California Western School of Law

Martin, David A.

English

The End of De Facto Asylum: Toward a Humane and Realistic Response to Refugee Challenges

This Article reviews both the giving and the taking away: the protections afforded to confidentiality by privileges and legal duties, and the way those protections are eroded. The duties of professionals and others to maintain confidences are noted, but testimonial privileges are emphasized. This Article proposes reforms in the way we try to protect confidentiality and suggests that the protection of therapy confidences be dealt with as a coherent whole (privileges and obligations of confidentiality should be dealt with together). Exceptions to privileges should be reduced and narrowed, and federal law should recognize the desirability of a consistent approach to confidentiality. Perhaps most importantly, the transmission of some confidential information to third parties should carry with it a duty which would require the recipient to maintain confidentiality ( extended confidentiality )

Smith, Steven R.

Medical and Psychotherapy Privileges and Confidentiality: On Giving With One Hand and Removing With the Other

International Law Journal, California Western

CALIFORNIA WESTERN
INTERNATIONAL LAW JOURNAL
VOLUME 17 SUMMER 1987 NUMBER 2
CONTENTS
CONFERENCE ON THE LAW AND THE ARTS
Introduction
SaraLloyd Truax .................................. 239
ARTICLE
Repose Legislation: A Threat to the Protection
of the World's Cultural Heritage
James A.R. Nafziger ............................... 250
REMARKS
Keynote Address: Visual Arts Law
John Henry Merryman .............................. 266
Artist-Collector Relations
Peter Karlen ....................................... 272
The Impact of Legal Fees on Cultural Institutions
Steven Brezzo ..................................... 280
Protection of Cultural Property
James A.R. Nafziger ............................... 283
Problems Facing Museums and the Law
Judith Teichman ................................... 290
Questions and Answers ................................ 298
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International Law Journal: Table of Contents
Published by CWSL Scholarly Commons,
SYMPOSIUM ON RECENT DEVELOPMENT OF
INDUSTRIAL PROPERTY RIGHTS
IN LATIN AMERICAN COUNTRIES
Introduction
Frank B. Flink .................................... 306
Recent Development of Industrial Property
Rights in Argentina
M artin A. Etcheverry ............................... 310
Recent Development of Industrial Property
Rights in Brazil
Peter D. Siemsen & Jos Antonio B.L. Faria Correa .... 320
Recent Development of Industrial Property
Rights in Chile
Sebastian Obach ................................... 327
Recent Development of Industrial Property
Rights in Mexico
M ariano Soni ..................................... 342
Nonuse Cancellation of Used Trademarks in
Venezuela
Richard Nicholas Brown ............................ 349
BOOK REVIEW
A Still Evolving "Law of the Sea"
M artin H . Belsky .................................. 355
BOOKS RECEIVED ................................. 374
©1987 by California Western School of Law
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Nafziger, James A.R.

Repose Legislation: A Threat to the Protection of the World\u27s Cultural Heritage

