or kill reform around the globe. The scrapping of the plan to privatise both the oil and the electricity industries meant that the set-up of the CRE grew from a baseline of uncertainty. Although reformers tried to put together many of the previously unrelated authorities in the energy sector to create the CRE, their opposition focused on dividing its authority chaotically. The obvious

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consequence was the creation of an empty-shelled regulatory commission, which plays more of an advisory role than one of exercising any real regulatory power. The regulator is only in charge of regulating the poor second cousin to oil: gas. Despite the formal creation of a regulatory authority for the energy sector, the reform team failed to provide more authority for the CRE. The CNH, set up under reforms to energy legislation enacted in 2008, has gradually been asserting its position as a regulatory body within. This makes evident that the new gradual and careful opening in PEMEX activities is balanced with the reinforcement of the policy role of the energy ministry and by the creation of an upstream technical agency. The history of the CRE shows how political struggles between opposite coalitions, in this case, politicians, bureaucrats and powerful worker unions, have a direct impact on the design of a regulatory autonomous agency. These struggles have taken place among different forces, at many levels, in many arenas, at different moments and with different intensities. This collection of interactions has resulted in multiple organisational forms for the CRE. The level of autonomy of the CRE and its regulatory scope has been severely affected by politicians and bureaucrats trying to gain more power over the regulatory policy. More importantly, regulatory action as possible control over state-owned energy companies has been doomed to fail. As this book has shown, in the case of the CRE, as every other autonomous agency, its organisational form has been shaped throughout the continuous interaction between opposite political and bureaucratic coalitions. Final organisational forms are just fair equilibriums in constant and recurrent political struggles between politically minded actors who want to shape government agencies as a way of ensuring political survival. Agencies’ level of autonomy and their reform are inevitably a result of political struggles.

Conclusions

This research is devoted to providing a political explanation for variations in the level of autonomy of autonomous agencies. The premise of this book is that autonomous agencies are shaped through political struggles rooted in, and mediated by, previous institutional arrangements, rather than the automatic result of optimal design. I established this through addressing three main research questions/aims. First, this research investigated the political character of public organisations and, more specifically, public, arm’s-length agencies, usually characterised as autonomous agencies. Second, I proposed a methodology to measure the level of autonomy for public agencies. I departed stressing that the autonomy of a public organisation needs to be analysed beyond its formal-legal status. Then, I showed that the roles of bureaucrats in the creation of autonomous agencies have been systematically neglected. Hence, at the theoretical level, the research explains how the interaction between politicians and politically minded bureaucrats creates different levels of autonomy across a diversity of agencies. Third, in three in-depth case studies, I investigated the conditions under which autonomy occurs. Evidence was offered to show how actors matter in the process of creation and how their actions were mediated by the character of the political institutions. In this concluding chapter, I review these issues by summarising the main findings of the research presented here, and by summarising the main conceptual and methodological points of discussion. The first part of the book expanded on the idea of government agencies as political organisations. Theory tends to omit political struggles, negotiations and lobbying, as well as political processes. Although this is not a new topic for students of politics and administration, the role of politics and political struggles is often neglected in studies of 187

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autonomous agencies. Hence, I conceptualised autonomous agencies as the result of the interaction of politically minded actors. Previous academic models have not only failed to integrate the bureaucrats into the institutional design process, but, consequently, have also failed to integrate conflict between politicians (both legislators and presidents) and bureaucrats, thereby neglecting the most important – even essential – feature of the politics of agency design, which is conflict. When trying to model agencies, scholars have generally tried to model either legislators or presidents alone as actors in the role of making decisions, minimising the analytical complexities that interaction with other actors would entail. Agency design, contrary to what other scholars claim, involves not only legislative interactions, but also bureaucratic ones. Agency designs are joint decisional outcomes that arise from presidential–bureaucratic–legislative interaction. For this reason, this research has tried to suggest a broader perspective that recognises the integrative role of the interaction between presidents and bureaucrats. The research shows that bureaucrats are political actors, rather than merely technocrats or passive actors. In so doing, it fills an important theoretical gap and helps to explain variations in agency design across different economic domains. It also documents a process in which institutional design ensues from the collision of different groups within the government, and uncovers some of the reasons why certain actions were undertaken while others were not, as well as the factors that determined the shape, breadth and scope of the agencies. Understanding the incentives of the actors has proven to be fundamental to comprehending the results. It is also necessary to bear in mind that political struggles are mediated by the political institutions of each country. The model presented here allowed a search for these elements both in the political process and in deep-rooted informal institutions that underpin the political system. Although the relationship between bureaucrats and politicians has been extensively analysed, such analysis has mostly been undertaken through an ideological perspective rather than empirical testing. In any case, analysis of the roles of other actors, and the consequences thereof for the final institutional design of these agencies, has been scarce. Indeed, empirical research specifically on this interaction and its impact on agency design is virtually non-existent. Hence, it is necessary to create innovative and more accurate approaches that are capable not only of explaining the problem from a theoretical perspective, but also of providing a model that can be empirically tested.

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At the beginning of the second part of this research, I argued that, to date, there is a poorly developed literature that measures the ‘real’ or ‘actual’ policy autonomy of public agencies. Therefore, one aim of this book is to contribute to the discussion of agentification and autonomisation, by testing a refined concept of autonomy. Then the second part of the book addressed the subject of organisational autonomy in a more exhaustive and multi-dimensional way. It constructed a methodology intended to explain how the final level of autonomy of an agency depends on the interaction of the different actors involved in the process and is not based merely on the formal-legal status of the agency. I showed that taking autonomy as merely the formal-legal status of an agency results in a narrow view of the autonomy of public organisations. It was therefore necessary to construct a more comprehensive index of autonomy for empirical analysis. Autonomous agencies are still assigned an autonomy status by means of some formal-legal criteria. Those autonomy statuses can be constrained using formal controls and rules. Hence, the level of formal-legal autonomy of public organisations increases along with their level of formal structural disaggregation from the government, yet that level of autonomy is reduced by any power that is retained by the ministry exercising oversight. The juxtaposition of these two elements reveals multiple possible levels of autonomy. Agencies may be autonomous in making organisation-related decisions or in making managerial decisions about the use of organisational resources, such as personnel or financial resources, yet they may not have the autonomy to make policy and political decisions. The model presented here shows that there is not a straightforward relationship between autonomy that is defined legally or formally and political control (or, as I called it here, limited or extended autonomy). It is therefore safer to interpret autonomy as the combination of two elements, namely: the formal-legal status of an agency and the political controls to that level of autonomy. This suggests that the ‘total’ autonomy of agencies may vary among agencies – even between agencies that possess the same formal-legal type of public organisation. More importantly, the model suggests that the conceptual claim that organisational autonomy is a multi-dimensional concept can, to a certain extent, be established empirically. In a nutshell, the model suggests that an agency’s autonomy is likely to be determined by the interplay of politicians and bureaucrats, those who take or grant autonomy. Thus, ‘actual’ or ‘political’ autonomy has been conceptualised as the result of the interaction of political forces in the various stages of the creation of an agency. As the level

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of autonomy does not arise automatically from a calculated technical decision by creators, but from the interaction of different actors, their relative preferences have a direct impact upon the final outcome. The model presented here consists of two key groups of actors: the presidents/reform teams/oversight authorities and the bureaucrats. This reduction of the model was necessary because the model is grounded in the case studies, which showed the processes of agency creation in a single country in the context of economic liberalisation. Other actors are treated as exogenous to this model. Understanding the incentives of the actors proved essential to understanding the interaction among them and consequently to comprehending the diverse institutional outcomes. The methodology used results in an extension of conventional economic principles, applying them in a broader fashion. It has been demonstrated here that the degree of independence conceived by the president/reformer teams could never have been established successfully. In fact, the institutional shape of the agency is ultimately the result of a combination of several factors, including the bureaucratic dynamic, the degree of organisation of groups and coalitions within the bureaucracy, and the interaction of these with the politicians, as well as the timing of the initiative. This book demonstrates that even when politicians might formally control the creation process, the eventual result is nonetheless vastly changed from their original intent with diverse results. Implementation therefore results in a crucial element rather than the perfection of the idea. This, in turn, reveals that, contrary to conventional explanations, delegation varies extensively across issue areas and over time, and not always necessarily due to deliberate preferences of the principals, but rather to actions and resistance by other actors, resulting in unintended organisational designs. This model has shown that even in the case when politicians have a single, optimal and efficient preference regarding the agency’s institutional design, the final institutional shape is the combined result of the interaction of the actors in the particular context and at a given moment. Ultimately, there is not just one logic of delegation, but multiple and diverse ones. This diversity is partially generated by the facts that neither politicians nor bureaucrats maintain the same order of preference over time as regards economic domains, and that the other actors involved respond in different ways to the agent’s preferences. Furthermore, this model allowed for the selection of the case study for the remainder of the research.

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Delegation does not occur in a political vacuum. Since agentification in fact occurs in a political context, the degree of effectiveness of its institutional form is actually endogenous to prior and ongoing political relationships in the contextual political system. In this sense, both formal and informal institutions that exist prior to the creation of the new agencies are critical factors in explaining the resulting institutions, as they shaped the incentives of the political actors. ‘Efficient’ institutions and variations in the structures of governmental agencies depend on the institutions that facilitate or bring about effective agreements between the different actors involved in the process. This research thus analysed agency as a consequence of struggles for political power, struggles defined and mediated by pre-established institutions. Agencies’ levels of autonomy are, then, fair institutional equilibria in the context of political struggles. One can thus expect that actors will try to change those institutions at the next possible opportunity. The development and evolutionary paths of agencies are shaped according to the character of the political struggle in each policy domain. Although this argument might be simple, its consequences are farreaching. This research has thus stressed that it is necessary to consider not only the formal institutional design but also the less evident, informal practices. Studying formal structures alone not only offers limited relevant theoretical models but also restricts empirical explanations. In addition, the conclusions that emerge about managerial autonomy and controls need to be interpreted in a political context. The methodology presented here also contains relevant explanatory factors that seem less vulnerable to bias from case-specific features. For example, the factors from the explanatory model have been formulated on a higher level of abstraction, which should enable the ‘translation’ or conceptualisation of these variables in different contexts. More importantly – and this is the added value of this type of analysis – the methodology invites one to review the creation of autonomous agencies and their further evolution in the political context in which this has taken place. Agencies take form according to the political struggles that are embedded in a complex matrix of the elements and actors that make up a political system. The methodology is, then, politics-centred. Notwithstanding the fact that I was able to identify some important explanatory factors behind the levels of agencies’ autonomy, and that at a higher level of abstraction, these variables can be related to existing theoretical and empirical explanations, the model presented above is still hypothetical. However, the theoretical value of this model is that

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it contains variables grounded in various theoretical perspectives that have extensive explanatory powers, so that the analytical tools offer a suitable methodology to analyse the creation of autonomous agencies. This methodology helps to trace the actors involved in the process of creation and identify their actions and reactions. It also illustrates how different levels of autonomy result from conflict rather than from a calculated technical design. The bi-dimensional index of autonomy has proven to be useful in showing the real scope of each reform and facilitating the appraisal in comparisons over time. In sum, the most important theoretical conclusion is that we cannot assume that the level of autonomy of public agencies is the result of technical necessity, instead being the consequence of political struggles taking place within the confines of each political system. Then autonomy must be empirically tested, as I did here. The reason for addressing autonomy via the case study method stems from the conviction that autonomy is ‘harder to grasp’ than merely analysing formal-legal approaches. The political autonomy of the organisations is defined and measured in different case studies and in the different phases of their evolution. I use data from different sources, mainly documentary analysis and interviews, but, more importantly, from political contextual analysis. This book’s basic premise is thus tested by analysing the creation of autonomous agencies, with selected and exemplificative cases studied in depth. I took a closer look not merely at the different levels of autonomy of different agencies, but at the political struggles that shaped them that way. Agency creation and further evolution is prompted by environmental changes, yet remains at all times contingent on politics and historically defined structures. Thus, institutions matter politically and historically, more than theoretically. Agencies’ levels of autonomy are affected not only by the political institutions of a given country, but also by the inner dynamic of political struggles in each ministry and economic domain. This means that one or other dynamic could prevail, depending not just on the political context or the situation at hand, but the kind of policy or market to be regulated and the political-bureaucratic dynamic in that domain. This research dealt with one country in which well-known political conditions are apparent. At the same time, the solidness of the methodology used shows the limitations of traditional approaches. Examining the characteristics of the political system and the process of reforms helped to highlight some flaws in the theory of agency design. Mexico’s structural reform also reflected important learning dynamics that have

