metadata: authors: 0: author: Kate, Adriaan Ten
count: Mexico
docna: 0: docna: Industrial development and the environment
            in Mexico
docty: Policy Research Working Paper
subtopic: Construction Industry,Oil Refining & Gas Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Energy Policies & Economics,International Trade and Trade Rules,Energy Demand,Energy and Environment,Energy and Mining,Business Cycles and Stabilization Policies
teratopic: Water Resources
abstracts: cdata!: Postwar industrialization has moved
            Mexico's manufacturing industry toward more polluting
            activities. Fairly independent of changes in foreign trade
            policy, this process was induced by expansive public
            investments in heavily polluting subsectors, especially
            petro - and agrochemicals. Below - market pricing policies
            (implicit subsidies) for petroleum fuels contributed to an
            increase in industrial energy intensity -- in sharp contrast
            with pervasive energy - saving transition in Organization
            for Economic Cooperation and Development (OECD) countries in
            the last two decades. Energy intensity in Mexican industry
            increased 5.7 percent between 1970 and 1990, compared with a
            decrease of 35.3 percent in OECD industry.
geo_reg_key: 119228,517191
repnme: repnme: Industrial development and the environment
            in Mexico
display_title: Industrial development and the
            environment in Mexico
listing_relative_url: /research/1993/04/699059/industrial-development-environment-mexico
topicv3: Manufacturing Sectors m1326521 1281,Energy and Extractives m1326595 507,Trade m1326924 698,Power and Electricity Sector m1327094 515,Petroleum Industry m1583790 4710
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Water Resources
origu: Policy Research Department
no_of_pages: 82
model_extractions: <!-- Start of picture text --> Policy Ra"rch|<br>Public Economlcs<br>WPS 1125<br><!-- End of picture text -->

This paper-a product of the Pubic Economics Division, Policy Research Department-is part of a larger effort in the department to study pollution control policies in developing countries. The study was funded by the Bank's Research Support Budget under research project "Pollution and the Choice of Policy Irsruments in Developing Countries" (RPO 676-48). Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Carlina Jones, room N 10-063, extension 37699 (April 1993, 76 pages).

Postwar industrialization has moved Mexico's manufacturing industry toward more polluting activities. Fairly independent of changes in foreign trade policy, this process was induced by expansive public investments in heavily polluting subsectors, especially petro- and agrochemicals.

- increase in industrial energy intensity in sharp contrast with the pervasive energy-saving transition in OECD countries in the last two decades. Energy intensity in Mexican industry increased 5.7 percent between 1970 and 1990, compared with a decrease of 35.3 percent in OECD industry.

Below-market pricing palicies (implicit subsidies) for petroleum fuels contributed to an ThePolicy ResearchWorking PaperSeriesdissemCatestherdingsofworkunderwayintheBankAnobjectiveoftheseries is to get these findings out quickly, even if presentations are less than fully polished The fmdings, interpretations, and conclusions in these papers dD not necessarily represent official Bank policy.

Produced by the Policy Research Dissemination Center
INDUSTRIAL DEVELOPMENT AND THE ENVIRONMENT IN MEXICO by Adriaan Ten Kate* Ministry of Commerce and Industrial Development, Mexico

> * Acknowledgements are due to Gunnar Eskeland for detailed comments on earlier drafts of the manuscript and to Gabriel?. Villegas and Joost Draaisma for statistical support.
CONTENTS

|1.|Introduction|1|
|---|---|---|
|1.1|Development Strategies|1|
|1.2|Environmenital Problems|2|
|1.3|Scope|3|
|1.4|organization|5|
|2.|Industrial Pollution Estimates|7|
|2.1|Methodology|7|
|2.2|Sources of Information|10|
|2.3|Results|11|
|3.|Foreign-Trade<br>Policies and Industrial Development:||
||Conseauences<br>for the Environment|14|
|3.1|Import Substitution Period (1945-1976)|14|
|3.2|Petroleum-Led Growth (1977-1982)|17|
|3.3|Macroeconomic<br>Stabilization and Trade||
||Liberalization<br>(1983-1988)|21|
|3.4|Growth Recovery and North-American<br>Free||
||Trade Agreement<br>(1989-present)|24|
|3.5|Foreign-Trade<br>Policies and the Environment|26|
|4.|Energy Pricing and Energv Intensity in||
||Mexican Industry|28|
|4.1|Introductory Remarks|28|
|4.2|Pricing Policies in General|30|
|4.3|Energy Pricing|31|
|4.4|Implicit Subsidization|34|
|4.5|Energy Intensity of Mexico's Industrial Sector|36|
|4.6|Energy Intensity of Mexican Industry||
||in an International Perspective|40|
|5.|Conclusions|43|
|Refer|ences|47|
|Table|s||
1

# 1. II'TRODUCTION

# 1.1 Development Strategies

Shortly after the Second World War, Mexico adopted a model of import substitution which was followed by a long period of high economic growth and impressive industrial development. When, in the middle of the seventies import substitution had reached its limits, it was replaced by a growth model based upon the development of the petroleum sector. 1 In the early eighties, external circumstances (declining oil prices, increasing interest rates) obliged economic policy makers to abandon this model again and the economy was plunged into its most severe crisis of the post-war period.

Since then, Mexican economic policies have undergone thorough changes. In the macroeconomic sphere, the fiscal balance was brought back under control, credit policies were reshaped in such a way as to reduce the dependency on foreign borrowing and exchange rate management became more flexible than it had been before.

At the same time, the inward-looking strategy was changed into an outward-looking one. The very restrictive import regime was 1 For a description of the different growth models adopted by Mexico since the Second World War see De Mateo (1988).
2 progressively dismantled, many state-owned companies returned to private ownership, direct foreign investment was liberalized up to a certain extent and deregulation hit important sectors of thb economv (e.g transportation). Generally speaking, competition was given a much more important role in the development process than it had ever had since the Second World War. **2**

# 1.2 Environmental Problems

In practically all countries of the world economic growth in general, and industrial development in particular, have had important consequences for the physical environment its people are living in. Mexico is no exception. Nowadays, almost all major urban concentrations are suffering from heavy air pollution and Mexico City is sometimes mentioned as the most polluted city of the world. Most rivers and lakes are severely contaminated, and so is groundwater in many places. Consequently, marginal costs of water supply have increased significantly. Waste r*llection and disposal facilities are increasingly insufficient. Soil erosion lowers the productivity of land for agricultural uses and deforestation threatens the survival of scarce animal species and plants. All these phenomena are of major concern and are putting a heavy strain 2 This episode of structural adjustment and trade liberalization was described in detail by Ten Kate (1992 a and b).
3

# on future economic growth.

Evidently, these problems are caused by a variety of factors among which industrial development is an outstanding but not the only one. Other factors that should be mentioned are: (i) the growth of the population and its consumption patterns, (ii) regional concentration of economic activity, (iii) modes of transportation of both persons and cargo, (iv) modes of electricity generation, (v) the development of the mining sector and last but not least (vi) agricultural activity, particularly through land reclamation, irrigation and fertilizer use.