Karlen, Peter

ARTIST-COLLECTOR RELATIONS
PETER KARLEN*
I would like to talk about artist-collector relations. The first thing
you can believe, or not believe, is that a work of art has no physical
existence.' It is a very difficult point to understand, but actually it
provides the framework for understanding art law, especially as it
relates to artists and users of their works.
Perhaps you can visualize that a work of art is not a physical
object when you look at different types of artistic works and works
of authorship. For instance, imagine Homer reciting his Iliad or
Odyssey, and remember that the Iliad and the Odyssey were
passed down orally for thousands of years without ever being writ-
ten down. Now, the Iliad and the Odyssey were works of author-
ship back then even though they were never reduced to writing.
You may also remember that Mozart supposedly composed com-
plete musical pieces in his head, and the only reason he wrote them
down was so that musicians could play them. And when Schubert
was writing the Trout Quintet, he had it in his head as a complete
work. It is true, however, that he did write it down on a napkin in a
Viennese cafe. But that was only because of convenience.
The same is true with a work of art, as reflected in the language
of the Copyright Act. Section 102(a) of the Copyright Act' men-
tions that copyright protection subsists in original works of author-
ship fixed in tangible media of expression, which implies that un-
fixed works of authorship or unfixed works of art can exist." In fact,
in the California Civil Code,' there is a mention of unfixed works of
O 1987 Peter H. Karlen
* San Diego attorney practicing art, literary, entertainment and intellectual property
law; contributing editor to Art Week; J.D., Hastings College, 1974; M.S. (Law and Society),
University of Denver College of Law, 1976.
1. See Karlen, Legal Aesthetics: Property Rights in Art, Part 1, ARTWEEK, Mar. 31,
1984, at 10; Karlen, Legal Aesthetics: Property Rights in Art, Part I!, AR1WEEK, June 30,
1984, at 15.
2. For a more thorough discussion of the intangible nature of works of art, see Karlen,
Property Rights in Aesthetic Creations, 45 J. AESTHErTICS & ART CRITiCISM 183 (1986).
3. 17 U.S.C. § 102(a) (1982).
4. According to § 102(a) of the Copyright Act, protection is extended to "pictorial,
graphic, and sculptural" works which include works of art such as paintings, sculptures and
drawings.
5. CAL CiV. CODE §§ 980-982 (West Supp. 1987).
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ARTIST-COLLECTOR RELATIONS
authorship, which include unfixed works of art as well. Section 202
of the Copyright Act 6 confirms the very same thing because it im-
plies that there is a distinction between the art object and the work
of art, at least with respect to copyright law.
So, a work of art is not a physical thing, believe it or not; it is
actually an intangible, and that is what intellectual property law is
all about. Art lawyers have to deal with intangibles, and that gets
us right into some of the areas that I would like to talk about,
including copyright law, moral rights, resale of royalties, fine print
laws and other miscellaneous laws affecting artists and collectors.
I. COPYRIGHT LAW
When an artist sells a work of art to a collector, who owns the
copyright? The answer is that the artist always owns the copyright
unless, of course, the artist has created the work as a "work made
for hire."7 What this means is that when the artist sells the work to
the collector without a written copyright assignment,* the artist, not
the collector, has the exclusive right to reproduce, adapt, publicly
distribute copies of the work and publicly display the work.9 Only if
the artist signs a written transfer under section 204 of the Copy-
right Act does the artist lose the copyright.
This principle means that, if an artist paints a portrait of a col-
lector, the collector cannot reproduce the portrait. I have had many
cases involving people who pose for portraits. What these people
did was to use their portraits on magazine covers and on other pub-
licity materials. They found that even though they had purchased
their own portraits, they had no rights to reproduce them because
the artists owned the copyrights. 10
II. THE ART OBJECT
One thing that artists should remember when they sell works of
art is that even though they may hold the copyright, they lose the
6. 17 U.S.C. § 202 (1982).
7. See definitions of "work made for hire" at 17 U.S.C. § 101 (1982).
8. 17 U.S.C. § 204 (1982) allows for copyright transfers but only if memorialized in
written instruments.
9. The five exclusive rights belonging to the copyright proprietor are listed at 17
U.S.C. § 106 (1982). The performance right does not apply to pictorial, graphic or sculp-
tural works.
10. Of course, just because the artist owns the copyright does not mean that he or she
can commercially exploit the portrait which depicts the likeness of the collector. See CAL
Civ. CODE §§ 990, 3344 (West Supp. 1987) on statutory publicity rights.
1987]
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art object. This means that it may be impossible for the artist to
regain physical possession of the art object, even to exercise his or
her rights under the copyright. For example, an artist may want to
reproduce a work of art sold to a collector to derive royalties from
the sales of these reproductions. But the artist has no right to enter
the collector's home and take the work off the wall to reproduce it
because the collector owns the art object itself.1
Also, if the artist wants the right to exhibit a work after selling
the art object, he or she must secure a contract, preferably written,
which entitles the artist to gain physical possession. Furthermore,
the artist may sell a work of art yet want to ensure that the work
stays on public display because public display is very advantageous
to the artist's reputation. The artist should reserve in writing this
right to display. Further, when someone purchases a work from an
artist, the artist usually has no right to determine where the work