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yet to attract sustained theoretical analysis. It also makes evident the involvement of some often-neglected actors, such as bureaucrats. The empirical analysis therefore presented a double opportunity: first, an opportunity to develop my arguments; second, an opportunity to study heretofore undiscovered dynamics between bureaucrats and politicians in the formation of so-called ‘autonomous’ agencies. Mexico has been the most stable regime in Latin America, with uninterrupted civilian transfers of power since 1924. This political stability has not only been based upon the legacy of the past, but is the result of the periodic renewal of a process of bargaining with the key political forces. Political actors also recognised that it was more politically rewarding to follow the rules than to change them. Nevertheless, relations between actors could be changed and relations could also be rewritten, even though institutions remained in place. While formal rules did not reflect the institutions’ informality, informal rules were internalised and followed by political actors. As can be seen in this research, Mexican presidents were not the holders and exercisers of hegemonic power, as is often annotated in the literature, but were, rather, one partial and changing component in a complex set of power relations in which all political actors take part. In sum, the empirical findings of the case studies show that many variations exist among the institutions as to the level of autonomy they enjoy. The distribution of the agencies in terms of autonomy is actually strongly dispersed. These variations seem to occur between agencies and over time. The findings suggest that the level of autonomy of an agency is, to a large extent, determined by political criteria and as a result of political struggles. The level and nature of autonomy reflects how political actors have shaped the institutions to achieve their political aims. The dynamic character of the analysis presented here, which has shown not only the level of autonomy of a newly created agency, but also its further evolution, underlines that actors possessed a capacity to learn from previous political conflicts. New regulatory agencies emerged out of a political pattern of partial institutional breakthroughs and untimely reversal. This pattern confounded and altered the meaning of reformist ideas. The struggles broke the institutions, and this ultimately produced a disarray of regulatory organs. In all cases, the political struggles are evidenced in the diversity of agencies. If the new institutions for market governance appeared problematic, much more problematic was the effort to create a coherent regulatory framework. Effective regulation presupposes a governmental capacity

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to resist the immediate interests of groups in conflict and to transform these conflicts through mediation and authoritative direction. The transition sent a series of shockwaves across different political and economic domains. Rather than transcending inconclusive political struggles, the agency design imperatives of the modernisation agenda extended the struggle and further confused the modernisation agenda. In other cases, the problems of constructing institutions for market governance meant that other pending economic reforms were either boycotted or aborted. In short, agencies were designed on quicksand, with a constant and increasing disagreement and no possible optimal solution – the consequences of political struggles. Although the reform team followed a decentralised strategy in creating and modifying administrative and governmental structures, the system as a whole was poorly co-ordinated. Authority was divided chaotically. With everyone pursuing their own immediate interests, no one could maintain control of this situation. The bureaucrats worked in highly specialised fields and had superior technical knowledge, making monitoring of their activities difficult and allowing managers to rationalise bureaucratic goals of self-aggrandisement and expansion with technocratic arguments. The modernisation agenda was moved forward at the expense of economic coherence. The new economic panorama generated a need for administrative form, but without defining political responsibility. This evidence also makes evident the fragile status of all the agencies. Put simply, although some agencies present optimal levels of autonomy, these levels are far from being consolidated; those are problems that have to be considered by further research. For instance, once wellknown agencies have proved vulnerable to capture by politicians, such politicians will likely not hesitate to use their retained authority to control these agencies when the agencies show signs of taking decisions that are incompatible with their own political aspirations. Similarly, other agencies have been proven susceptible to the decisions of the market agents, the regulatees, therefore being totally capturable. Thus, this methodology also facilitates knowing who really controls an agency. This is particularly relevant for today’s conditions, where current global economic and financial crises have shown the weakness of regulators and, more importantly, how these are capturable. Market agents can actually capture regulatory agencies without even fostering changes to the legal status of these government agencies. Institutions then turn into a service for a special interest group. The incapacity of regulatory agencies has made the industry more uncertain of what cards are on

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the table. As the most serious illustration of such a situation, federal governments had no other alternative but to organise an ad hoc regulatory authority to try to solve the market opportunity problems thereof. This resulted in a badly designed regulatory framework, and one deeply inconsistent with the political traditions and institutions. Some final points: in their quest for general explanations, analysts continue to focus on the technocratic elements of agency design. We cannot easily generalise about the sequence of delegation in both developed and developing countries, as there are so many areas in which politics can twist or stall agency creation or reform. However, analysts need to become increasingly aware of the political factors underlying those decisions. One common tendency in the studies of autonomisation and agentification is using theory in trying to reach general explanations. I have tried to depart from the insights of different macro-theoretical frameworks to challenge existing explanations in the literature. The model I derived from my explorative research has been discussed with reference to these explanations. The perspective developed through analysing institutions in Mexico can be used to understand the development of institutions in other countries. This research indeed sheds light on issues that also remain unsolved in advanced democracies. What we see in both the United Kingdom and the United States are intense reforms that take place in conditions of emergency, especially in the structure and control of their central banks and finance and banking regulators. Departing from the traditional explanation, both political and administration scholars had not been able to predict the current catastrophic economic crisis that began in 2007–08. Analysts continually overlook the incentives of wellestablished operators and interest groups inside the regulatory agencies. However, this could be more accurately predicted if we start including power struggles as a main variable in explaining the creation and further evolution of autonomous agencies. Unfortunate experiences with agentification and autonomisation should not lead to the conclusion that politics makes effective economic reform impossible in both developed and developing countries. Rather, it should serve as a lesson to both scholars and policymakers keen to try alternative explanations and solutions. These solutions, as in this book, need to include more systematically the role of political struggles in the analysis of agency design.

Notes

Introduction 1. For instance, a country could experience systematic violation of its democratic institutions while simultaneously maintaining those institutions in their various forms. At the very least, a great and diverse number of actors are involved in the discussion and approval of laws and public policy in every country. 2. Given the political importance of public institutions, it is not surprising that agency design is more the result of politics than of the demands of efficiency. In changing environments, such as political and economic liberalisation, political actors try to influence newly created institutions in order to gain or retain some influence over the policy-making process for themselves. Yet, while this finding may be expected, it is interesting that so little research on the topic has been carried out. 3. The transplanting of institutional designs from one national environment to another might well yield unintended consequences. Where institutional adaptability is likely to be poor, institutional vulnerability to political pressures also appears high. Consequently, it may be the case that the economic reforms fail to displace the traditional authoritarian political structures. Instead, as we shall see, they can end up adapting themselves to pre-existing authoritarian political regimes. It is important to probe the extent to which these economic reforms can foster a break with the authoritarian past, and to what extent they preserve authoritarian realms of influence. The institutional setting from which the reform sequence starts may determine vastly different institutional outcomes after launching. 4. From now on, when I refer to Mexican bureaucrats, unless otherwise stated, I am talking about high-level bureaucrats who take part in at least one stage of the decision-making or policy-making process. 5. Much literature has tried to explain the reforms that have taken place in Mexico during the 1990s. Some analyses of the Mexican case have been sufficient only when explaining these reforms in terms of the transfer of international models. This research, however, does not seek to repeat what this literature has already mentioned but seeks to refine it. I do not deny the importance of international forces, but instead focus upon the internal constraints to these reforms. It is true that the economic reforms were carefully attuned to the doctrines and suggestions of international economic forces. But it is also true that the governing coalitions faced institutional constraints provided by the characteristics of the political system. 6. When focusing on the recent explosion of autonomous agencies throughout the developing world and where modernisation theory is used to study institutions, it is frequently taken for granted that economic reforms will push forward important political changes, and vice versa. In this perspective, economic policies that favour the free operation of markets will help generate 196

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economic advancement, produce social differentiation and encourage liberal individualism, thereby strengthening the foundations of democratic politics in developing countries. Nevertheless, a frequently ignored reality is that most of the reforms for creating new market economies had to be implemented precisely using the previous institutional arrangements that these new economies were supposed to be helping to eradicate. Because these factors are not considered, the impact of this history requires the reconsideration of the existing theories. 7. The privatisation agenda and the resulting creation of these agencies required constitutional reforms to be passed. 8. Academic and press-related literature were extensively researched in Mexico City. In addition, interviews were undertaken with some officials involved in the process of agency creation, such as vice-secretaries (one of whom was later appointed as a secretary), director-generals, advisors, commissioners and heads of regulatory agencies. Academics were also interviewed. In a couple of cases, interviewees were actually on ‘both sides of the table’ (as designers, and as part of a bureaucratic group) at different points in the process. For instance, one of the interviewees happened to be an advisor, then a director-general, then an under-secretary and finally a commissioner at the regulatory agency. Generally speaking, interviews were very useful, and the information provided helped significantly to prove the hypothesis. A couple of interviewees were reluctant to give information away, as they still had political aspirations. 9. It is important to stress here that the level of autonomy is not my main concern; it is the struggles that shape it. Levels of autonomy are shown to reflect the consequence of political struggles.

1 A Power-Centred Framework for the Empirical Analysis 1. For an analysis of different approaches to autonomous agencies, see Christensen and Lægreid (2004), Nordström (2004), Pollitt (2004), Pollitt and Bouckaert (2004) and Pollitt and Talbot (2004). 2. The term ‘institution’ is used in this chapter as a synonym for a political organ, rather than in the way it is used in the vocabulary of institutionalism. 3. Some scholars have emphasised regulation as a consequence of this new kind of organisation, and stress the beginning of the ‘regulatory era’ (Lodge, 2001, 2003; Loughlin and Scott, 1997; Majone, 1990, 1994, 1996a, 1996b, 1997b, 1997c, 1999, 2001b, 2001c; McGowan and Wallace, 1996; Moran, 2001, 2002; Moran and Engwall, 1999). The regulatory state is, however, not a consistent concept. Such terms as ‘American Regulatory State’, a ‘European Regulatory State’ and a ‘British Regulatory State’ all mean slightly different things (Moran, 2002). 4. Typically, in this new kind of state organisation rules are made and enforced by expert agencies operating at arm’s length from government. Regulation, in this context, plays a more important role in the redistribution of income and macro-economic stabilisation (Majone, 1990, 1994, 1996b, 1997b, 1997c, 1999, 2001c). Moreover, regulating the former is a way to achieve the latter. As the regulatory state tends to favour regulation over

198

5.

6. 7.

8.

9.

10. 11.

12.

13.

Notes other means of policy-making, this implies a shift from direct to indirect government, where policy-making roles are separated from regulatory functions from operational ones. However, many of the basic policies (such as taxation and redistributive policies) remained under the direct control of political authorities, who still directly controlled the economy (McGowan and Wallace, 1996), where great emphasis was placed on single-purpose organisations created to inspect and invigilate the agents’ performance (Boston et al., 1996). Hence, in the hub of this modern state is the primacy of the agency-model organisation (Moran, 2001, 2002). However, regulation is a brand new phenomenon in the economic scenario. This is also the result of a multi-functional state in which aims are focused on improving the efficiency of the economy, promoting competition and protecting consumers and citizens, thereby reconciling a variety of partly conflicting goals by means of narrowed and simplified aims. This model tries to mingle expertise, autonomy and specialisation (Majone, 1994, 1997a, 1997c, 1999, 2001c). Several scholars have described this extensively (Bouckaert and Verhoest, 1999; Greve et al., 1999; OECD, 2002; Pollitt et al., 2001). Levy and Spiller (1994, 1995, 1996a, 1996b) have proposed a complete and clear separation of responsibilities between the different powers involved in the regulatory process, which distinguishes between the regulators who design the laws and implement the policies, those who apply and supervise the rules, and the judges who control the regulators. However, this proposal appears to be more complicated than it seems in theory. For instance, the creation of new regulatory agencies in the European Union has changed the way in which public policy is made at the national, international and regional levels. In this sense, and perhaps more importantly, the way in which they have been created has affected the distribution of power and, consequently, political processes that were historically established. Unsurprisingly, in the last couple of decades, literature analysing the processes and consequences of delegation has produced substantial descriptive and empirical work. These works include Majone (1994, 1996a, 1997b, 2001a, 2001c), Gilardi (2002, 2003), Levi-Faur (2003) and Gilardi et al. (2006). Since the US system of organising political power is hardly representative of Western democracies, this is a more common and evident example in parliamentary democracy. Regardless of their national or international orientation, regulatory agencies utilise essentially the same logic. Hood et al. (1999) stress that delegation to these independent bodies, in which purchaser and provider operate at arm’s length through formal contracts, has brought internal regulatory bodies to the fore (see also Majone, 1990, 1994, 1997b, 1997c, 1999, 2001b, 2001c). Not all agencies must be considered autonomous agencies. Some might be responsible for managerial tasks, while others might deliver some kinds of service. It is common to find mixed or multi-functional agencies (Christensen and Lægreid, 2004). The concept of non-majoritarian institutions refers to those governmental entities that possess and exercise some grant of specialised public authority

Notes

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16.