# 1.3 Scope

With the foregoing in mind, the present paper attempts to assess to what extent Mexico's industrial development and the economic policies affecting its industrial sector can be held responsible for the enormous deterioration of the environment that has occurred since the Second World War. Specific questions to be addressed are:

- (i) what has been the influence of the import substitution policies of the fifties, sixties and first half of the seventies upon the state of the environment?

- (ii) how far has the environment been affected by the belowmarket-pricing policies for energy goods of the late seventies and early eighties?
4 and (iii) what has been the role in polluting the environment of public sector participation in the productive .phere?

The fact that these questions are addressed in the paper does not imply that they are answered in a satisfactory way, Considering the enormous lack of data, particularly historiL information on the state of the environment, it is hardly surprising that the answers cannot be but partial and that most of them can only indicate directions or suggest trends ratlaer than being conclusive in a quantitative sense.

Moreover, many questions are not touched upon. For example, macroeconomic policies are not considered in this scheme. The reason is that the influence of macroeconomic policies upon environmental variables is far from direct and conditioned on all sorts of unknown responses, which would make an assessment of its effects too speculative. Perhaps the only thing that might be stated in this context is that austerity in gc.:ernment spending may come into conflict with the needs for environmental monitoring and the establishment of enforcement mechanisms. But even in this field, expenditures on environmental control remain a matter of setting priorities within the government budget. Also, if austerity is commanded by the need to reduce a fiscal deficit, this could be eased by environmental policies, if pollution taxes, fees and fines were imposed.
5 This does not imply that the environmental impact of the policies to be addressed expressly is so straightforu rd. On the contrary, most policies are not designed so as to deliberately influence environmental variables. Therefore, their effects are usually indirect and, possibly, unintentional.

# 1.4 orcanization

The organization of the paper is as follows. After this introduction, the second section presents estimates of the pollution intensity of the Mexican manufacturing industry and of its evolution over the last four decades, using fixed US emission -nefficients by industrial subsector by lack of mo-re adequate information.

The third section reviews the main characteristics of Mexico's foreign-trade rolicies and industrial development since the Second World War and makes some inferences about the likely consequences of this development for the state of the environment. These intuitive inferences are compared with the findings of the preceding section and an attempt is made to understand the discrepancies.

In the fourth section, relative prices of environmentally sensitive goods are examined with particular attention to energy goods, andthe question is asked to what extent low pricing policies for those
6 goods may have contributed to a further deterioration of the state of the environment.

The last section summarizes the content of the paper and brings together its main conclusions.
7

# 2. INDUSTRIAL POLLUTION ESTIMATES

# 2.1 Methodology

In the present section the reaults of the calculation of some pollution indicators for the Mexican manufacturing sector are presented for the 1950-1989 period. As no emission figures are available for Mexico's manufacturing industries, the estimates are based on fixed US emission coefficients collected from USEPA emissions databases converted by Wheeler 3 into the following 7 compound industrial pollution indicators:

1. total quantity of TRI (Toxic Release Inventory) chemicals released or transferred (AVTRIT)

2. linear acute human health and terrestrial ecotoxicity (AVHUML) 3. exponential acute human health and terrestrial ecotoxicity (AVHUMX) 4. linear acute aquatic toxicity (AVQAC) 5. exponential acute aquatic toxicity (AVQAX) 6. cancer risk (AVCANC) 3 The inventory contains measures of releases of various substances. The 7 alternative indicators mentioned here are weighted sums of substances released. Indicator number two uses risk weights 1 through 4 where 4 denotes the substances deemed to pose the highest risk to human health. For an explanation of the indicators and an exposition of the assumptions on which they are based see Wheeler (1991b). The values of the indicators by ISIC class are listed in Annex 3.
8 7. total quantity of metal compounds released or transferred (AVMETAL) In view of the fact that the different pollutions indicators produce fairly similar results and in order to avoid excessive repetition, we confine ourselves to the presentation of the results for the second indicator, i.e. the linear acute human health and terrestrial ecotoxicity (AVHUML).

For lack of better information, it had to be assumed that the US emissions figures by industrial ISIC class (which meajure discharges per dollar value of output), and the derived pollution indicators, were equally applicable to Mexican manufacturing activities. Moreover, it was assumed that the emissions per unit of output in each industry were constant over time. Consequently, changes in our estimates of the pollution intensity of the manufacturing industry are exclusively produced by structural changes in the composition of the activity basket. In other words, the effects of intra-activity changes and of technological changes in the emissions per unit of output, e.g. by cleaner production technologies, are not taken into account.

It is quite possible that the above mentioned assumptions have introduced an important bias in our estimates. In the first place, US emission figures were collected at a moment that pollution control measures had already been in place for some time in the US
9 while in Mexico the environmental aspects of industrial pollution were largely ignored during the period under study. In the second, whereas US industry faced increasing energy cost after the 1973 and 1979/1980 international price shocks, Mexican energy pricing policies did not fo'low the increases and kept the cost of energy far below world market opportunity cost until very recently. As a result US and international industry have developed less energyintensive technologies, 4 that were not adopted, or adopted to a lesser extent, by Mexican industries. Under these circumstances, the assumption of fixed pollution coefficients may well be too optimistic for the Mexican case. Therefore, our figures probably underestimate the real dimension of the pollution problem.

The weakness of the assumption of fixed emission coefficients by industry is further aggravated by recent findings that the scope for inter-fuel substitution within industries is quite ample 5 and that within-industry effects of such a fuel substitution usually outweigh the effect of inter-industry shifts.<sup>6</sup>

> 4For example, Bacon (1992) argues that total fuel use by manufacturing industries in OECD countries did not increase from 1971 to 1988 in spite of a growth in output of 62%. See also section 4 below.