will be placed. For instance, let's imagine Richard Serra's work in
New York called Tilted Arc, an enormous work that was placed in
the middle of a public square and which created a lot of contro-
versy. I believe that the work is going to be removed, or was re-
moved, and yet the artist has had no say as to where the work can
be reinstalled because he sold the art object. Moreover, after selling
the art object, if the work is damaged or deteriorates, the artist
may have no access to the work to make repairs unless there is a
written agreement to reserve this right.
III. RESALE ROYALTIES
With regard to resale royalties, under the California resale royal-
ties statute,1' anytime a collector sells a work in California or the
seller happens to be a California resident, the seller may have to
pay the artist five percent of the gross proceeds derived from the
resale.' 8 Naturally, this statute should have caused large numbers
of collectors to emigrate from California. In the same fashion, the
statute only protects artists who are either California residents or
United States citizens.14 These rules then should have caused a
great wave of immigration to California and the United States by
II. See 17 U.S.C. § 202 (1982) for the proposition that ownership of the copyright is
distinct from ownership of the physical art object. Compare CAL CIv. CODE § 988 (West
Supp. 1987) for the proposition that a transfer or license of rights under the copyright does
not confer ownership of the physical art object.
12. CAL CIV. CODE § 986 (West Supp. 1987).
13. Id. subd. (a).
14. Id. subd. (c)(1).
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discontented artists from all over the world. In fact, the statute has
had very little impact because it applies to so few sales.
First, there are the residency restrictions. Second, the statute
does not apply unless the seller resells the work for $1,000.00 or
more. 15 Third, the statute does not apply to stained glass works in
buildings because it would be impossible to attribute what proceeds
came from the sale of the building from those of the work of art
itself.1 Also, sales by art dealers, under certain circumstances, are
exempted.17 Moreover, the statute is restricted to certain media of
expression, namely, paintings, drawings, sculptures and original
works of art in glass.18
The resale royalties statute has so many restrictions that most
collectors are not affected and, for the most part, artists never en-
force their rights even though the statute permits awards of attor-
ney's fees if the artist has to bring a collection action.1 In fact, I
have had only one or two artists whom I have helped to collect
resale royalties. So, it is not very much of a practical concern in
California.2
However, I must disagree with Professor Merryman about enact-
ing a resale royalties statute at the national level.2 I think that a
new federal statute on resale royalties would help create a lot more
litigation and work for attorneys. Imagine all the work for attor-
neys created by the requirement that sellers of art works register
their sales with the Copyright Office so that artists can collect their
royalties. Also, the registrations would help with determining prov-
enance and ultimately with detecting forgeries. Imagine how nice it
would be if we had a statute that required absolutely every work of
art in the United States to be registered and sold with a pink slip!
15. Id. subd. (b)(5).
16. Id. subd. (b)(7).
17. Id. subd. (b)(6).
18. Id. subd. (c)(2).
19. Id. subd. (a)(3).
20. The prophets of doom were wrong: The resale royalty statute did not destroy the
art market. The prophet's words are expressed in Asimow, Economic Aspects of the Droit de
Suite in LEGAL RIGHTS OF THE ARTIST (M. Nimmer ed. 1971).
21. See Visual Artists Rights Amendment of 1986, S. 2796, 99th Cong., 2d Sess.
(1986). This is the legislation proposed by Senator Edward Kennedy (D. Mass.) which pro-
vides for moral rights and resale royalties through amendments to the copyright laws.
19871
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III. MORAL RIGHTS
Section 987 of the California Civil Code22 was replicated in a
diluted and altered form in New York2s and later in Massachu-
setts."' The California statute gives artists the right to prevent the
physical destruction, alteration, mutilation and defacement of their
works of fine art even though they may no longer own the works.2
Thus, even though an artist sells a work to a collector, the collector
cannot damage, destroy or alter the work.
Professor Merryman wrote an article in the Hastings Law Jour-
nal concerning the Refrigerator of Bernard Buffet,26 a French art-
ist. Buffet had painted a refrigerator on all six sides but, believe it
or not, ambitious art dealers and collectors cut up the refrigerator
into separate panels and sold them individually. If this had hap-
pened in California, the California Art Preservation Act could have
been used to punish such conduct.
Now I have had cases like the Buffet case where dealers or col-
lectors divided up a piece so that they could see more of it in differ-
ent places. In one case, we had a watercolor divided into four sepa-
rate pieces. In another case, a dealer and his collector friends
decided that some sculptures were "evil figurines" and thereafter
conducted an exorcism ceremony during which they carved crosses
on the sculptures. This type of conduct is forbidden by the statute
even though the dealers or collectors may own the works of art.
I had another case recently where a collector bought large
murals to be installed at the Horton Plaza construction project in
downtown San Diego. The murals were used to surround the con-
struction site and aesthetically disguise the construction project.
When the art works were purchased, the artists transferred in writ-
ing all of their property rights to the collector. Afterwards, when
the construction was finished, the collector decided that the works
would be better used not as art works but rather as barricades and
gates, and a couple of the murals were knocked down and dirt and
debris piled on top of them. This is definitely the type of conduct