17.

18. 19.

20. 21. 22.

23. 24. 25.

26.

27.

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and are separated from other institutions, but are neither directly elected by the people, nor managed by elected officials (Thatcher, 2003a: 2). Agencies for social regulation, by contrast, have not spread out at the same rate as agencies for economic regulation. Regulation is normally considered to be regulation by the state, but there is also a growing focus on self-regulation inside government, as a way of auditing government organisations’ compliance with some specific standards (Hood et al., 1999; James, 2000). This justification is also known as the public interest theory, which is supposed to enhance justice and fairness (Baldwin and Cave, 1999; Breyer, 1982; McGowan and Wallace, 1996; Noll, 1989; Ogus, 1994). By disorder, one can refer to the suboptimal outcomes that would happen without the regulation or, again, the unsatisfactory account of the public interest (Clark, 2000: 5). This kind of definition is also known as ‘American-style of regulation’ (Majone, 1996a). As Jordana and Sancho (2002) stress, fragmentation is a different phenomenon to the overlapping of responsibilities. Fragmentation refers to the formal specific powers and instruments within a policy area that are assigned or delegated to one or more public organisations. Overlapping refers to a more complex but informal phenomenon. This takes place when different bodies have diverse policy instruments available to intervene on one specific policy. Thus, when some degree of co-decision rules or mutual control designs exists, the decision-making process may lead in some cases to a form of overlapping. As Williamson has pointed out, hierarchy imperfection leads to market imperfection, but the converse is also true (Williamson, 1975). This might, in turn, produce ‘agency drift’ with high costs for monitoring the application of sanctions and enforcement (Lodge, 2001). Although it has also been affirmed that this entails policymakers signalling a credible commitment to the announced policy and avoiding inconsistent preferences over time (Kydland and Prescott, 1977). A regulatory agency might be insulated from power exerted by elected officials but not power exerted by lobbyists and private entities on agencies. This sort of regulator is called ‘careerist’ (Wilson, 1989), who is waiting for ‘delayed bribery’ (Quirk, 1981). Also, different administrative traditions have brought about a totally different version of this institutional form, and an adaptive organisational form for organisational survival (Hood, 1998). In some cases, there is a tendency to follow fads, fashions and dominant ideas, so that copying and diffusion are the main mechanisms (Levi-Faur, 2003). Increased liberalisation is perceived as inevitable – the deterministic TINA (There Is No Alternative) principle – and the choice for political leaders becomes more about when and under what conditions they should liberalise, rather than whether they should do so at all. Hood et al. (1999) stress that delegation to these independent bodies, in which purchaser and provider operate at arm’s length through formal contracts, has brought internal regulatory bodies into sharper relief (see also Majone, 1990, 1994, 1996b, 1997c, 1999, 2001b, 2001c).

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28. But, as Majone (1990, 1996b, 1997b) notes, deregulation, which is often referred to, is a misunderstood term. It is never observed in practice as the dismantling of public regulation, but is rather a combination of regulation and deregulation at different levels of the governmental structure. 29. Increases in the number of these kinds of agencies are said to have reduced the use and efficiency of traditional political forms of steering, and produced a greater need for more formal and objective external control (Brunsson and Sahlin-Andersson, 2000). 30. An excellent review of the differences between the European and the American approaches to delegation can be found in Pollack (2002). He argues that Americans, unlike European counterparts, have concentrated on testing the hypothesis about delegation with substantial qualitative data. More recently, they devised the conditions under which principals delegate. On the other hand, European scholars have concentrated on the consequences at the domestic and regional levels. 31. It is necessary to clarify that principals are those officials who delegate some particular authority or use their authority to establish agencies through public acts of delegation. Consequently, agents are those who govern by exercising delegated powers and carry out tasks in the name of the principal. 32. The concept of non-majoritarian institutions refers to those governmental entities that possess and exercise some grant of specialised public authority and are separated from other institutions, but are neither directly elected by the people nor managed by elected officials (Thatcher, 2003b: 2). Consequently, independent agencies are a type of bureaucratic agency created through delegation by elected politicians. 33. The literature on delegation is founded on widely divergent assumptions about the principal–agent relationship and the source of agents’ decisions. Consequently, the approach has been largely centred on two different concerns. On the one hand, it focuses on when delegation occurs. On the other hand, it examines the agents’ behaviour once delegation has taken place. The Principal-Agent Model has proven useful but limited. Government is not the typical principal, and bureaucracy is not the conventional agent. Second, the principal–agent framework was originally created to analyse private contracts, short-term contracts, as in the exchange of goods, or long-term ones, for services, and not the delivery of public services or abstract ‘goods’ such as regulation or taxing. 34. This is defined as the net of initial delegation minus the administrative and oversight mechanisms established to limit shirking to their agents. 35. Thatcher and Stone Sweet (2003b) give an excellent summary of the reason for which the principal decides to delegate. It is fair to say that this reason has emerged, and altered, over time. See also Coen and Thatcher (2005a, 2005b). 36. Consistent with this argument, Gilardi et al. (2006) stress that, for this reason, economic regulation has spread faster around the world than social regulation. 37. For Alesina and Tabellini (2004, 2005), the problem with this structure of delegation is that politicians delegate in many cases for the right reasons, but not the right things. Their arguments are justified with the assumption

Notes

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40.

41.

42.

43.

44.

45.

46.

47.

48.

49.

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that this structure of bureaucratic arrangement is likely to be very different from the social optimum. For instance, on regulation, independent agencies, bureaus for taxes and state-owned enterprises. Madison’s essay on delegation in The Federalist raised the question of delegative government. Jefferson, in opposition, criticises the very consideration of delegation of the legislative authority. A great discussion on this debate can be found in Lowi’s The End of Liberalism (1969) and in O’Donnell’s Delegative Democracy (1994). In the same vein, in his Spirit of the Laws, Montesquieu pointed out that a delegation of powers to a centralised government may lead to a despotic state. Consequently, Tocqueville, in analysing democracy in America, stressed that a decentralised federal system helps to prevent the abuse of power and maintains check and balances (Montesquieu, 1750). Consequently an agent actually does generate outcomes that are different from policies preferred by those who have delegated power (Coen and Thatcher, 2005a; Thatcher, 2003). Epstein and O’Halloran (1999) provide an excellent survey of the literature. American students of regulatory bureaucracy have studied the existence and the determinants of agent autonomy through both case study analysis and through large-n studies of the correlation between principals’ preferences and agency behaviour. Dewatripont and Tirole (1999), Dewatripont et al. (1999a, 1999b, 2000) and Maskin and Tirole (2001) have analysed the attribution of responsibilities between accountable and non-accountable agents. Others, like Schultz (2003), focus on the tradeoff between ideological polarisation and accountability. Besley and Gathak (2005) also study intrinsically motivated agents, and Besley and Coate (2003) contrast appointed and elected regulators of public utilities. According to these approaches, voters, legislators, presidents and even the heads of the agencies could decide either to directly control and monitor a specific public policy, law or institution, or to hand over the responsibility to an agent that works on the principal’s behalf (Bendor and Swistak, 2001; Huber and Shipan, 2002). There is a large body of literature studying administrative procedures and the consequences of their control, for instance, Aberbach (1990), McCubbins et al. (1987, 1989), Oleszek (1989) and Epstein and O’Halloran (1994). The cost of delegation can be wide-ranging, depending on the principal and the agent or the economic domain. It usually includes time, political and economic costs and deployment of resources. Analysing the relationships between principal and agencies in different European countries, Thatcher found that the theory’s assumptions regarding the use of control do not hold, as the result is costly for the principal. On solving the time inconsistency problem, see Rogoff (1985) for an original contribution, and Persson and Tabellini (2002) for an overview of the literature. The term ‘non-majoritarian institutions’ refers to those institutions that are not directly accountable to the voters or to their elected representatives.

202

50.

51.

52.

53.

54.

55. 56.

57.

Notes Examples include central banks, commissions and, in the case of Europe, supra-national institutions like the European Commission and so on. At this point, we make no distinction between parliamentary and other assembly based systems, as we focus on the difference between elected officials and non-elected ones, rather than differences in political systems. American studies have also concentrated on the role of the Congress in agency design. This is a very different approach to that of their European colleagues, who have concentrated on the role of parliaments. Those American theories of delegation need to be specified at a higher level of abstraction in order to transcend the specificities of the American separation-of-powers system, while methods must be adapted to the availability of data in EU and national European contexts. At the same time, delegation could be understood as a chain of nested delegations from voters all the way to the civil servants who in the end implement public policy. In this chain, those formally in charge of making political decisions (principals) appoint others (agents) to make such decisions in their name and place. Theoretically, some mechanisms of accountability constrain these agents to remain responsive to their respective principals. A similar argument has been put forward by McCubbins and Schwartz (1984) about congressional oversight. They argue that Congress has different kinds of options when choosing oversight based on the frequency of action, called ‘Fire Alarm’ and ‘Police Patrol’. Dunleavy (1991), through his studies of British government, has developed a classification of different agencies whose mission and origin impact on the incentives of the bureaucrats, which could be, in some cases, contrary to the politicians’ preferences. Wilson (1980) has constructed a similar classification of the American government as a case study (see also Dowding, 1995; Plowden, 1994; Weir and Beetham, 1999). De Figueiredo (1997) analysed how governors use vetoes as a way of making policy outcomes consistent with their preferences. Carpenter (2001) highlights that American governmental agencies gain a degree of autonomy based on their legitimacy among several political groups. Once the legitimacy and reputation of any agency is taken for granted, even the most powerful and respected politicians could not go against agency policies. For instance, the Department of Agriculture persuaded legislators to transfer the national forest reserves to that Department, against the wishes of Joe Cannon, leader of the Republican majority. Bureaucrats figured out how to turn the tables with politicians, using legitimacy and reputation. However, this does not give certainty to the building up of any kind of institution, because the certainty of maintenance of any agreement or compromise depends on the strength of the coalition and of the agreement itself. The weaker the coalition, the less certainty over a possible outcome. Multiple networks do not refract power, but rather reduce the dependence of agencies on one group. Agencies, in this way, play the role of broker between numerous interests seeking access to the policy process. In this sense, it seems pretty obvious that legislative coalitions are more likely to want to insulate, since they lack the instruments to maintain any given agency design. Thus, the coalition will be unable to do it.

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58. For more on courts, see Mashaw (1985), Hill and Brazier (1991), Macey (1992), Shipan (1997a, 1997b, 2000) and Canes-Wrone (2003). 59. The existence of the judicial branch, in this vein, guaranteed that the decisions of the legislators were consistent with the preference of the legislators. Also see, for instance, Neustadt (1960, 1991), Nathan (1975, 1983), Skowronek (1982), Lowi (1985), Moe and Wilson (1994), Carpenter (2001) and Moe (1989a, 1989b, 1990a, 2003). 60. And by constitutional mandate that places them at the head of one branch of government. 61. For general discussions of congressional versus presidential influence, see Fiorina (1981) and Moe (1989a, 1989b). 62. For a discussion on this, see Krause (1999). 63. From this perspective, politicians want to be re-elected, while bureaucrats want to be perceived as competent in performing a task assigned to them. For example, from this point of view, politicians want to win elections. On the other hand, bureaucrats want to appear competent at managing and implementing policies. Both – and this is an important point – work in order to be rewarded in office, and especially to further their career. In economic jargon, this is referred to as a ‘career concern model’ for the bureaucrat, but it is barely used for describing politicians. 64. See mainly Niskanen (1971), and Borcherding (1977), Ferejohn and Shipan (1989), Dunleavy (1991), Peters (1989) and Hammond and Knott (1996). 65. See a criticism in Miller and Moe (1986). 66. Dunleavy (1991) argues that, according to this classification, the budget can be used effectively to reward and sanction bureaucrats only in the second type of agency. 67. Here, we refer to politicians as elected representatives, and bureaucrats as non-elected authorities. 68. For instance, politicians set tax rates, and bureaucrats collect them. Bureaucrats do not decide the amount of spending for their department, but can affect the way in which the money is spent and when it is delivered. Foreignpolicy decisions are made by politicians, but sometimes after consultation with diplomatic or military personnel and so on. 69. These issues of strategic institutional design have also been analysed in Kafka’s PhD thesis (1996) extending Moe’s logic of structural choices within a Lowi – Wilson framework (see also Epstein and O’Halloran, 1999: 153).