5 See Eskeland et al. (1991).

6 See Moss and Tybout (1992) and section 4 below.
10

# 2.2 Sources of Information

The evolution of the levels and structure of manufacturing industrial activity was taken fr)m the National Accounts series elaborated by the Bank of Mexico for the 1950-1971 period and from two series elaborated by the INEGI, one for the period 1970-1984, the other for 1980-1989. The National Accounts of the Bank of Mexico distinguishes 30 manufacturing sectors, those of the INEGI 131 industrial groups at the subsectoral level.

From the above mentioned information two series of real manufacturing output were constructed: the first with 30 manufacturing sectors ranging from 1950 to 1971, the second with 131 activities, ranging from 1970 to 1989. The second series was obtained by coupling the two INEGI series whose sectoral classifications coincide almost completely. The resulting series are listed in Annexes 1 and 2.

The next step was to establish the correspondence between the manufacturing activities of the two series and the 74 industrial ISIC categories reported by Wheeler. For the first series this was not always possible and this must have givten rise to a lower precision in the estimates. For the second series the correspondence could be established in an almost straightforward manner. The correspondence between the National Accounts
11 activities and the ISIC classes for the 1950-71 and 1970-89 series is given in Annexes 4 and 5 respectively.

# 2.3 Results

Table 1 and the corresponding figure present the evolution of the pollution intensity according to the compound pollution indicator AVHUML mentioned before. There is an important mismatch in the overlapping years of the two series. This mismatch is mainly due to the lack of detail in the activity classification of the first series and, to a lesser extent, to differences in weighting factors provoked by the transition from 1960 to 1970 prices. It should be remembered that the table represents the intensity of pollution generated per unit of manufacturing output; i.e. the effect of the growth of the manufacturing output, which amounted to 333% from 1950 to 1970 and to 126% from 1970 to 1989, is not accounted for in the table. If we were to take account of both phenomena, we would find manufacturing industries producing 20 times as much pollution in 1989 as in 1950, where a doubling of pollution intensity combines with a ten fold expansion of output.

The general picture is that the pollution intensity is increasing over time; by approximately 50% over the 1950-1970 period and by 25% over the 1970-1989 period. The figures demonstrate convincingly how the Mexican manufacturing industry has moved towards more polluting subsectors over the last forty years.
12 A closer look at the time profile of the growth of pollution intensity makes clear that this indicator increased steadily over time with shortlived interruptions from 1955 to 1958 and from 1963 to 1967 and with a somewhat longer interruption from 1973 to 1980.

In table 2 the sectoral contributions to the pollution intensity are presented as a percentage of total discharges for the period 1970-1989. The twenty most polluting sectors out of a total of 130 activities are listed according to their share in the overall pollution discharges in 2989. Sixteen of them correspond to production of intermediates. These sectors increased their participation in the pollution intensity from two thirds in 1970 to almost four fifths in 1989.

Perhaps the most important conclusion form the figures of table 2 is that the increase in pollution intensity during the seventies and eighties is almost exclusively attributable to the increase in the relative contribution of only two sectors: petrochemicals and fertilizers. This is of particular importance as both sectors were dominated by public sector companies, PEMEX and FERTIMEX, either due to constitutional restrictions (petro-chemicals) or to government pricing policies making private sector investments highly unprofitable (fertilizers). In other words, the notorious increase in the pollution intensity of Mexican manufacturing industry since 1970 can fully be written on the account of public sector participation in a few heavily polluting activities.
13 Although the growth of the relative importance of some private sector based activities such as synthetic fibers, synthetic resins, and basic chemicals also led to an increase in the pollution intensity, this was compensated by relative reductions of other manufacturing industries output which are also in the more polluting categories.

Similar observations, although to a lesser extent, can be made about the 1950-1970 period. In fact, somewhat more than half of the approximately 50% increase of the pollution intensity from 1950 to 1970 is explained by the increase in the relative participation of petro- and agrochemical-, the remainder being due to a few sectors mainly under private ownership such as basic chemicals and synthetic fibers and resins.
14

# 3. FOREING-TRADE POLICIES AND INDUSTRIAL DEVELOPMENT: CONSEQUENCES FOR THE ENVIRONMENT

# 3.1 ImRort Substitution Period (1945-1976)

During the three decades following the Second World War Mexican industrial development passed through different stages of import substitution, and its foreign-trade policies became increasingly inward-oriented. As early as 1947 an import licensing system was installed whose importance grew steadily over time until it covered 91% of import value in 1976 (See table 3). By far the most important criteria un determining whether or not an import permit was granted was the availability of the good under consideration from local production. Additionally, imports have been subject to import tariffs, mostly on an ad-valorem basis, with rates ranging from 0 to 100% as a rule. Generally speaking, rates were higher for goods produced in the country than for those not available form local sources.<sup>7</sup> The import substitution process can be roughly divided in three stages. During the first stage, which lasted until the end of the fifties most imports of non-durable consumer goods were 7For extensive descriptions of Mexico's foreign-trade policies during the considered period see King (1970), Bueno (1971), Ten Kate et al. (1980) and Balassa (1983).
15 substituted. The second stage covers the decade of the sixties and refers to the substitution of consumer durables and unsophisticated intermediates. Substitution of technologically more advanced intermediates and of capital goods was undertaken in the seventies but was frustrated by a change of policies in the middle of that decade.<sup>8</sup> Given the fact that, generally speaking, the production of intermediates, particularly that of the unsophisticated ones, is by - far the most polluting activity much more polluting than - production of final consumer and capital goods it is expected that the heaviest impact of the Mexican industrialization process upon the environment was produced during the second stage of the import substitution process.

It should be recognized, however, that the growth of manufacturing output is not only defined by the degree of import substitution but also, and often to a larger extent, by the dynamics of domestic demand. That is to say, the fastest growing sectors need not necessarily coincide with the sectors for which import substitution is highest. Moreover, demand growth may be negatively affected by the higher prices needed to keep the import substitution process going. Apart from that, it should be emphasized that the three stages of import substiL Lion largely overlap. For example, import substitution of intermediates did not wait for that of the durable 8 See De Mateo (1988).
16 consumer goods to be finished , but started already during the Second World War and continued until far<sup>beyond the import</sup> substitution period.

