Consultative mechanisms and economic governance in Mexico

49061 Private Sector Development Department Occasional Paper No. 37 Consultative Mechanisms and Economic Governance in Mexico Vedat Milor, Stanford University Law School Jesse Biddle, Department of Sociology, Penn State University Juan Manuel Ortega Riquelme, Instituto de Investigaciones Sociales, UNAM Andrew Stone, The World Bank September 1999 The views expressed are those of the author(s) and do not necessarily reflect those of their institutional affiliation. Do not use for purposes of citation, quotation, or attribute without the permission of authors and the World Bank. The World Bank Private Sector Development Department 1  Contents I. Introduction: Consultative Mechanisms in Mexico A. Consultative Mechanisms and Economic Governance II. Government-Business-Labor Relations II. The Economic Solidarity Pacts A. Institutionalization of Dialogue B. Credible Commitments by Stakeholders C. Monitoring Agreements and Sanctioning D. Member Composition of the Particular Organizations IV. COECE and the NAFTA Negotiations A. Institutionalization of COECE and Member Composition B. Credibility and Monitoring by COECE during NAFTA Negotiations V. Discussion and Conclusion Appendix I: Interview Schedule Appendix II: Methods and Interview Instrument Appendix III: The Economic Deregulation Council Bibliography 2  I. Introduction: Consultative Mechanisms in Mexico1 On the 15th of December of 1987, in his official residence, Los Pinos, Mexican President Miguel de la Madrid Hurtado inaugurated the first of several economic pacts that profoundly shaped Mexican economic policy for the next decade. Underscoring the need for assertive measures was the reality that the accumulated rate of inflation in Mexico for the year was 131%. Yet, Mexican business, labor and peasant representatives present to co-sign the agreement were concerned that it, like "shock" programs recently adopted in the Southern cone of Latin America, would entail painful economic adjustments among their constituencies.2 One indication of the extent of concern was that the government had only been able to persuade these other signatories to agree to an initial month-long agreement. Thus, few present would have anticipated that two years later the yearly inflation would have dropped to 20% and that economic pacts would have become a well-regarded and institutionalized instrument of Mexican economic policy.3 This report analyzes the procedural and organizational dynamics that enabled Mexicos Economic Solidarity Pact and subsequent agreements to help control inflation and initiate significant restructuring of the national economy. Broadly speaking, such economic accords may be viewed as instances of consultative mechanisms (CMs), groups or committees which bring economic and political actors together for dialogue and consensus- building with respect to economic policy and reform. While CMs are most commonly found in East Asia, they are increasingly being adopted in other regions as well. CMs may be organized along industrial, sectoral, functional (e.g., export promotion, tax reform, etc.) and even national bases, as with the Mexican pacts. Generally, they are informal bodies lacking legal authority yet are often influential due to the participation of high-ranking government officials, career bureaucrats, business association representatives and captains of industry.4 The motivating rationale for the creation of consultative mechanisms is that they may allow economic actors to find solutions to collective problems associated with both market and government failures. For example, CMs may enhance the flow of information between government, business and civil society, engender a sense of common ownership 1The authors thank the Research Committee and the Business Environment Group, Private Sector Development Department, World Bank, for funding this project. Thanks also are extended to the government of Mexico for supporting this research as well as to the many government, business sector and labor community representatives who agreed to be interviewed. While in Mexico the research team benefited from the expert advice of Professor Matilde Luna, Institute of Social Research, National Autonomous University of Mexico. In addition, Ben Ross Schneider, Northwestern University, and Mark Dutz, World Bank, provided helpful comments on an earlier version of the report. The authors alone, however, are responsible for the interpretations provided in this report. 2See Proceso, December 21, 1987, No. 581: 14-15. 3Although the Mexican approach to inflation control did not conform to international economic orthodoxy, it did require government to implement greater fiscal discipline and, as will be seen, laid the groundwork for important later progress on economic liberalization. 4The formal dialogues which take place in CMs further are associated with, and may help foster, informal networks among participants which extend over time. Thus, CMs somewhat resemble corporatist interest- intermediation structures which exist in parts of Europe (Katzenstein, 1985; Wilensky and Turner, 1987). 