2 Zugzwang: Agency Creation and Bureaucratic Reaction 1. This is exactly what Williamson (1975, 1985) means when he refers to the economic realm called ‘governance structure’. He points out that governance structures are essentially relational contracts, in which actors set up rules and procedures that are acceptable to all. These arrangements can be adjusted by taking into account new information, or they can be maintained over time. A few authors have analysed this, more in a normative than a positive way; for instance, Cox (1997, 1999, 2005), Duverger (1954), Laver, and Shepsle (1990), Lijphart (1991, 1992), McCubbins (1991), McCubbins et al. (1987, 1989), Riker (1980, 1982, 1998), Riker and Sened (1996), Shepsle (1979, 1986,

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2.

3.

4.

5.

6. 7. 8.

9.

10. 11. 12. 13. 14. 15.

16.

Notes 1989) and Tsebelis (1990, 1995). In a broader context, Aoki (2000, 2001) argues, institutions would then be the ‘substantive characteristics of equilibrium action choice . . . endogenous constructs of repeated games that govern the interactions of agents in (each) domain, a case of punctuated equilibria’ (2001: 15). See for instance, Lewis (2003, 2004), Moe (1989a, 1989b, 1990a, 1990b) and Moe and Wilson (1994). Prominent works on statutes are Epstein and O’Halloran (1999), Horn (1995), Moe (1982, 1984, 1990a, 1990b, 2003) and Wilson (1989). Organisational forms have both historical and political features that must be taken into account (March and Olsen, 1984, 1989). If agents continuously change institutions through their actions, it could be expected that these may end up being transformed into something else, and not necessarily into something that the creators initially sought. There are some exceptions (Hood et al., 1999; Howell and Lewis, 2002; Huber and Shipan, 2002; Lewis, 2004; Lewis and Rudalevige, 2005; Majone, 1994, 1996a, 1996b, 1999, 2001a, 2001b; McNamara, 2002; Thatcher, 1994a, 1994b, 1997, 1998, 1999a, 1999b, 2000, 2001, 2003; Thatcher and Le Galáes, 1995; Thatcher and Stone Sweet, 2002a, 2002b, 2003a, 2003b; Wilson, 1887, 1980, 1989). Here, it is necessary to differentiate between institutions – the rules of the games – and the actors, organisations and agencies – those constrained by the rules of the game. I am referring here and henceforth to senior bureaucrats. Verhoest et al. (2004) have offered a great classification of these approaches and the consequence on empirical research of each trend. The literature studying administrative procedures, and the consequence in the control of them, is extensive. See, for instance, Epstein and O’Halloran (1994), Longley and Oleszek (1989) and McCubbins et al. (1987, 1989). Chapter 4 develops further different kinds of legal/administrative status for government agencies. For the aims of this chapter, we develop only those that refer to autonomous agencies. To see more on this, see Ballinas (2009). Essentially, the Mexican Constitution and the Ley Orgánica de la Administración Pública Federal. The evocative idea of how to name these axes was suggested by Mark Thatcher. See a more detailed description on all the possible limitations in Epstein and O’Halloran (1999: 101). For a summary of this literature, see Verhoest et al. (2004). Similar methodologies have been used to measure the Flemish autonomous agencies. See Verhoest et al. (2004). This analysis is based upon a careful coding of over 40 documents and a variety of proposed laws at each historical moment. The Mexican Constitution (and its amendments), the Ley Orgánica de la Administración Pública Federal, the Diario Oficial, bills introduced to the Congress, the Diario de Debates and the Organic Law of each agency were all analysed. For instance, Cameron (2000), Ingberman and Yao (1991a, 1991b), Krehbiel (1991, 1998) and Shepsle (1979). On comparative studies, see Baron (1998),

Notes

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18.

19.

20.

21.

22.

23.

24.

25.

26. 27.

205

Cox (1997), Diermeier and Feddersen (1998a, 1998b), Huber and Shipan (2002) and Londregan (2000a, 2000b). Its weakness is felt, however, when attempts are made to explain the evolution, maintenance and decay of informal organisations that seem to be of critical importance for fundamental changes in economic systems. Moreover, deductive reasoning – inherited by game theory from its mathematical formalisation – facilitates appraisal of the consequences of altering a model’s premises (Magar, 2001: 13). There is no doubt that anyone who has studied policy-making in the political systems concerned quickly accepts the idea that bureaucrats have greater levels of influence over decisions. They try to gain and maintain influence over the agency and policy decisions. Traditional public administration and New Public Management are often portrayed as fairly homogeneous ideas and models, when actually they are not. See a critique in Hood (1998). In his works, Stigler (see, for instance, 1971) stresses that interest groups and other political participants will use the regulatory and coercive powers of government to shape laws and regulations in a way that is beneficial to them. He describes capture as the event when bureaucrats or politicians, who are supposedly acting in the public interest, end up acting systematically to favour particular interests. In this sense regulatory agencies can be captured by the interests of those who are supposed to regulate. In other cases, politicians may trust bureaucrats to implement desired policies but may also worry that other political actors, particularly judges, may subvert their decisions. Therefore, they will try to implement their most preferable agency structure and controls all the time, in order to minimise any possible reaction by other actors. Note the distinction between uncertainty and the costs of not obtaining either its first or second option. There is no assumption that these are correlated. It will be much costlier to move its first preference forward in economic domains where politicians are less qualified or enjoy fewer opportunities for negotiation than in others where bureaucratic coalitions are more sympathetic. These issues are wide-ranging, such as how the agency is organised, how the decision is made, the qualifications required for key personnel, interinstitutional co-ordination, and formal and informal powers. There are many ways to portray agency design. I have chosen a representation of the process through deductive reasoning, as it is easier to understand if we use an extensive form here to illustrate the different possibilities in the legislative process in a game for two players. Such representation facilitates appraisal of the process and its consequences without altering the premises, while guaranteeing that the argument remains logically sound. Nevertheless, note first that the model involves an extremely simplified representation of this process at this point. This model is an extension of the one presented by Epstein and O’Halloran (1994, 1999) and the one made by Huber and Shipan (2002). Also, actors may think that they would be better off when they do not delegate this kind of greater responsibility to politically active bureaucrats,

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whom they will then blame for hijacking the agency creation process. In the opposite case, bureaucrats may think that, in creating the agency, politicians have an ulterior aim beyond the simple creation of the agency, and feel that it is better off not creating one. This observation reminds us that the non-creation of an agency under certain circumstances is always an option. The status quo is also a possible option, given certain circumstances, and could indeed be the most desirable choice, or at least not the last one. 28. This situation is also called a full-point mutual Zugzwang. 29. Politicians can rely on other actors, such as other legislators, courts and judges, to enforce their wishes by making decisions that can overturn agency actions and policy outcomes. As stressed before, this research does not explore the role of the courts in this, although the role of the judiciary must definitely be explored further. In other contexts, actors might want to correct the actions of agents after some agency structure is adopted. This might also occur when they control legislatures and thus can veto rules adopted by agencies, or when cabinet ministers can easily use informal means to influence the actions of bureaucrats.

3 Institutions, Coalitions and Struggles in the Mexican Federal Bureaucracy 1. Data from Centeno (1996: 16) and The Economist, 13 February 1993. 2. See Rogozinski (1997). 3. As a matter of fact, Carlos Salinas was once named the ‘Margaret Thatcher of Latin America’ by The Economist. 4. This literature is large and diverse. Among well-known publications are Alesina and Drazen (1991), Bates and Krueger (1993), Bradford (1994), Graham et al. (1999), Geddes (1994), Grindle (1996, 2000a), Grindle and Thomas (1991), Haggard and Kaufman (1992), Haggard and Webb (1994b), Schamis (1999), Tommasi and Velasco (1996), Williamson (1994), Williamson and Haggard (1994) and Whitehead (2005). In a different vein, see also Linz and Stepan (1996), Linz and Valenzuela (1984), O’Donnell et al. (1986) and Whitehead (1993a, 1994a, 1994b, 1995, 1996, 1997, 2002a, 2002b). 5. In a similar vein, MacLeod (2004) argues that common approaches distort and oversimplify the actual role of the states and reform teams when carrying out liberal reforms. 6. Many scholars, however, have argued that the ‘success’ of the Mexican economic reforms cannot be replicated outside the context of Mexico’s political regime (Haggard and Webb, 1994b; Ros, 1994). 7. The literature on this is extensive and varied (see, for instance, Camp, 1983, 1993; Cornelius and Craig, 1988, 1991; Cornelius et al., 1994; Cosío Villegas, 1972; González Casanova, 1970; Huntington, 1968; Middlebrook, 1985, 2004; Smith, 1979). 8. In the words of a Mexican Nobel Prize winner and political analyst, ‘Mexico was a government of functionaries’, with a Party without militants and with

Notes

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10.

11.

12.

13.

14.

15.

16.

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no influence (Paz, 1987:62); see also Garrido (1982, 1987). For a critical and comparative analysis of the role of presidentialism in Latin America, see Lijphart (1992) and Valenzuela (1993). As was remarked by Castañeda (1995), policymakers had two principal objectives in mind: economic growth and political survival. In times of economic crisis, for instance, policy could shift, even if that meant losing political ground, and vice versa (Torres, 1999). During a television interview in 1990, writer Mario Vargas Llosa offered an analysis of the Mexican political system, stressing that the PRI regime was characterised by a camouflage of its authoritarian nature, with regular elections and changes of elite personnel. He summarised this arrangement as ‘a perfect dictatorship’. In order to make the reading easier, when talking about ‘the Party’, I refer to the different incarnations of the official Party, Partido Nacional Revolucionario (PNR), Partido de la Revolución Mexicana (PRM) and Partido Revolucionario Institucional (PRI), unless otherwise indicated. For a detailed review of the history of the Party, please refer to Garrido (1982). The Mexican doctrine of meta-constitutional powers refers to the de facto powers of the president, which are not actually included in the written text of the Constitution (Carpizo, 1983). The analysis of non-democratic, one-party regimes in the same way as Soviettype countries has been commonplace. As the Mexican political system bore some similarities with Soviet ones, it was commonly assumed that the relationship between party and bureaucracy followed the same patterns of recruitment as in communist countries. For more details, please refer to Wasilewski (1990) and Winecki (1996). For an analysis of the distinctive evolution of both types of regimes, see Gilly (1971). Although in political science presidencialismo refers to an extremely powerful president, in the Mexican case the suffix ‘-ismo (ism)’ and the variation presidencialista were used to add even more intensity to the Mexican case (see Carpizo, 1983; Cornelius and Craig, 1988; Cosío Villegas, 1972; Garrido, 1989; Schmidt, 1991). Economic crises were never severe or deep enough to prompt a regime change, and they never jeopardised or undermined the political arrangements by unravelling the bargains that sustained them (Aspe and Beristain, 1984; Bazañez, 1990; Kaufman, 1989). The structure of the Mexican legislature in this period could be described, in the words of Tsebelis and Money (1997), as a ‘symmetrical bicameralism’, where neither chamber prevails over the other and legislative changes represent the combined will of both. The fact that qualified majorities were required to amend the Constitution translated into control over the highest judges’ preferences. The judicial branch reserved for itself a sphere of relative independence in protecting citizens from some irregular procedures, but never attempted to defy the Executive on its fundamental political decisions, even when these went against the Constitution. As both González Casanova (1970: 37) and Schwarz (1997: 215–16) conclude, even in politically sensitive areas the Supreme Court rarely defied presidents’ decisions.