With that in mind, it is not surprising that<sup>the different phases</sup> of import substitution are not so clearly reflected<sup>in the growth</sup> pattern of manufacturing output. In table 4<sup>compound annual growth</sup> rates od different components of the manufacturing<sup>and other</sup> sectors are b-ought together for a number of periods.

To give an example of the lack of correspondence, the<sup>g--rth of the</sup> relatively modest Mexican capital goods sector<sup>has always been</sup> significantly higher than that of the manufacturing<sup>sector as a</sup> whole, i.e. not only during the last stage of import<sup>substitution,</sup> as is to be expected, but also, and even more sharply<sup>,during the</sup> first two stages. Similar observations, but to a lesser<sup>extent,</sup> hold for the intermediate goods sector which<sup>increased its</sup> participation in manufacturing output continuously<sup>over the whole</sup> import substitution period, from 39% in 1950 to 45%<sup>in 1989.</sup> As demonstrated in the foregoing section, the pollution<sup>intensity</sup> estimates of the manufacturing sector as a whole<sup>show a steady</sup> increase from 1950 to 1976 irrespective of the different import substitution stages, mainly as a consequence of<sup>the growing</sup> relative importance of intermediate goods.
17 The legacy of the import substitution phase was a largely traditional and uncompetitive industrial apparatus with an important foreign participation in the technologically more advanced sectors and still a high dependency on imports for sophisticated intermediates and capital goods. At the mid seventies import substitution possibilities were virtually exhausted and an important change of policy took place after the peso devaluation of 1976 at the beginning of the Lopez-Portillo administration.

# 3.2 Petroleum-Led Growth (1977-1982)

With the discovery for huge oil endowments in 1974 and 1975 and given the enormous increases in international oil prices since 1973, the L6pez-Portillo administration (1977-1982) decided to abandon the growth model based upon import substitution and concentrate its efforts upon the development of oil resources. In response to a relative abundance of foreign exchange, foreign-trade policies were slightly liberalized during the late seventies and at the close of the decade the government even tried to achieve Mexico's accession to the GATT. The attempt failed, however, due to heavy opposition from domestic trade unions and small-scale entrepreneurs.

The modest trade liberalization did not bring domestic prices closer to international prices, however. On the contrary, the incentive structure became more distorted than it had been before
18 as a result of a monstruous system of government subsidies 9, made possible by the export earnings from crude oil and capital inflows. In fact, during that period, the Mexican economy drifted further away from market forces and became increasingly manipulated by the government.

In the early eighties the opening up of the import regime came to a stand-still and with increasing balance of payments problems, derived from a weakening international oil market and sky-high interest rates in the major financial markets, the Mexican economic policy package came under heavy pressure and virtually collapsed with the debt service moratorium in 1982 and the subsequent crisis of the international financial system.

There are a number of reasons to assume that the environmental situation should have deteriorated quickly during the shortlived petroleum-led growth period. First of all, there was an important acceleration of the growth of the manufacturing industry as a whole. In fact real manufacturing output registered a compound annual growth rate of 9.3% during the period 1976-1981, as compared with 6.4% for the 1970-1976 period. In tha second place, the petroleum sector itself whose participation in GDP increased sharply is a comparatively heavy polluter. Last but not least, pricing policies for oil products stimulated a number of heavily 9 For an assessment of Mexican subsidies and their economic consequences see Gil Diaz (1987).
19 polluting activities in the chemical industries, a relatively fuelintensive transport sector and more energy-intensive technologies.

Strangely enough, as demonstrated in the foregoing section, our estimates of pollution intensity do not fully support this hypothesis. Cortrary to expectations, we find that the pollution intensity has been relatively stable form 1973 to 1981, in contrast with sharp increases during other periods.

It should be realized, however, that the relative stability of the pollution intensity does not mean that the environmental situation did not deteriorate. On the contrary, on one hand, the acceleration of growth itself of manufacturing output during this period with a more or less stable pollution intensity level must have resulted in an increase in the absolute level of pollution at the same rate of growth as that of manufacturing output. On the other hand, it should be kept in mind that out pollution intensity estimates are based on fixed emission coefficients so that the effects of intra-sectoral shifts towards more energy-intensive technologies are not accounted for in those figures. Thus, the only conclusion that may be drawn from the findings of the foregoing section is that structural changes towards more pollution intensive subsectors did not take place during the period.

Still, there are some otner reasons for the comparative stability of our pollution intensity estimates during the petroleum-led
20 growth period. In the first place, the expansion of the petroleum sector during the period under consideration took place mainly in the exploitation of crude oil and natural gas which does not belong to the manufacturing sector as such. Thus, it is not accounted for in the figures presented in the foregoing section. As may be seen in table 4, the growth of the manufacturing part of the petroleum industry, i.e. the refining activity and the petrochemical industry, was only slightly higher that of manufacturing on the average. (9.8 against 9.3% per annum.) The second reason is that the substantial public investments in a number of downstream hydrocarbon related activities such as petrochemicals and fertiLlizers, although realized during the petroleum-led growth period, came into operation only in the early eighties, most of them after the crisis of 1982 (see table 4).

Likewise, it was only until the end of the petroleum-led growth period that energy goods became cheap in comparison with international prices (see section 4 below). Again in this case, due to gestation lags, the supply response to low energy prices was far from direct in sectors such as the chemical industries, so that it is not surprising that these sectors continued with growth rates significantly above the average in subsequent years (see table 4).
21

# 3.3 Macroeconomic Stabilization and Trade Liberalization

# 1983-1988

After the foreign-exchange crisis of 1982 and the subsequent devaluations and upsurge of inflation, the 1983-1985 period was characterized by macroeconomic stabilization efforts. However, in spite of the closure of a number of unprofitable state enterprises draining the government budget, the efforts turned out insufficient t.o bring inflation down to acceptable levels and to bring the economy back to a sustained growth path.