3  over reform strategies among participants, help conserve resources through pooling of technical expertise and sharing of costs, and generate trust and social capital which, in turn, lower the transaction costs of business and economic governance. Not surprisingly, therefore, a number of national and international agencies are also beginning to foster CMs in their operational work.5 Despite such promise, national experiences with CMs in Africa, Latin America and Eastern Europe have been mixed and, in some cases, CMs may have actually empowered opponents of reform. Because research into the dynamics of CMs has been limited, however, the factors which determine when and how consultative processes can enhance economic reform are largely unknown. This report on consultative processes in Mexico is part of a comparative World Bank study to determine how and when CMs can be useful adjuncts to economic reform efforts. In addition to this study of Mexico, case-studies of national and regional consultative mechanisms in Ghana and Malaysia, a review of World Bank experiences with promoting CMs, and a summary report on the dynamics of government-business consultative processes are forthcoming.6 The findings discussed within are based on field research conducted by the authors in Mexico City, Mexico, in March, June and December of 1998. Beyond secondary data collection, the authors conducted a series of in-depth, semi-structured and confidential interviews with high-ranking government officials and nationally influential members of the business and labor sectors, and held informal background interviews with certain professionals and academics as well. Refer to Appendix I for the names of interviewees and Appendix II for a discussion of the semi-structured interview methodology and associated interview schedule. The primary focus of the research was the Economic Solidarity Pact (1987-1989) and its follow-up economic pacts (Pact for Stability and Economic Growth (1989-1992), Pact for Stability, Competitiveness and Employment (1993-1994), and the Pact for the Welfare, Stability and Growth (1994-1995). Throughout this report we use the term "Pacts" to collectively refer to these accords. Beyond research on the Pacts, however, research was also conducted on several other consultative mechanisms. First, interviews were conducted with the participants in COECE (the Coordinadora Empresarial de Commercio Exterior), an influential public-private advisory committee that advised the government when Mexico entered into negotiations over NAFTA (the North American Free Trade Agreement) (see Section IV). And second, basic research and interviews were conducted on the topic of government-business consultations with respect to regulatory reform in Mexico and the Economic Deregulation Council (see Appendix III). 5For example, the World Bank routinely facilitates the formation of CMs, believing these can contribute momentum to economic reform (Stone, 1995a; 1995b). USAID has contributed funds and expertise to building CMs. In Ghana, for example, US AID helped fund the Private Enterprise Foundation (Ayee, et. al., 1998). And UNIDO, through its Industrial Policy and Research Branch, attempts to promote public-private partnerships, particularly at regional levels. 6The Principal Investigators for this project are Jesse Biddle, Department of Sociology, Penn State University and Vedat Milor, Stanford University Law School. Andrew Stone, Senior Private Sector Development Specialist, is the Task-Manager on the part of the World Bank. 4  A. Consultative Mechanisms and Economic Governance Our research was guided by the recognition that CMs were likely to be more or less effective as adjuncts to economic reform depending on their design and operation. In this regard, the institutional economics literature offers two contrasting visions on institutional functions. On one hand, institutions are viewed as devices to help resolve collective problems (Bates, 1988; Ostrum, 1990). On the other hand, institutions which are "captured" are viewed as devices which help provide distributional benefits to those who have authority over them (Olson, 1982; Knight, 1992). In terms of the first vision, consultative mechanisms can potentially help resolve collective economic problems, especially ones which result from information asymmetries and mistrust between the public and private sectors. One type of information asymmetry occurs when the private sector example has knowledge of the impact of regulatory reform that is unavailable to economic planners. Another occurs when, the government, although it may have a sensible economic reform strategy, fails to communicate this logic to the private sector and is misunderstood. Lack of trust increases transaction costs, shortens planning horizons and makes more likely strategic as opposed to cooperative interactions. Therefore, insofar as CMs increase trust and decrease information asymmetries they may make significant contributions to the forging of consensus on economic reforms among powerful economic and political actors. Despite this potential, however, as the vision of institutional capture suggests, it is possible that CMs may function in whole or in part to promote the interests of a particular group as opposed to helping to resolve a collective (social) problem. This is understandable given the high stakes involved in economic reform exercises. In particular, where there is uncertainty regarding whether or not the reforms will generate economic growth at all, and uncertainty as well regarding the distribution of any future growth, economic actors with a relative advantage under the status quo arrangement may have little enthusiasm for sincerely supporting reform. Under such circumstances, participation in a CM by economic and political actors may be little more than a strategic ploy for self-defense or self- promotion. Given these concerns regarding the functioning of consultative mechanisms, we conducted our research with specific hypotheses in mind regarding how the design and operation of CMs would enhance or impede reform efforts: (1) We hypothesized that an effective CM would institutionalize dialogue among economic stakeholders with respect to a specific reform agenda. To clarify, a lack of an institutionalized dialogue means that the CM would not necessarily be distinct from existing policy networks and thus would not necessarily be seen as the forum in which to seriously discuss policy issues. A lack of specific focus would likely imply that the CM did not have a unique mission vis-