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18. The Desarrollo Estabilizador was the model of economic development from the mid-1950s to early 1970s. For an analysis of the Desarrollo Estabilizador model, see Cárdenas (1994, 1996) and Ortiz Mena (1970, 1998). 19. Non-consecutive re-election made elected officials in Mexico uninterested in developing legislative careers. 20. A good analysis of the role of Hacienda in the political system could be found in Cordera and Tello (1981) and in Ortiz Mena (1998). 21. The predominant view of the Mexican political system has been strongly influenced by the corporatist literature. 22. The data used in this section, unless indicated otherwise, are derived from prior research (Ballinas, 1998, 2000, 2001). These databases contain information on the careers of the total number of the higher-level officials from 1960 to 1994. For more detail and methodology, see Ballinas (1998). The Ministry of Defence and the Navy are not included (because their promotional patterns are different from civilians). For an analysis of the military, see Camp (1992, 2005) and Lieuwen (1960, 1968). 23. In two early studies, Camp (1971, 1972), one of the authors most convinced that the Mexican recruiting system was held hostage by camarillas, accepts that government positions are given to persons of proven capacity and competence, almost in the same manner as in the United States, where civil service careers are the norm. In the words of Camp himself, ‘Mexico is an example of a developing country that does not have a formal [recruiting and promotion] system, but a defined set of qualifications is loosely applied in the training of the person and his experience in agencies and departments’ (1971: 189). Similarly, Smith (1982) states that there are promotion tracks clearly observable in Mexican politics. One of these tracks is through the bureaucracy, meaning that those who work their way up to high positions in public administration have been in public administration for a long time. In other opportunities, Camp has developed a competing approach (Camp, 1982, 1983, 1985, 1993, 1996). 24. The nationalist model called for government stimulus of industry through protectionism; nationalisation of key industries; greater control of the private sector, especially banks; low interest rates; strong exchange controls; and heavy direct investment (Cordera and Tello, 1981; Robinson, 1982). 25. The first stage of the Echeverría administration was characterised by a constant searching for political legitimacy, as a consequence of the repression of the students in 1968 when he was Minister of the Interior. 26. In that decade, the public sector employment grew steadily between 1970 and 1984, and four-fifths of total state employment in the Echeverría and the López Portillo administrations (1970–82) were allocated to education, energy, health and agriculture (Cordera and Tello, 1981: 55–77). This had a positive effect on the power of the bureaucracy. 27. Hamilton says, referring to Carlos Tello, ‘an advocate of strong intervention by the state to activate the economy, he had approved the policy of the previous Echeverría administration of state investment in heavy industry, wage support, and limited agrarian reform, and blamed its failure on the failure to restructure the financial, monetary, and credit system’ (Hamilton, 1984: 19).

Notes

209

28. As a consequence of this unexpected act, Miguel Mancera, the director of the Banco de México, resigned, as did Finance Secretary Silva Herzog. Yet, López Portillo refused to accept Herzog’s resignation, fearing the effect on Mexico’s ongoing debt negotiations with the international banking community. 29. For a detailed analysis of the nationalisation of banks, see Cardenas and Espinosa Rugarcía (2007). 30. For an analysis of economic doctrines in Latin America, see FitzGerald and Thorp (2005), Santiso and Whitehead (2006) and Whitehead (1993b). 31. Commonly, the initiatives are simply taken as a given, and the policy solutions are assumed to be technically necessary – reducing high inflation, free exchange rates and so on – or appropriate responses to particular problems such as privatisation, liberalisation and so on (Haggard and Kaufman, 1992; Haggard and Webb, 1994b). 32. While many have described the activities of reformers within government as such, the term ‘change team’ is usually credited to Waterbury (1983). Change teams consist of those who design policy and the high-level officials who champion these proposals in the political process. In some literature, the term ‘state reformers’ is used to signal the same combination of design teams and political sponsors who push for the adoption of reform. In this book, I use ‘reform team’ as referring to change teams with no particular political denotation. 33. For instance, González-Rossetti and Bossert (2000) and Grindle (2000a, 2000b). For case studies that provide details on the activities of these teams, see also Angell et al. (2001), Schneider (1991), Foweraker et al. (2003), Centeno (1994) and Sturzenegger and Tomassi (1998). 34. These experiences confirm what many other studies have described – that they are Executive-led reform initiatives. Williamson (1990) has expressed this as the Washington Consensus, a term that refers to a theoretical agreement between the international organisation and the reformer governments in developing countries, under which a series of actions are to be taken in order to tackle economic problems and undertake profound structural economic and political reforms. 35. Reforms were also supposed to have taken place in a sequence (Naim, 1995a, 1995b; Williamson, 1990, 1994; Williamson and Haggard, 1994). They were called – as in other parts of Latin America – first- and second-generation structural reforms (Kuczynski and Williamson, 2003). 36. Who would remain there until the administration of Ernesto Zedillo (1994–2000). 37. As Hernández Rodríguez (1984, 1987, 1994, 1997, 1998) has stressed in his analysis of the Mexican cabinet, there was a tradition in the selection of the top officials that revealed expertise and compromises in the appointments. For instance, during the de la Madrid and Salinas administrations, colleagues from the same team were appointed to the Ministries of Economics, Trade and Finance, people from the politically representative caucus were appointed to the political ministries (such as Interior, Labour or the Party), those with technical expertise were appointed to the remaining ministries (SEDUE, Agriculture and so on) and political compromises were made over the composition of the decentralised agencies and paraestatal enterprises.

210

Notes

38. This ministry would eventually merge with Finance as its tasks and faculties were redundant. 39. Hernández Rodríguez (1994) supports the idea that Salinas appointed Gutiérrez Barrios to prove to old-guard PRI politicians that their opinions will be taken into account. Nevertheless, Salinas reallocated Gobernación functions. Negotiations with the opposition were led by Manuel Camacho and some other important political functions were directly handled by José Córdoba Montoya. Yet Gutiérrez Barrios had substantial participation in post-election negotiations in Guanajuato, San Luis Potosí and Michoacán. He was finally removed after differences with the president in 1993. 40. José Córdoba Montoya, Chief of Staff to the President during the Salinas administration, outlined the situation during the previous term. From the outset of the Salinas administration, the economic cabinet and the acting ruling cabinet met over 300 times – once a week on average – and reached over 1600 agreements on liberalisation, privatisation and deregulation. The cost of decisions and outcomes was high because of a divergence of views on what should be done. This caused them to avoid many important decisions and, at the same time, sent mixed signals to the economic agents. In such a situation, unity was preferable to diversity within the government (Córdoba, 1994: 282). 41. It is fair to say that, during the Salinas administration, SPP was involved in a process of reforms in order to be reincorporated into SHCP; this process finished in 1991, when SPP was brought to an end (see more in Hernández Rodríguez, 1993a). 42. Reformers aimed for foreign, rather than national, capital, justified on the grounds of the crisis and Mexico’s desperate need for dollars; hence, a team that could have a good international reputation was also needed. 43. Structures were also a source of patronage to dispense in the form of contracts, jobs and public works. Many reforms were designed to recover control over them and centralise control over policy-making while apparently decentralise the government (see Centeno, 1994; MacLeod, 2004). 44. Two good studies of this are MacLeod (2004) and Teichman (1995, 2001). 45. The research of Morales Camarena (1994) shows that the attitudes of nationalists and liberals were completely polarised. Bureaucrats, in one group, had different approaches to the reforms that the economy would need and also to the ways in which they might be implemented when compared with the other group. 46. Thus, the governing group turned into the ruling group (Babb, 2001; Barber, 1989; Centeno, 1994; Domínguez, 1997). 47. This was, however, not new, as politicians repeatedly attempted to bring ministries and parastate sector under control (MacLeod, 2004: 65). 48. He presented not only a programme of reorganisation of the privatisation process, but also a restructuring of the state-owned companies, called ‘resectorisation’, in order to bring them under the jurisdiction of Hacienda. Under this new scheme, once the president approved a company for divestment, it would be ‘resectored’ from its traditional ministry to Aspe’s Ministry of Finance. In this way, the Ministry of Finance had the legal authority not

Notes

211

only to access the company’s financial information, but also to hire managers amenable to privatisation or fire corporate ‘foot draggers’ (Williams, 2001, 2002). 49. According to Williams (2001, 2002) this decision restricted the privatisation criteria and abolished the ministerial discretion that had bedevilled divestiture in the past. 50. Carlos Salinas characterised the opposition from within the government to the reform carried during his administration as nomenklatura: a network of ‘professional, experienced politicians with great power and a talent for control’ (Salinas de Gortari, 2001: xviii).

4 An Overview of the Mexican Autonomous Agencies Constellation 1. Previous evidence has shown that offices in charge of regulation are far from being insulated from the interest of political actors (Schneider, 1991). Rather than creating openings for economic efficiency, regulation and the establishment of institutions for market governance generate powerful incentives for political action (see Bates, 1989; Bates and Krueger, 1993; Migdal, 1988; Noll, 1989). 2. Article 17 of this law promulgated in 1976 states that ‘Secretaries of State and administrative departments may make use of deconcentrated administrative bodies in order to deal in the most efficient and expeditious way with the matters of their responsibility, which will be hierarchically subordinated to them, and have specific faculties to solve issues on matters and within a territorial sphere of activity to be defined in each case, while conforming with the legal arrangements applicable.’ 3. See Constitución de los Estados Unidos Mexicanos, Ley Orgánica de la Administración Pública Federal, Ley Orgánica de Petróleos Mexicanos, Ley Orgánica de Instituto Mexicano del Seguro Social, Ley Orgánica de la Comisión Federal de Electricidad, Ley Orgánica de Luz y Fuerza del Centro. 4. This category includes the Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE). In theory, three options exist for offering a legal setting to a regulatory authority in the Mexican institutional framework: (a) deconcentrated authority; (b) decentralised authority; and (c) a special body created after a constitutional amendment. 5. A vast literature focuses on the analysis of electoral reform; good examples are Molinar Horcasitas and Weldon (2001) and Prud’homme (1996). 6. See Molinar Horcasitas and Weldon (2001). 7. The study of Snyder (1999, 2001) in the coffee sector is particularly illuminating. He explores the variations in market-governing institutions that resulted when political actors decided to act following the removal of regulation of the coffee sector at the national level. The study illustrates that these institutions were reshaped by politicians and grassroots organisations at the sub-national level. The capacity of the different political actors involved in this process finally determined, for the author, a limited number (four) of institutional outcomes. In all the cases, rather than a laissez-faire approach being allowed, new re-regulatory institutions were built.

212

Notes

8. Other initiatives in the context of the Asia-Pacific Economic Cooperation (APEC) and the Free-Trade Area of the Americas (FTAA) came later. 9. Additionally, the treaty developed a set of organisations (the dispute-solving and tripartite commissions on the Environment and Labour, as well as a North American bank) to regulate trade between Mexico and the United States, which would in turn serve as a lock-in mechanism for a number of institutional arrangements within the industrial organisation, supply and labour domains. 10. See, for instance, Aspe (1992, 1993), Centeno (1994, 1996), Geddes (1991, 1994), Levitsky and Way (1998), Lustig (1992) and Zermeño (1990). 11. Diverse authors have analysed administrative reorganisation (DiIulio, 1994; Gore, 1994; Nigro and Nigro, 1973; Rhodes, 1997a; Wilson, 1989). 12. Unlike a parliamentary democracy, in the Mexican central public administration the head of the secretariat is in charge of the portfolio of public policies in that particular domain rather than the committee in Congress. See Ley Orgánica de la Administración Pública Federal. 13. Rhodes (1997a, 1997b). See also Geddes (1991, 1994), Naim (1995a, 1995b) and Zermeño (1990). 14. Or what organisational theorists also call ‘network centrality’. 15. Institutional innovation in this context should be understood as the manipulation of institutional variables to one’s advantage.

5 The Central Bank 1. In the literature, ‘autonomy’ is sometimes preferred to the frequently used term ‘independence’, as autonomy entails operational freedom, while independence indicates a lack of institutional constraints. 2. In Latin America alone, six countries contemplated new legislation to increase the autonomy of their central banks. 3. Early studies on central banks focused on the relationship between independence and economic performance. See, mainly, Barro and Gordon (1983a, 1983b), Cukierman (1992), Grilli et al. (1991), Kydland and Prescott (1977), Rogoff (1985), Wooley (1984). 4. An important exception is Maxfield’s (1997). 5. This appears unlikely in settings where democratic institutions are far from being consolidated, where vertical and horizontal accountability has not been properly developed, and where actors have not internalised democratic rules (Kenney, 2003; Mainwarring, 2003; O’Donnell, 1999; O’Donnell and Schmitter, 1986). 6. Nonetheless, they only tried to replicate the previous methodology to prove a correlation between inflation and central bank independence. 7. China is a good counter-example. 8. Woolley (1994) has observed that autonomy measures do not provide data whether the ‘independent’ central banks ever actually act contrary to the wishes of the elected government – whether policy is ever different from what it otherwise would be because of the status of the central bank. 9. In addition to the methodological limitations of the approach, numerous doubts have been raised about the accuracy of the data in the various studies,

Notes

10. 11. 12.