In July 1985 recourse was sought in an ambitious trade liberalization program to combat inflation and render the Mexican economy more competitive by exposing domestic producers and distributors to foreign competition. one year later, i.e. in the summer of 1986, Mexico acceded to the GATT. Due to the enormous depreciation of the real exchange rate during the 1985-1987 period, the effects of the import liberalization were only felt. until 1988 when, with the measures of the Economic Solidarity Pact, the real exchange rate appreciated back to more sustainable levels. 10 For the same reasons as those mentioned for the petroleum-led growth period, but now working in the opposite direction, industrial development during the period considered here should have been fairly neutral, or perhaps even favorable, to the state of the environment. In the first place, economic growth stagnated

> 10 See Ten Kate (1992 a,b).
22 and was not significantly different from zero until<sup>1988.</sup> Real manufacturing output grew at a compound annual rate of 0.2% from 1981 to 1988. Second, the relative importance of the petroleum sector diminished, although this is mainly due to price effects and not so much to real changes. In the third and last place, in the course of the adjustment psriod the prices of petroleum<sup>fuels,</sup> basic petrochemicals and fertilizers were adjusted<sup>so as to bring</sup> them closer to international prices by which at least<sup>part of the</sup> implicit subsidies granted by the distorted price system<sup>to the</sup> more polluting activities was remcved.

As demonstrated before, our estimates of the evolution<sup>of</sup> industrial pollution intensity do not support this hypothesis either. Contrary to expectations, the pollution intensity indicator increases sharply from 1981 to 1987 after relative stability during 1973-1981.

The main reason is again the substantial increase in public investments in heavily polluting activities, such as petrochemicals and fertilizers, which took place from 1978 to 1981 (i.e at the end of the petroleum-led growth period), but came into production only after the collapse of 1982.

Similarly, as regards the price adjustments of some environmentally sensitive goods (such as energy good, fertilizers and basic petrochemicals), these were brought in line with international
23 prices only towards the end of the stabilization period. Before that time, the discrete price increases of those goods had been eroded by the high inflation rates characteristic of the crisis and stabilization period.

Another important consequence of the Mexican trade liberalization, which was carried through during the period under consideration, is the enhanced role for competition in the Mexican economy which may improve the scope for the application of price-based pollution control measures significantly. As argued by Wheeler, such measures usually do not operate adequately in manipulated economies or for companies under soft-budget constraints. 11 Therefore, also the privatization of state-owned companies is expected to contribute to this goal.

11 This is one of the reasons why, according to Wheeler, texbook price-based pollution control measures in Poland proved quite unsatisfactory. See Wheeler (1991a).
24

# 3.4 Growth Recovery and North American Free Trade Agreement (1989-Present)

With the entrance of the Salinas administration in 1989, the Mexican economy entered a new episode which will probably be referred to in the future as that of growth recovery and of the negotiation of the North American Free Trade Agreement. The first two years of that period were characterized by a progressive stabilization of the macroeconomic panorama thanks to the renegotiation of foreign debt under the umbrella of the Brady plan, of which Mexico was the first beneficiary, and to the announcement of the reprivatization of the banking system.

The most outstanding achievements were the following:

- i) a recovery of economic growth, in 1989 still at a modest rate of 3%, and in 1990 and 1991 at 4%

- ii) inflation was brought down from over 50% in 1988 to 20% in 1989, then increased slightly to 30% in 1990, and was back slightly below 20% in 1991, and

- iii) real interest rates in the domestic financial market declined sharply.

At the same time the trade liberalization carried through from 1985 to 1987 was consolidated further and the attempts to bring prices of public goods and services closer to international standards
25

# continued.

An important feature of that period was the decision of the Salinas administration to enter into negotiations with the US aiming at the establishment of a Free Trade Agreement. At a later stage Canada joined the table. Given the fact that over 70% of Mexico's foreign trade is with the US and given the reciprocity of the concessions to be negotiated, such a North American Free Trade Agreement (NAFTA) might turn out of even greater importance to Mexico than the unilateral trade liberalization of the 1985-1987 period.

Another outstanding change with respect to the previous period is the renewed concern of the Salinas administration about the state of the environment. While the creation of the SEDUE (now SEDESOL), the ministry in charge of environmental protection (1982) and the enactment of the Law of Ecology and Environmental Protection (1988)12 stem from the de-la-Madrid administration, during the Salinas administration budget allocations to the undersecretariat for the environment have been increased substantially, special programs are being put in place (such as actions to diminish air pollution in Mexico City), standards for industrial emissions are issued and environmental impact assessments (EIA), albeit already compulsory under the 1988 Law for all new projects and extensions of existing ones, are being enforced more strictly.

> 12 See Diario Oficial, 28 January 1988.
26 With the above indicated developments Mexico has taken the four standard benchmark steps necessary for the implementation of an environmental protection policy. According to Wheeler 13 these standard events are; (i) an environmental bill of rights, (ii) adoption of ambient standards, (iii) establishment of an environmental protection agency and (iv) enactment of environmental impact assessments. Herewith Mexico has set the stage for its environmental policies for the future.

# 3.5 Foreign-Trade Policies and the Environment

Resuming the findings of the foregoing subsections, the relation between foreign-trade policies and the pollution intensity of manufacturing industries is rather obscure. At our level of analysis there is no indication whatsoever that a more open trading system would be systematically either beneficial of harmful to the environment. Comparing the trade policy changes described it, the present section with the pollution intensity estimates of the foregoing section one rather finds a number of unexpected features but the increase in the industrial pollution intensity in Mexico since the Second World War seems to be much more attributable to government participation in the productive sphere (petrochemicals and fertilizers) than to changes in foreign-trade policies.

These conclusions should be considered in light of two important 13 See Wheeler (1991a), pp. 81-82
27 limitations of our approach. The first is that the estimates of pollution intensity are based upon fixed pollution coefficients by industry so that only structural changes and no within-sector technology changes are reflected in the figures. The second is that trade liberalization in Mexico is fairly recent so that its effects upon the environment may not yet be reflected in the available data.
28

# 4. ENERGY PRICING AND ENERGY INTENSITY IN MEXICAN INDUSTRY

# 4.1 Introductory Remarks

In the foregoing section the pollution phenomenon was approached from the point of view of the emitting industry. I.e., the attention was upon the pollution that is generated with the Production of certain products. The pollution caused by their consumption was only taken into account in case they were consumed in the production process of the manufacturing industry. Pollution derived fror intermediate consumption by other than manufacturing industries or from final uses was not considered. For example, the pollution generated by the process of petroleum refining was accounted for, but that caused by the consumption of refined petroleum products in the transport sector or by private transportation, was not. Alternatively, the pollution phenomenon can be approached from the point of view of the consumption of environmentally harmful goods, such as agrochemicals or petroleum fuels. That is the point of view adopted in the present section.

A similar dichotomy in approach is reflected in pollution control policies. I.e. one may approach pollution control either directly from the perspective of emissions or indirectly from the consumption of products causing pollution. Policies limiting of putting a tax on emissions belong to the direct approach, policies
29 limiting or taxing the use of environmentally harmful goods to the indirect approach.<sup>14</sup> The first approach (i.e. taxing or controlling emissions) induces cleaner production technologies. For example, emissions taxes levied on refineries induce cleaner technologies in petroleum refining but leaves the pollution caused by the consumption of petroleum fuels unaffected, unless the higher costs resulting from those taxes are transferred to the prices of the fuels. Moreover, there is the disadvantage of a cumbersome and costly implementation. In fact, its implementation requires the measurement of emissions at all emission points which is often not feasible.

The second approach (i.e. taxing the goods whose consumption causes pollution) induces a cleaner consumption product mix but leaves production and consumption technologies unaffected. I.e., fuel taxes may lead to less fuel consumption but do not necessarily induce cleaner production technologies in petroleum refining or cleaner consumption technologies, e.g. through catalyzer use. However, the second approach has the advantage of a comparatively easy implementation. Environmental policies usually combine the two approaches.<sup>15</sup>

> 14 This distinction is proposed and discussed in Eskeland and Jimenez (1992)

> 15 Eskeland (1992) recommends such a combination for automotive emission control in Mexico City.
30 In view of the importance of energy consumption for air pollution, this section reviews Mexico's energy pricing policies during the seventies and eighties. After presenting some rough estimates bf the implicit subsidies involved in those pricing policies, some inferences are made about their possible consequences for the energy intensity of Mexican industrial activity.

# 4.2 Pricina Policies in General

Many developing countries have adopted pricing policies in order to expand the industrial sector, to foster agricultural development or to reach certain social objectives. Below-market prices are charged and subsidies or cross-subsidies are granted in a range of goods and services often supplied by the public sector. Apart from stimulating some economic activities, (at the cost of the rest of the economy), these pricing policies and subsidies may also affect the production technology of existing economic activities increasing the use of subsidized intermediates in the production process or stimulating the consumption of subsidized products by other than the target population. Such an increased intermediate use or final consumption may be harmful to the environment. Lowpriced petroleum fuels may induce a fuel-intensive transport system, cheap fertilizers may lead to overfertilization of agricultural land, and below-cost water supply may lead to wasteful usage.
31 In Mexico, the experience with below-market price supply and (cross) subsidization has been pervasive. As can be expected, these policies flourished during the oil boom of the late seventies and were reversed at times of austerity in public spending or when more reliance was put on market forces. Below-market prices and (cross-) subsidies could and can still be found in areas such as petroleum fuels, electricity, fertilizers, water supply, waste disposal, credit etc.

In the following a few out of many possible examples are examined in somewhat more detail. In particular, energy pricing policies from 1970 to 1990 are given some attention because the adverse environmental impact of below-market prices for petroleum fuels and electricity may have been quite substantial given the size of the subsidies.

# 4.3 Energy Pricincr

In Mexico, energy use is of particular importance in the environmental context as a relatively high percertage (up to 85%) is generated by the burning of hydrocarbons (petroleum fuels and natural gas). The supply of energy is almost entirely in the hands of the public sector due to constitutional constraints on private sector participation. Therefore, pricing policies are mainly defined by the government and were openly used in the late seventies and early eighties as an element to speed up
32 industrialization and economic development. The governmental energy program of 1980 stated: "The policy of industrial development based on the supply of energy at prices below international levels should continue. This is an instrument that a developing country with abundance of hydrocarbons can legitimately use in international competition".'<sup>6</sup> Pricing policies for PEMEX supplied petroleum fuels and natural gas have varied over time and have been different for different products. Generally speaking, hydrocarbons for intermediate use such as heavy fuel oils, diesel and natural gas have been kept cheap in comparison with international standards. Table 5 shows the relation between domestic prices and international prices or opportunity cost. The relation deteriorated especially in the period 1976-1981. Only since 1986 domestic prices have been brought more or less in line with international prices partly due to the sharp decline of international oil prices during that year.

Gasoline pricing policy has been slightly different from that for other petroleum fuels. Before the oil boom, gasoline prices were kept at levels somewhat higher than those in the US: During the petroleum-led growth period, i.e. from late 1976 until the end o- 1981, prices remained almost constant, which gave rise to increasing price differentials with the international market, Since late 1981, however, domestic, gasoline prices were adjusted 16 Secretaria de Patrimonio y Fomento Industrial (1980).
33 continuously and reached again levels slightly higher than' those prevailing in the international markets by the end of the eighties.

The relative price of liquid gas, which is mainly used for domestic purposes, declined considerably during the late seventies and early eighties. This decline continued until 1985 and was only reversed as of 1986. At present prices are still at a relatively low level compared to a similar product in the US market, approximately 40% of the price of propane in the US.

The decrease of the prices of hydrocarbons in Mexico, relatively to abroad as described above, took place partly as a result of increasing international prices after the 1973 and 1979/1980 oil price hikes. However, the domestic prices also decreased in real terms form the early seventies on to 1982 for natural gas, fuel oil and diesel, which are the main fuels used for energy generation in productive activities. From 1983 onwards, real prices of the fuels increased considerably. (See tahle 6.) Products such as gasoline and liquid gas, however, showed a somewhat different picture. The main destination of these products is final consumption. Prices of gasoline in real terms were only significantly below their traditional 220-250 pesos/liter range (expressed in 1987 constant prices) from 1978 to 1982. Price policy for liquid gas allowed an almost uninterrupted decline in real terms form 1975 to 1985. As liquid gas is mainly used for
34 domestic purposes, social considerations have been an important element in this policy. Recent proposals to use liquid gas in public transport in Mexico City to combat the severe air pollution problems of the area, will probably lead to a pricing policy that links the price of liquid gas more closely to that of gasoline.

Pricing policies for electricity in Mexico include both rate levels implying important subsidies and a rate structure not reflecting long-run marginal costs. Subsidies from the public sector were realized both through subsidized fuel inputs and through direct transfers to the public sector electricity company.

Table 7 presents comparisons of electricity rates between Mexico and the US for alternative uses. From these comparisons it can be seen that the erosion of rates that took place in Mexico almost throughout the whole period, was particularly severe from 1982-87.