13.

14. 15. 16.

17.

18. 19.

20. 21. 22.

23.

213

for example, by Jenkins (1996) and Prast (1996). In a similar vein, Forder (1998, 1999, 2000a, 2000b) has highlighted that measures of central banks’ independence provide no guidance for the assessment of central bank real performance. For different studies on isomorphism, see Jordana and Sancho (2003, 2004) and Levi-Faur (2003). Exceptions are Boylan (2001, 2004), Maxfield (1997a), and Sola and Whitehead (2006). Previously, none of the major studies considers such issues. Elgie (1998) says he does, but when scrutinised, no such data come to light. This paper appears to be the first published study of this kind, especially for the developing world. Most recently, Sola and Whitehead (2006) have explored how politics crafts financial and monetary policy. Both studies are comparative, rather than single analyses and only examine the creation of the central bank in 1993, and not the further evolution of this story in 1997. A good analysis of the use of credit as a political mechanism can be found in Glade and Anderson (1963). See Turrent Diaz (1982). The formal name of the Ministry of Finance is Ministry of Treasury and Public Credit (Secretaría de Hacienda y Crédito Público). It was responsible for finance, credit and monetary policies. For a critical analysis, see Cárdenas (1994). The most comprehensive work on monetary policy are the annual reports edited by the Bank of Mexico. See also Cavazos Lerma (1976) and Fernández Hurtado (1976). A critical approach can be found in Cárdenas (1996). Although part of the same sector of government, central bankers and officials at the finance ministry presented different profiles and careers. In their analyses of the Mexican bureaucrats, both Ballinas (1998, 2001) and Hernández Rodríguez (1984) show that, although they present similar educational backgrounds, the patterns of the careers of the central bankers and the bureaucrats in the finance sector diverge. Central bankers presented more stable careers, a lower turnover and longer careers than those in the finance ministry. The Ministry of Finance was accustomed to controlling the recruitment of its personnel. See also Centeno (1994). For an analysis of this, see Cordera and Tello (1981) and Tello (1980, 2005). For an analysis of the point of view and attitudes of Mexican bureaucrats towards politics and political decision, see Morales Camarena (1994). Central bank autonomy was a powerful argument for diminishing the responsibilities of banking supervision. See Mancera Aguayo’s speech at the IMF conference on the role of the central bank (Volcker et al., 1990). Faced with increasing pressure against the peso and the attendant capital flight, the administration forgot the real reasons why capital flees a country, blamed the banks and nationalised them. To make sure the banks stayed that way, López Portillo incorporated their nationalisation into the Constitution. When Miguel de la Madrid Hurtado replaced José López Portillo as president in 1982, the new administration would not privatise the new public

214

24.

25.

26.

27. 28.

29.

30.

31. 32. 33.

34.

35.

Notes banks, as nationalised banking was protected by the Constitution. Nevertheless, there was still some room for action. Of the 58 originally nationalised, by 1990 only 18 remained so (Banco de México, 1994). Although it is beyond the objectives of this study to analyse the reasons and consequences of the nationalisation of the banks, this also contextualises the process of creation of the central bank. For testimonies of the people involved, see Cardenas and Espinosa Rugarcia (2007). For an analysis of the privatisation of the bank, see Elizondo (1993), Mancera (1998) and Ortiz (1994). Furthermore, a decade had passed since the central bank had had to cope with the flight of an estimated $17.7 billion worth of capital from Mexican borders (Garrido, 1993). Cuauhtémoc Cardenas’s (the potential presidential candidate from the Democratic Revolutionary Party, PRD) popularity was rising, though he was still in second place in the polls (Crespo, 1995; Domínguez and McCann, 1996: 190). A key electoral claim was that the opposition could manage the economy, but the PRI could not (Centeno, 1996). An epistemic community is often defined as ‘a network of professionals with recognised expertise and competence in a particular policy domain, and an authoritative claim to policy-relevant knowledge within that domain or issue area’ (Haas, 1992:3). Communities share a set of normative beliefs, which provides a value-based rationale for social action. They also share a causal belief, served for a similar analytical process, and a notion of validity internally defined and which could be subjective. Finally they also share common practices associated with a set of problems. Cognitive institutions are institutions with technical and policy-oriented capacities that serve as spaces of deliberation and arenas of interaction and articulation between members of the epistemic community and the policy-making process (Santiso and Whitehead, 2006). Whitehead (2000) claims that the role of epistemic communities shaping policies is not new in Latin America and not narrowly confined to economic forms of expertise. Particular types of expertise may therefore enjoy a brief period of concentrated power. He claims that an apparent triumph of technocratic ideas may so often prove ephemeral. The decision to join the OECD could also help explain the transition to an autonomous central bank. The analysis of the reform of the financial sector in Brazil by Sola and Whitehead (2006) is particularly illustrative on how this could work. Tension with international commercial banks, the Paris club and the American government was common during Salinas’s term. A description of this episode can be found on Salinas de Gortari (2001), chapters 1 and 2. In his memoirs, Salinas stresses that the structural reform would not have unlimited financing from the central bank. ‘This was going to require one of the deepest reforms of my administration: to provide the central bank with autonomy through constitutional mandate’ (Salinas de Gortari, 2001: 449). Some scholars were quick to point out that they could always come back and fine-tune the legislation later (Boylan, 2001, 2004).

Notes

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36. Especially considering the painful episode of the nationalisation of the banks in 1982 (Elizondo, 1993; Garrido, 1994; Heredia, 2002; Teichman, 1995, 2001; Valdés Ugalde, 1994, 1996). 37. The last clause in Article 43 states that the governor could be removed on failing to comply with the decision of the exchange commissions. The reason that this clause is unnumbered suggests that it was a decision inserted without consultation with the people in the central bank. 38. Several authors have tried to explain both the reasons and the consequences of the 1994 peso crisis. An excellent book analysing a different aspect of the crisis is the one edited by Edwards and Naim (1997). See also Santiso (2003). A competing argument can be found in Gil Díaz and Carsten (1996, 1998). 39. The new relationship between the Ministry of Finance and the central bank was aired even more after the Brady Plan and the NAFTA talks. 40. According to the US International Trade Commission, Mexico direct investment rose to US$3,327 billion (US Trade Commission, 1997). See also Banco de México (1994). 41. Whereas the monetary base grew at an average nominal rate of 7.3 per cent in 1993, this figure rose to 20.6 per cent in 1994, representing an increase of more than 200 per cent. At the same time, whereas interest rates rose from around 10 per cent in February to 18 per cent in March, they subsequently levelled off at this rate until the December before the crisis (Banco de México, 1994). 42. Privatising the banks, for instance, would increase support in the industrial organisation and financial domains, while increasing economic efficiency and reducing fiscal pressure (Gurría, 1994; Ortiz, 1994). See also Nava Campos (1998) and Amaya (1997). 43. Secretaría de Hacienda (1993; Secretaría de Hacienda y Crédito Público, 1998). 44. The FOBAPROA/IPAB is a highly controversial, government-sponsored bank stabilisation fund constructed in a two-step strategy. Currently, the IPAB costs more or less 20 per cent of Mexico’s GDP. See more in Szekely and Aguilar (1999). On the other hand, SABA is the body in charge of the administration and selling of all the goods obtained for this crisis. 45. For this, see Proceso, 23 May 1999 and Reforma, 23 May 1999.

6 The Federal Telecommunications Commission 1. In general, two schools of thought explain the relationship between telecommunications and development. On the one hand, some scholars argue that technology will aid developing countries in leapfrogging stages of development (Castells, 1998; Mansell and Wehn, 1998; Nulens and Van Audenhove, 1999). On the other hand, other scholars believe that the transformative nature of telecommunications and its contribution towards development have been greatly exaggerated (Van Dijk, 1999). Some argue it could divert resources from other activities that could have a greater impact on development (Mansell, 1999:36). 2. A good analysis of this can be found in Clifton (2000).

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Notes

3. The assumption behind this is that efficiency is related to prices, interconnection rates and access standards (Baumol and Siclak, 1994; Brock, 1994; Wenders, 1990). 4. Each country has similar challenges according to the nature of domestic political institutions and the policy context each government faces when implementing the reform. The internal composition of the political system – the method of representation and the distribution of power among branches of government – determines the nature of the reform. Horwitz (1989) argues, regarding telecommunications deregulation in the United States, that not only are technology and economic conditions important, but that it is also vital to look at the US political context in order to understand the ‘regulation question’ (Horwitz, 1989). 5. The Chicago School of Economics, led mainly by George Stigler, has extensively written about what, in economics, is called the Theory of Capture, lately expanded by Jon Hansen. The Chicago School, especially Stigler, has indeed focused on regulatory capture but not on the political analysis of regulatory authorities. In his works, Stigler (1971) describes capture as the event when bureaucrats or politicians, who are supposedly acting in the public interest, end up acting systematically to favour particular interests. He stresses that interest groups and other political participants will use the regulatory and coercive powers of government to shape laws and regulations in a way that is beneficial to them. 6. To put this in perspective, this amount of money was the equivalent investment necessary to the modernisation of the whole public education system. See also Martínez and Farber (1994). 7. The patrimonial participation of the state began in 1963 through credits that were later capitalised in a series of preferential stock emissions. By 1972, the state represented 49 per cent of the capital. 8. For the strategy for privatisation, see Aspe (1992, 1993), Ortiz (1994), Rogozinski (1999) and Salinas de Gortari (2001). 9. Just prior to that sale, the government sweetened the deal by drastically raising telephone service prices to consumers. In January 1990, it eliminated an indirect tax on telephone services and permitted Telmex to absorb the remaining taxes into its prices, which were allowed to rise substantially. The charges for measured local calls, for example, increased from 16 pesos per minute to 115 pesos per minute (COFETEL, 2006). The reduction in rates would otherwise have substantially reduced the price of the company. Even if one assumes that the telephone service would not be profitable at the time of the privatisation, it was very likely to become profitable soon afterwards. Consequently, even though the government sold for what was considered a good price at the time, Telmex’s stock prices increased considerably after the sale. In its 1992 report on the Telmex sale, the World Bank estimated that the biggest losers from the privatisation were consumers, who were worse off by 92 trillion pesos (US$33 billion). Telmex became one of the most profitable operators in the OECD; in terms of revenue in 2000, it was the 12th largest company in the world (Teléfonos de México, 2000). 10. Discussions about selling strategies are dealt with later. 11. See also FCE (1994).

Notes

217

12. By 1994 Telmex had the same number of employees – 50,000 – as when the privatisation process started (Teléfonos de México, 2000). 13. Although Hernández Juárez was elected union leader on a platform of democratisation, he used his power to consolidate his control over the union and to support the ruling party, the PRI (interview with a former official of SCT, August 2005). For more on Hernández Juárez’s political position, see Hernández Juárez (1991). 14. Privatisation would have to take place through the sale of stock for the majority shareholders of Telmex. After selling the controlling shares to Grupo CARSO, the rest of the shares were placed on the stock market, mainly in New York. 15. Some prominent scholars have studied how public sector corruptions prove critical for a better understanding of politics in Mexico. In Mexico, corruption consists of an intricate system of exchanges in which support for public officials is given in return for certain privileges (Branderburg, 1964). Payments of money to ensure that routine services are rendered are also part of the mix, as are elaborate public ceremonies in which hosts extract favours from their politician guests in return for support (Lomnitz, 1995; Morris, 1992). 16. While Lomnitz (1995) and Morris (1992) are the first attempts to understand corruption in Mexico, it is not until López Presa (1998) that it was elaborated in a comprehensive study and a typology of corruption, a study that also offered solutions to control the corruption through different public policy actions. 17. Despite many press allegations no solid evidence of corruption has come to my attention. Policymakers were certainly competent and there is no apparent evidence of corruption, at least in the direct sense. Nevertheless, I have not excluded in my analysis the advantages conferred to some business groups and how this affected the conformation of the regulator. For more on this topic, see Szekely et al. (1995). In addition, the apparent intervention of international institutions in these decisions has not been properly proved (Ramamurti, 1996). The World Bank’s role in the Mexican telecommunications privatisation was that of a follower rather than a leader (interview with a former SCT official, June 2004). 18. Branderburg (1964) has affirmed that the dynamic of the Familia Revolucionaria was based on a tacit pact of keeping the benefits of both the economy and the political system within the country where these have to be reinvested in exchange for impunity. 19. It has been alleged that one of the elements in favour of selling Telmex to Grupo Carso was the idea that the money and the profits of Telmex would remain in the country, something that would not have happened if Telmex had been sold to AT&T. This makes an element of nationalism evident in the decision, at least in the way bureaucrats understand it. 20. In fact, during the Salinas administration, the number of billionaires in Mexico rose from 2 to 24. 21. For instance, after Mr Slim got control of Telmex in 1990, he quickly bought one of the two main suppliers of copper cables used by Telmex for telephone wires and made sure Telmex did not buy any cable from the other

218

22. 23.