# 4.4. Im2licit Subsidization

Evidently, below-market prices for petroleum fuels and natural gas implied heavy subsidies to the consumers of those products. Estimates of implicit subsidization, calculated as a price differential times domestic sales volumes, are presented in table 8. It should be noted that domestic sales include sales to electricity generation.
35 Table 8 reveals considerable subsidies reaching a record height of almost US $11 billion in 1981, i.e. almost 5% of GDP. Implicit subsidies remained of importance throughout the eighties, but were substantially reduced after 1986. It is interesting to observe that the subsidies of table 8 are slightly lower that the ones reported by Gil Diaz (1987), though in the same order of magnitude.

As far as electricity is concerned, a different methodology was adopted to estimate the magnitude of the subsidies. Although international rate comparisons can be used to get an idea of their influence upon the competitive position of local producers **17,** foreign electricity rates may not be considered to represent opportunity costs in Mexico.

Therefore, implicit subsidization was estimated by direct government transfers and indirect subsidies through fuel inputs. It should be noted that the first element is imprecise as regards - the time profile of the subsidies i.e. direct transfers are often realized to cover losses which result from the rate subsidies - granted earlier and that the second element is also accounted for under fuel subsidies. Thus, totaling subsidies one should only take the first element to avoid double counting.

The estimates of electricity subsidies are presented in table 9. It appears that subsidies were particularly high during the period

> 17 See for example CONCAMIN (1991).
36 1980-1985 not only as a result of the fuel subsidies but also, and even more so, due to the direct government transfers.

# 4.5 Energy Intensity of Mexico's Industrial Sector

In the following the energy intensiti of Mexico's industrial sector, the most important source of industrial a-- pollution, is considered in some detail. Table 10 presents energy use by Mexican industry by type of fuel for the period 1970-1990. Solid fuels are not included. For lack of more detailed information industry includes mining and construction, not electricity generation.

Table 10 shows a continuous increase of energy use during the period, only interrupted in 1984 and 1986 due to the negative growth of the industrial sector in those years. The compound annual qrowth rate of total energy use was 4.8%, that of electricity use 7.0%, of petroleum fuels 5.7% and that of natural gas 3.6%, reflecting relative shifts from natural gas to electricity and petroleum fuels.

- The evolution of energy intensity i.e. energy use over gross - output at constant prices is presented in table 11. Total energy intensity shows heavy fluctuations over time with peaks in 1978 and 1983, the latter one caused by a significant decline in industrial output with energy use still growing. Over the whole period, total energy intensity increases by 5.7% from 287.5 Tcalories per billion
37 pesos of output at 1970 prices to 303.8 in 1990. This growth in energy ir.tensity is in strong contrast to Bacon's finding that manufacturing industries in OECD countries reduced their energy intensity by 38 percent.<sup>18</sup> Considering the intensity in the use of different types of energy separately, one observes a somewhat different picture. Particularly the enormous substitution of natural gas by other sources of energy since 1983 is notorious. As a consequence, the increase in the intensity of petroleum fuels and electricity (24.5 and 59.1% respectively) is much more pronounced than that of energy as a whole. From an air pollution perspective, natural gas is most likely the least polluting fuel, per calory consumed.

In order to see to what extent energy intensity is influenced by energy prices, an attempt was made to establish a correlation between the intensity rates presented in table 11 and the domestic prices of petroleum fuels and natural gas of table 6. However, the exercise turned out relatively unsuccessful. Experimenting with different lags did not improve the picture. Thus, the changes in the energy intensity of Mexican industry appear to be poorly correlated to changes in energy prices.

Finally, an attempt was made to decompose the increase in petroleum-fuel and electricity intensity in a part due to 18 See Bacon (1992)
38 intersectoral changes in the production structure and a part due to intra-sectoral changes in energy intensity. Following Sterner (1985), these parts are called the structural and technological components.

Table 12 presents an approximation of the structural component of change. Calculations were performed with fixed 1970 input-output coefficients for petroleum fuels (sector 33) and electricity (sector 61) combined with gross output growth at constant 1970 prices per industrial sector. The input-coefficient for basic petrochemicals was corrected for fuel inputs for nonenergetic use. This was of some importance because of the explosive growth of the petrochemical sector as compared to the growth of the industrial sector as a whole.

The figures reported in the table represented the amount in 1970 pesos spent on petroleum fuels and electricity per 1000 1970 pesos of gross industrial output under the assumption of fixed 1970 input coefficients. That is to say, the time path of the figures reflects the extent to which the petroleum-fuel and electricity intensity of industry would have changed as a result of structural changes in the composition of the production basket. I.e., it stands for the structural component of energy intensity change.

The table demonstrates that petroleum-fuels intensity (at least its structural component) was fairly constant over the considered
39 period. There is only a 1% increase from 1970 to 1990 as compared to a 24% increase in total petroleum-fuel intensitv. Although there are important meti'odological differences in the way these two figures are obtained, it seems to be justified to conclude that the change of petroleum-fuel intensity of Mexican industry is almost completely attributable to increases in energy use per unit of output within the sectors. On one hand, these findings are in agreement with those of Sterner (1985) in spite of the difference in the considered periods. Casler (1992), on the other hand, reports important contributions from the structural component to industrial energy demand in the US.

Similarly, table 12 shows a structural increase in electricity intensity of Mexican industry of 12% from 1970 to 1990 as compared to a total increase of 59%. Thus, again, most of the increase in energy intensity must be due to increases in energy use per unit of output within each subsector. Also here, the residual (or within sector) effect by far outweighs the effect of structural change.

Generally speaking, the conclusion seems justified that the resistance for economies to adjust structurally is much higher that to adjust technologically. This characteristic was also found by Moss et al. (1992) for Chile and Colombia. In that study the predominance of changes in fuel use intensities was found within sectors and, even, within firms. This finding underlines once more the limitations of the approach adopted in section 2 where only the
40 structural component of pollution intensity change was considered. However, it also alerts us to the possibility that each subsector has become more polluting during the period, rather than less.

- 4.6 EnerQy Intensity of Mexican Industry in an International Perspective

Although the changes in energy intensity of Mexican industry appear to be poorly correlated with real price changes of energy inputs, one may still defend the position that the fact that mexican energy intensity increased while, at the international scene, there was a pervasive trend towards energy saving is determined by the low pricing practices for energy goods in Mexico in comparison with the international markets.