24.

25.

26.

27.

28. 29.

30. 31. 32. 33. 34. 35.

Notes big suppliers, eventually prompting the owners to sell the company to him (Lunhow, 2007). See, for instance, Financial Times, 19 August 1997. For patterns of bureaucrats during Salinas’s and Zedillos’s presidential terms, see Ballinas (1998, 2001) and Hernández Rodríguez (1993a, 1997, 1998). It could also be inferred that the commission was created by a low-ranking legal statute in such a way that it could be modified single-handedly by the Minister of Telecommunications. Although a lack of regulatory tradition is a relevant issue is not determinate – regulators in other countries, including consolidated democracies such as the United States, get captured all the time. A series of conditions are also required to prevent capture, such as (1) autonomy of regulatory bodies to regulate, to hire personnel, to enforce regulations, to oversee budget; (2) barring administrations from changing rules without passing a law through the legislature; (3) an independent judicial system/court system; and (4) limits on the ability of regulatory staff to take jobs in the industry they were regulating after leaving the regulatory agency. In the United States, which has a long history of regulation, regulators are regularly captured because the fourth condition rarely exists. Regulators are lenient or side with industry, and then on retirement are given lucrative positions as rewards. Yet, in the case of Mexico, the lack of an autonomous regulatory tradition created a dispute within the bureaucracy to define who would be in charge of regulation and consequently of these other relevant elements. A Declaration of Dominance is a regulatory instrument that states a company as dominant in a market, yet not a monopoly. It was created to avoid the dominance of a single company in a relevant market. According to an evaluation from the Auditoría Superior de la Federación, COFETEL takes between 238 days and 4 years to grant a concession, even though the law prescribes a period of 120 days (see Mariscal and Kuhlmann, 2008). Barriers to entry are conceptualised as obstacles in the path of a firm that make it difficult to enter a given market. In Latin America, Peru is ranked best (perhaps after deciding to create two regulators that co-exist), and Mexico ranks as highly as Chile (Mariscal and Kuhlmann, 2008). 12.5 per cent of the daily time translated to about three hours for each radio or television station. From 778 million pesos in 2002 to 1534.4 million pesos in 2003. For this, see the cover of the Mexico City’s newspaper, La Jornada, 12–17 October. Incidentally, the author of the bill, Miguel Lucero Palma, a PRI deputy, was also a concessionaire radio broadcaster in the state of Chihuahua. For an example of the press debate, see El Universal, 3 and 14 July 2006. It has been said that Fox’s reasons for reform centred on the idea that he wanted to have an impact on the 2006 presidential campaign with TV publicity in favour of National Action Party’s (Partido Acción Nacional, PAN) candidate. If they were to be instrumental in this, television companies wanted something in return. The obvious answer was to modify the regulator

Notes

36. 37. 38. 39. 40.

41.

219

for their benefit. This put the already weak regulator in an even more fragile situation. A good example of this debate can be found in Lozano (2006a, 2006b). As a matter of fact, specific mechanisms to resolve disagreements between the regulator and operators have not been established. See, for instance, Diario de Debates, Congreso de la Unión, August 2006. For a summary of the resolution, see El Universal, 30 May 2008. At the same time, Telcel, a unit of America Movil, won 21 blocks of 10 MHz in all operating regions with a bid of 3.79 billion pesos as well as 12.7 billion pesos in other fees during the life of the licences. In addition to its bid, Nextel/Televisa must pay 18.1 billion pesos over the 20-year licence period. Televisa has also promised to invest US$1.44 billion in the joint venture to roll out 3G services as a condition of winning the licence.

7 The Energy Regulatory Commission 1. This number has been more or less constant throughout the last few decades (Petróleos Mexicanos, 2008; Tello, 2005). 2. See ‘Ranking the World’s Oil Companies’ (Petrolium Intelligence Weekly, 2007). For studies on other Latin American countries, see Bastos and Abdala (1993) for Argentina, Hachette and Luders (1993) for Chile and Tugwell (1975) for Venezuela. 3. Electric power generation, transformation, transmission, supply, distribution and marketing activities intended to serve the public are carried out and coordinated by the Federal Electricity Commission (CFE) and to a lesser degree by the electric company for Mexico City (LFC). 4. Several authors have highlighted the political importance of PEMEX (Hernández Chávez, 1979; Meyer and Morales, 1990; Rubio, 1993; Tello, 2005). 5. For an analysis of the problem during the privatisation and liberalisation processes in different sector, see MacLeod (2004), Murillo (2001) and Teichman (1995, 2001). 6. The cynicism of Mexican politicians in declaring that, with the oil boom, Mexico had only to administrar la riqueza (administrate the wealth) is well known. 7. Currently, the other seats are taken by the Ministers of Finance, Environment and Natural Resources, Communications and Transport, Foreign Affairs and Economy. 8. The Executive Branch is not the only one that has legal control over PEMEX, CFE and LyFC. Legally, the legislative branch can also exert control through the Federal Auditor’s Office. This is part of the checks-and-balances structure and adds responsibilities to the Comptroller-General’s Office by evaluating the oil sector, mostly through expenditure control. 9. The energy sector alone includes around ten different organisations, namely Petróleos Mexicanos, Comisión Federal de Electricidad, Luz y Fuerza del Centro, Comisión Reguladora de Energía, Comisión Nacional para el Ahorro de Energía, Comisión Nacional de Seguridad Nuclear y Salvaguardias, Instituto Mexicano

220

10.

11.

12. 13. 14. 15. 16.

17.

18.

19. 20.

21.

Notes del Petróleo, Instituto de Investigaciones Eléctricas and Instituto Nacional de Investigaciones Nucleares. There is a problem of governance, specifically in the allocation of responsibilities, in the Mexican oil sector. While the Ministry of Energy should be responsible for central planning and strategic decision-making, the reality shows that PEMEX performs both duties (Rousseau, 2006). ‘La Quina’ was considered, along with Fidel Velazquez, one of the most powerful union leaders in Mexico. As documented by Riding, ‘La Quina’ had managed to blackmail previous administrations and conquer power spaces for himself and his allies (Riding, 1986). ‘La Quina’ collected so much power that, in the moment, he was considered a threat to the regime. He believed so as well. As he knew that a threat to his empire would come from within the system, he made sure to create not only a complex, extended network of personal and political contacts, but also to arm himself should he have to resist an attack from the establishment. It is also said that he gave under-the-table support to the opposition presidential candidate, Cuauhtémoc Cardenas’s 1988 campaign, and Salinas wanted to claim revenge. See also Excelsior, 6 February 1994. The Union had a budget of around US$9 billion by the end of de la Madrid’s term, mainly from government funding. Both Telmex and PEMEX unions were some of the most powerful unions in the country. During this time, spending cuts were indiscriminate and even potentially lucrative projects were not launched. CFE is the dominant agency in generation, distributing and delivering energy in almost the whole country, with the exception of the capital and the metropolitan area that is exclusive of LyFC. CFE is a vertically integrated monopoly in the transmission and distribution networks. Although the PRI still had a majority in Congress for the purposes of reforming statutes and secondary laws, it did not have the requisite qualified majority for constitutional amendments. For more details, see the proposal, Propuesta de Reforma del Sector Energético (Secretaría de Energía, 1999). An analysis of this could be found at DíazBautista (2005) and Tovar Landa (2000). See a summary of the debate at El Financiero, 28 August 1998. Laws amended: Ley Reglamentaria del Artículo 21 Constitucional, Ley Orgánica de la Administración Pública Federal, and Ley de la Comisión Reguladora de Energía. New laws: Ley Orgánica de PEMEX; Ley de la Comisión Nacional de Hidrocarburos; Ley para el Aprovechamiento de Energías renovables y el Financiamiento de la Transición Energética; and Ley del Aprovechamiento Sustentable de la Energía. It is important to mention that this law does not include the refining, storage, transport or distribution of petroleum or its by-products. Comparatively, the current Mexican legal system allows individuals and companies to take part in the storage, transportation, distribution and operation of natural gas pipelines, as well as the transportation, distribution, storage and sale of liquid petroleum gas.

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Index

Note: Bold numbers indicate tables and figures. accountability, 14, 19, 23, 93, 162, 201, 212, 228 advanced democracies, 8, 31, 40, 93, 201, 204 agency design agentification, 12, 14, 15, 18, 29, 33, 49, 50, 51, 54, 55, 56, 58, 85, 189, 191, 195 autonomisation, 11, 18, 29, 133, 195 agent, 10, 15, 18, 19, 20, 21, 22, 23, 32, 33, 43, 44, 74, 88, 123, 131, 169, 181, 190, 194, 198, 200, 201, 202, 204, 206, 210 Álvarez del Castillo, Enrique, 72, 73 Asia-Pacific Economic Cooperation (APEC), 212 Aspe Armella, Pedro, 72, 73, 78, 120, 127, 129, 139, 141 authoritarian regime, 60–1, 85, 87, 154, 196, 207 autonomous agencies arm’s-length bodies, 1, 82, 174, 187 formal organisation position, 38, 42, 94–9, 124, 130, 145, 150, 175 non-majoritarian institutions, 1, 23, 198, 200, 201 political control of, 2–3, 8, 19, 23, 30, 32, 34, 40, 42, 63, 81, 84, 85, 94–9, 104, 115, 122, 123, 124, 130, 145, 150, 157, 175, 180, 189 quangos, 1, 12 autonomy autonomy index, 9, 36, 40, 53, 134, 142, 189 managerial autonomy, 1, 36, 40, 41, 55, 130, 172, 191 procedural autonomy, 41

Bartlett Díaz, Manuel, 71, 73 Brady Plan, 215 camarillas, 64, 65, 208 capture, 18, 44, 55, 88, 137, 148, 152, 155, 184, 194, 205, 216, 218 Cárdenas Solorzano, Cuauhtémoc, 214, 220 Carpizo, Jorge, 73 Caso Lombardo, Andrés, 141 central bank, 20, 57, 67, 69, 71, 89, 104, 105, 106 central bankers, 109, 115, 127, 215 Cerisola, Pedro, 156 Cervera, Víctor, 73 Chicago School of Economics, The, 18, 216 Chirinos, Patricio, 72, 73, 129 civil service, 40, 66, 92, 130, 208 command-and-control, 11 Congress, 12, 22, 23, 24, 25, 26, 27, 28, 31, 32, 36, 39, 202, 203 American Congress, 26, 29, 31–2, 85 legislative careers, 208 Mexican Congreso, 61–2, 63, 87, 88, 116, 119, 131, 146, 148, 157, 158, 161, 172, 173, 177, 178, 181–3, 185, 204, 212, 220 Mexican Senate, 61, 62, 87, 119, 123, 155, 159 Córdoba Montoya, José María, 72, 129, 210 corruption, 32, 145, 146, 151, 161, 217 courts, 14–15, 20, 43, 150, 153, 158, 203, 206, 218 judges, 62, 198, 206, 207, 295 Supreme Court, 31, 62, 151, 159, 207

251

252

Index

creditworthiness, 107, 110, 112, 116, 122 crisis cyclical devaluation, 117, 121, 126, 128 peso crisis, 1970’s, 67, 76 peso crisis, 1994–5, 11, 127–33, 215 culture, 12, 15

González, Patrocinio, 73 Gurría, José Ángel, 72, 121 Gutiérrez Barrios, Fernando, 72, 210