To test this hypothesis an index of industrial energy intensity was constructed for petroleum fuels, natural gas and electricity for the OECD countries. The necessary information was collected from the OECD energy balances and indicators of industrial production. These OECD indexes were compared with similar energy intensity indexes for Mexico derived form the information contained in table 11. The results are brought together in table 13.

From the table it appears that, although Mexico's industrial energy intensity grew by only 5.7% over the period 1970-1990, in comparison with industrial energy intensity of the OECD countries
41 its relative increase was 63.3%. See also Bacon (1992). Similar findings hold for the individual intensities of the different sources of energy. Only for natural gas is Mexico's intensity reduction almost equal to that of the OECD countries.

Attempting to establish a simple translog least-square correlation between the comparative energy-intensity indexes Mexico-OECD as the dependant variable and the corresponding relative prices of table 5 as the independent variable, one arrives at the following results:

- i) For lack of information on relative prices for fuel oil during the seventies - fuel oil is by far the most important industrial petroleum fuel -, no results can be reported for petroleum fuels. However, a close look at the behavior of the comparative index and relative prices, as far as available, suggests that the correlation must be poor due to high values of the comparative index for years around 1976 and towards the end of the eighties without explanation in the form of low relative prices during those years or the years before.

- ii) For natural gas the correlation performed best with a lag of four years leading to a highly significant (T value of 7) negative elasticity equal to -.286. That is to say, one percent increase in the relative price of natural gas leads to a decrease of .286 percent in the comparative fuel intensity four years later.
42 iii) Likewise, for electricity the correlation performed best with a lag of four years. Again, a highly significant (T-value of almost 8) negative elasticity was found of -.485, implying that a one percent increase in the relative price of electricity leads to almost half a percent decrease in the comparative electricity intensity four years later.

Altogether, the comparative energy intensity of the industrial sector in Mexico appears to be rather firmly correlated with relative fuels prices in spite of the fact that the correlation between "absolute" energy intensity and real energy prices is poor. A possible explanation is that standardized energy-saving technologies were imported in Mexico even when real prices did not stimulate such technologies. Such a process might have interfered with the expected relation between "absolute" energy intensities and real prices, but not with the relation between relative energy intensities and relative prices. However, to come to a fully satisfactory explanation further analysis would be necessary.
44 explained by the growth of public sector investments from 1978 to 1982 in ttie petrochemical and fertilizer industries.

It should be borne in mind that the pollution intensity figures presented in this paper are derived from US emission data for 1987 using fixed pollution coefficients by subsector. Thus, changes in the estimates of total industrial pollution intensity are completely produced by structural shifts in the composition of manufacturing output. Changes in production technologies and other changes within subsectors that lead to differences in emissions per unit of output, ir time or between the US and Mexico are not considered. Therefore, neither the possibility of technology choice nor the influence of economic policies, e.g. trade policies, on this choice were taken into account in the estimates.

With that in mind, and in view of the fact that fuel use by subsector could give us an indication of emission-relevant changes within subsectors not captured in our estimates, a brief analysis of the energy intensity of Mexican industry in relation to energy pricing policies between 1970 and 1990 was performed. It was found that energy pricing policies led to annual implicit subsidies for energy products (i.e. petroleum fuels, gas and electricity) of between US $8 and 13 billion, or 4 to 7% of GDP, from 1980 to 1985.

Energy intensity of Mexican industry increased by 5.7% from 1970 to 1990 while industrial energy intensity in OECD countries decreased
43

# 5. CONCLUSIONS

Industrial development over the past forty years in Mexico has been remarkable. Industrial production increased by a factor 10 between 1950 and 1989. During same period, industrial policies underwent dramatic changes. From an inward-looking strategy of progressive import substitution, through a period of public-sector-led growth, policies were changed to a more market-oriented and outward-looking strategy.

The impact of industrial development on the environment has been substantial. Our estimates suggest that the environment did not only deteriorate as a result of the growth of manufacturing output but also due to a considerable shift towards the more polluting subsectors leading to an increase in the pollution intensity, i.e. the amount of emissions per unit of manufacturing output.

Between 1950 and 1970 the pollution intensity of the manufacturing industry calculated with fixed emission coefficients increased by 50%. The growing participation of the production of intermediates in total manufacturing output is the main cause of this increase.

Industrial pollution intensity, according to our estimates, increased by another 25% from 1970 to 1989, particularly in the second half of this period. This increase is almost completely
45 by 35.3% over the same period. The increase in Mexican energy intensity is the result of a 24.5% increase of the intensity in the use of petroleum fuels, a 59.2% increase in that of electricity<sup>and</sup> a 15.4% decrease in that of natural gas.

The increase in petroleum-fuel and electricity intensity appears<sup>to</sup> be almost exclusively attributable to technological and other changes within subsectors, not to structural shifts in<sup>the</sup> production basket towards more energy intensive sectors.

An attempt to establish a correlation between Mexican<sup>energy</sup> intensity and real domestic energy prices turned out<sup>unsuccessful,</sup> but a similar exercise establishing a correlation between<sup>the</sup> differential in energy intensity between Mexico and OECD countries, on one hand, and energy price differentials, on the other,<sup>led to</sup> a highly significant negative correlation between<sup>these two</sup> variables for both natural gas and electricity. The results<sup>for</sup> petroleum fuels were inconclusive.

From these results it seems justified to conclude that<sup>the fact</sup> that Mexican industry did not follow the trends<sup>towards energy</sup> saving adopted by the OECD countries after the oil price shocks of 1973 and 1979, is for a good deal attributable<sup>to governmental</sup> energy pricing practices keeping energy prices far below international standards in the late seventies and<sup>early eighties.</sup>
46 The reduction of implicit subsidies to energy as of 1986, partly derived from lower international energy prices but also due to a change in domestic energy pricing policies, such as to bring prices in line with international prices or opportunity costs, and leading to increased prices in real terms, are expected to induce a lower increase of energy demand during a period of renewed economic growth.

Last but not least, the notable increase in pollution intensity of the Mexican manufacturing industry which characterizes its industrial development since the Second World War can, at this level of analysis, hardly be attributed to the foreign-trade policies which, until very recently, were strongly biased in favor of the less polluting consumer good industries. They rather seem to be due to structural changes of a more or less autonomous nature - such as the increasing importance of intermediates -, to public - investment in heavily polluting activities particularly petro and - agrochemicals and, also, to a considerable extent, to low pricing policies for pub2i.cly provided petroleum fuels and electricity.