De la Vega, Jorge, 72, 73 delegation theory, 1, 2, 5, 7, 8, 10–11, 12, 18–21, 22–3, 24, 25, 36, 43, 44, 52–3, 133, 190, 191, 195, 198, 199, 200, 201, 202 Principal-Agent Model, 18–19, 20, 21–2, 23, 24–5, 35, 38, 43, 44, 49, 200, 201, 202 Del Mazo, Alfredo, 71 democratic façade, 61, 86 deregulation, 9, 11, 76, 93–4, 101, 143, 200, 210, 216 Desarrollo Estabilizador Development Model, 63, 67, 114, 116, 208 De Swaan, Mony, 159, 160, 161 Díaz Díaz, Daniel, 71 Donaldo Colosio, Luis, 72, 73, 127, 128

inflation, 59, 105, 106, 107, 108, 109, 114, 115, 116, 117, 123, 124, 151, 169, 212 institutions informal institutions, 6–7, 9, 37, 40, 66, 167, 188, 191, 193, 199, 205, 206 institutional analysis, 42, 57 institutional arrangements/ institutional framework, 3, 17, 20, 21, 25, 31, 35, 66, 101, 129, 174, 185, 187, 197, 203, 207, 211, 212 Inter-American Development Bank (IADB), 117 International Monetary Fund (IMF), 15, 58, 109, 118, 213 isomorphism, 10, 15, 58, 108, 109, 213

enforcement, 15, 32, 181, 199 epistemic communities, 58, 109, 111–12, 119–21, 132, 214 European Commission, 14, 202

Jesús Silva Herzog, 69, 71, 76, 209 Joaquín Coldwell, Pedro, 73

Farell, Arsenio, 73 Federalist, The, 21, 201 Free-Trade Area of the Americas (FTAA), 212

Labastida Ochoa, Francisco, 71 legitimacy, 11, 18, 19, 26, 67, 85, 86, 108, 109, 202 legitimisation, 109 Ley Orgánica de la Administración Pública Federal, 8, 82, 167, 204, 211, 212, 220 liberalisation, 11, 12, 59, 70, 72, 76, 78, 93, 100, 102, 103, 117, 120, 126, 135, 136, 137, 140, 143, 144, 146, 152, 190, 196, 199, 209, 210, 219 Lozano, Javier, 148, 151–2 Lozoya, Emilio, 73

Gamboa, Emilio, 73, 141 game theory, 4, 42, 44, 52, 205 Mexican standoff, 47 non-cooperative game, 53–4 sub-game, 50–1, 52, 53, 54, 55 zero-sum game, 44 General Agreement on Tariffs and Trade (GATT), 100 Gil Díaz, Francisco, 25

Hank González, Carlos, 72, 73 Hernández Cervantes, Héctor, 71 Hernández Galicia, Joaquín “La Quina”, 170, 220 Hiriart, Fernando, 73, 171, 172

Kumate, Jesús, 71

Index Mancera Aguayo, Miguel, 71, 76, 115, 116, 121, 125, 209, 213, 214 Manuel Camacho Solis, 71, 72, 73, 120, 127, 210 Margaret Thatcher, 206 Matrix, 40, 62, 101, 161, 162, 174, 185, 191 Mexican Constitution, 8, 14, 62, 78, 82, 86, 88, 116, 131, 140, 161, 164, 165, 172, 173, 174, 177, 179, 181, 182, 203, 204, 207, 211, 213, 220 Constitution of 1917, 62 Mexican Revolution, 60, 112 Mexico’s electricity-generating companies Central Light and Power (Luz y Fuerza del Centro, LyFC), 167, 177, 178, 211, 219, 220 Federal Electricity Commission (Comisión Federal de Electricidad, CFE), 164, 167, 168, 169, 171, 177, 178, 184, 211, 219, 220 Mexico’s Government Autonomous Agencies Bank of Mexico, (Banco de México, Banxico), 56, 57, 69, 76, 89, 91, 91, 94–9, 102, 112, 114, 115, 116, 122, 123, 124, 125, 127, 128, 129, 130, 131, 147, 209, 213, 215 Energy Regulatory Commission (Comisión Reguladora de Energía, CRE), 55, 57, 83, 89, 91, 96–9, 104, 165, 166, 169, 174, 175, 175, 176, 177, 178, 179, 179, 180, 180, 181, 182, 183, 184, 185, 186, 219, 220 Federal Bureau of Regulatory Improvement (Comision Federal de Mejora Regulatoria, COFEMER), 83, 89, 92, 99 Federal Bureau for Surety Industries (Comisión Nacional de Seguros y Fianzas, CNSF), 83, 88, 90, 94–9, 130

253

Federal Competition Commission (Comisión Federal de Competencia, CFC), 83, 88, 89, 90, 95–9 Federal Electoral Institute (Instituto Federal Electoral, IFE), 83, 85, 86, 88, 89, 91, 96–9 Hydrocarbons Comisión (Comisión Nacional de Hidrocarburos, CNH), 184, 186 Instituto Federal de Acceso a la Información Pública (IFAI), 83, 92, 99 National Commission for Human Rights (Comisión Nacional de Derechos Humanos, CNDH), 83, 85, 86, 88, 89, 90, 95–9 National Water Commission (Comisión Nacional del Agua, CNA), 83, 88, 90, 94–9 Social Security Institute (Instituto Mexicano del Seguro Social, IMSS), 82 Telecommunications Regulatory Commission (Comisión Federal de Telecomunicaciones, COFETEL), 57, 83, 89, 92, 98–9, 137, 138, 139, 141, 143, 145, 146, 147, 148, 149, 150, 150, 151, 152, 153, 155, 156, 157, 158, 159, 160, 161, 162, 163 military, 203, 208 ministry Ministry for Foreign Affairs, (Secretaría de Relaciones Exteriores, SRE), 66, 75, 219 Ministry for the Navy (Secretaria de Marina, SeMar), 208 Ministry for Trade (Secretaría de Economía, SE), 66, 71, 75, 78, 88, 90–2, 139, 209 Ministry for Urban Development (Secretaría de Desarrollo Urbano y Ecologia, SEDUE), 71, 72, 74, 209 Ministry of Defence (Secretaría de la Defensa, SD), 208

254

Index

ministry – continued Ministry of Energy, Secretaría de Energía, SENER, 66, 71, 74, 75, 83, 91, 164, 164, 167, 167, 169, 174, 176, 179, 179, 180, 183, 184, 220 Ministry of Finance and Public Credit, (Secretaría de Hacienda y Crédito Público, SHCP), 63, 64, 66, 67, 68, 71, 74, 75, 90–2, 112, 113, 114, 115, 116, 117, 118, 122, 124, 126, 127, 128, 130, 131, 132, 133, 134, 139, 141, 144, 147, 149, 167, 168, 176, 208, 210, 213, 215 Ministry of Programming and the Budget, (Secretaría de Programación y Presupuesto, SPP), 68, 69, 78, 171, 210 Ministry of Social Development (Secretaría de Desarrollo Social, SEDESOL), 72, 127 Ministry of Telecommunications and Transports (Secretaría de Comunicaciones y Transportes, SCT), 66, 75, 92, 102, 139, 141, 146, 149, 151, 152, 153, 156, 159, 161, 162, 163 Ministry of the Interior (Secretaría de Gobernación, SeGob), 63, 64, 66, 67, 68, 71, 72, 75, 86, 90–1, 102, 208, 209, 210 Molinar Horcasitas, Juan, 159, 160 monetary policy, 11, 91, 105, 106, 107, 108, 110, 114, 115, 116, 117, 118, 121, 122, 124, 125–6, 127, 128, 129, 130, 133, 213 Moreno, María de los Ángeles, 72, 73 nationalisation, 11, 208 Mexico’s nationalisation of the banks, 69, 76, 115–16, 126, 209, 213, 214, 215 nationalism, 143, 160, 185, 217 New Public Management (NPM), 1, 12, 205 Next Step reforms, 14 nomenklatura, 211

North American Free Trade Agreement (NAFTA), 85, 100, 117, 118, 128, 143, 165, 173, 215 Organisation for Economic Co-operation and Development (OECD), 58, 109, 118, 136, 214, 216 Ortíz, Guillermo, 72, 115, 121, 129, 133, 147 Ortiz Mena, Antonio, 68, 114, 208 Osuna Jaimes, Héctor, 158, 159 parties, political Partido Acción Nacional (PAN), 179, 182, 218 Partido de la Revolución Democrática (PRD), 214 Partido Revolucionario Institucional (PRI), 7, 60, 62, 63, 64, 72, 85, 86, 87, 102, 119, 126, 127, 146, 155, 168, 178, 179, 181, 182, 297, 210, 214, 217, 218, 220; Partido Nacional Revolucionario (PNR), 62, 207; Partido de la Revolución Mexicana (PRM), 207 patronage, 32, 64, 100, 102, 122, 210 Petricioli, Gustavo, 71 Petróleos Mexicanos (PEMEX), 82, 164, 165, 167, 168, 169, 170, 171, 172–3, 174, 175, 176, 177, 178, 181, 182, 184, 186, 211, 219, 220 Pichardo Pagaza, Ignacio, 71 presidency Mexican presidents: Cárdenas, Lázaro, 62, 166; Calderón Hinojosa, Felipe, 159, 161, 182, 183, 185; Díaz Ordaz, Gustavo, 63, 68; Echeverría Alvarez, Luis, 67, 68, 74, 208; Elías Calles, Plutarco, 62; Fox Quesada, Vicente, 89, 153, 155, 156, 158, 181, 182, 185, 218; López Portillo, José, 68, 69, 74, 76, 117, 170, 208, 209, 213; de la Madrid Hurtado, Miguel, 59, 60, 68, 69, 71, 72, 74, 76, 77, 115, 116, 117, 141, 171, 172,

Index 176, 209, 213, 220; Salinas de Gortari, Carlos, 59, 60, 68, 69, 71, 73, 74, 75, 78, 79, 85, 88, 89, 93, 112, 116, 117, 118, 119, 120, 121, 122, 123, 124, 126, 127, 128, 129, 138, 139, 140, 141, 142, 143, 144, 165, 166, 170, 171, 172, 173, 174, 175, 176, 177, 206, 209, 210, 211, 214, 216, 217, 218, 220; Zedillo Ponce de León, Ernesto, 68, 72, 73, 89, 117, 129, 130, 132, 133, 145, 147, 165, 166, 176, 177, 178, 181, 209, 218 presidencialismo, 61, 62, 207 privatisation, 6, 9, 11, 12, 56, 59, 70, 72, 76, 77, 100, 102–3, 116, 117, 131, 136, 137, 138–44, 145, 146, 147, 152, 161, 162, 165, 172, 173–4, 175, 176, 177, 181, 197, 209, 210, 211, 214, 216, 217, 219 public administration administrative procedures, 8, 31, 40, 93, 201, 204 administrative traditions, 12, 199 reform team/state reformers/change teams, 6, 7, 53, 58, 69–70, 71–4, 76–7, 78, 79, 80, 85, 88, 100, 104, 111, 112, 116, 123, 125, 131, 138, 140, 141, 144, 145, 146, 148, 151, 165, 170, 171, 172, 186, 190, 194, 206, 209 Rojas Gutiérrez, Francisco, 71, 171, 172 Roosevelt, Franklin D., 31 Ruiz Sacristán, Carlos, 147, 152 Salinas Pliego, Ricardo, 142 Serra Puche, Jaime, 72, 73, 88, 116, 121, 139

255

Slim, Carlos, 142, 143, 144, 159, 162, 217 Solana, Fernando, 73 structural reforms, 6, 70, 170, 185, 209 Telecommunications Law (Ley Federal de Telecomunicaciones) Ley Televisa, 153, 155, 156, 159, 160 Teléfonos de México (Telmex), 131, 136–4, 150, 151, 152, 156, 159, 160, 161, 162, 170, 177, 181, 216, 217, 218, 220 Televisa, 142, 154, 156, 161, 219 Tello Macías, Carlos, 68, 69, 76, 208 transaction costs, 2, 17, 18, 19, 21, 23, 25 transparency, 92, 146, 162, 179 unions, 60, 140, 141, 142, 164, 165, 167, 168, 170, 176, 181, 182, 185, 186 Confederación de Trabajadores de México (CTM), 141, 142 Sindicato de Telefonistas de la República Mexicana (STRM), 141, 142, 217, 220 Sindicato de Trabajadores Petroleros de la República Mexicana (STPRM), 170, 171, 172, 182, 220 Valadés, Diego, 73 Vázquez, María Elena, 73 Velázquez, Fidel, 141, 220 Washington Consensus, 139, 209 Weber, Max, 12, 30 World Bank, The, 15, 58, 109, 117, 139, 216, 217 World Trade Organisation (WTO), 153

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