forbidden by the statute because it damaged the artists'
reputations.
22. For a general discussion of the California Art Preservation Act, see Karlen, Moral
Rights in California, 19 SAN DIEGO L. REV. 675 (1982).
23. N.Y. ARTS AND CULT. AlF. LAW § 14.03 (McKinney Supp. 1987).
24. MASS. GEN. LAWS ANN. ch. 231, § 855 (West Supp. 1987).
25. CAL. Clv. CODE § 987(c) (West Supp. 1987).
26. Merryman, The Refrigerator of Bernard Buffet, 27 HASTINGS L.J. 1023 (1976).
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Section 987 of the Civil Code also gives the artist the right to
claim credit for his work of art or to disclaim credit for just and
valid reason.27 This means that collectors cannot use a work of art
without crediting the artist for it and thus depriving the artist of
the publicity value connected with the work. It also means that if a
work is improperly displayed or mutilated so that its display injures
the artist's reputation, the artist can insist on not being credited as
the creator of the work.
Again, what this statute says to collectors is that they may own
the art object, but there are reserved rights that the artist has
which affect the artist's reputation and ultimately determine how
the collector can use the work of art.
IV. DANGEROUS ART WORKS
Other considerations for artists and collectors are maintenance
and safety. Just because the artist gives the art object to the collec-
tor and receives payment does not mean that the relationships be-
tween the artist and the collector and between the artist and his
work end. The artist may still have responsibilities to the collector
and even to the public at large.
If the work decays or deteriorates, the artist may have an obliga-
tion to repair it for the collector. When an artist sells the work,
there is always some implied warranty of merchantability, accord-
ing to the Uniform Commercial Code, 8 which makes the artist lia-
ble to the collector if the work immediately falls apart or deterio-
rates because of defective workmanship.
If the artist installs a dangerous work or the installation itself is
dangerous, the artist may be responsible for injuries, including per-
sonal injuries to the collector. In other words, the artist has the
obligation to make the work safe. 9 I even know of a case where an
artist was held responsible for pestilence infecting a work composed
of organic materials.
A good example of these considerations is a proposed mammoth
work of art which was to be installed in downtown San Diego. The
work was a sculptural work of approximately 10,000 square feet
consisting of a mound of soil and local plant life, including trees to
27. CAL. CIV. CODE § 987(d) (West Supp. 1987).
28. See, e.g., CAL. COM. CODE § 2314 (West 1964).
29. Cf. CAL. CIv. CODE § 1899.6 (West 1985) (concerning artistic and other proper-
ties loaned to museums which may become hazards to the health and safety of the public or
to the museum's staff because of deterioration or otherwise).
19871
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CALIFORNIA WESTERN INTERNATIONAL LAW JOURNAL
be planted in the soil. One purpose of the work was to depict natu-
ral soil formations and plant life in San Diego County. I advised
my client that it had the obligation to ensure that the work did not
fall down and to ensure that people were not injured while climbing
or walking on the work. I also warned my client about the work
becoming slippery when it rained. My client also realized that it
would need an environmental impact report, believe it or not, be-
cause installing a "natural" work in the middle of downtown San
Diego might create problems in an unnatural environment.
V. FINE PRINT STATUTES
One other set of statutes affects artists and collectors. Sections
1740-1745.5 of the California Civil Code, 30 which concern fine art
multiples, were designed to protect collectors primarily against ra-
pacious art dealers, especially those who sell limited edition fine
prints after making false representations regarding the limited edi-
tions. The statutes also affect artists who authorize the creation of
limited edition fine art multiples, including prints, sculpture cast-
ings and photographs.
The problem in California and other states was that when dealers
sold limited edition fine art multiples, they often misled collectors
about the authenticity and originality of the fine art multiples and
about the sizes of the limited editions. For example, a dealer might
tell a collector that the only edition consisted of not more than 100
copies and that the plate had been destroyed when in fact there
were three editions each having 200 copies and the plate was still
intact.
These statutes require the art dealer to disclose certain informa-
tion about the limited edition fine art multiples which he is selling
or advertising.3' The dealer has to disclose how many editions were
made, how many copies were in each edition, whether the template
from which the multiples were made was destroyed, when the mul-
tiple was made and what process was used in making it. If all this
information is not disclosed, the purchaser of a limited edition fine
art multiple can insist on a refund and, in some cases, the aggrieved
collector can sue the dealer for three times the amount of the sale
30. CAL. CiV. CODE §§ 1740-1745.5 (West 1985) are California laws inspired by for-
mer State Senator Alan Sieroty, the author of most of the California art-related legislation.
See Karlen, Artists' Rights Today, 4 CAL. LAW., No. 3, at 22 (1984), for an interview with
Senator Sieroty about his art-related legislation.
31. CAL. CIV. CODE §§ 1742, 1744 (West 1985).
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plus interest, plus an award of attorney's fees.
These statutes also apply to artists because according to section
1742(e) of the Civil Code, under certain circumstances, the artist
must disclose the same information about his or her limited edition
fine art multiples.
CONCLUSION
You can see from my brief talk that buying and selling a work of
art is not as simple as it seems to be. The dealings between artists
and collectors not only involve physical art objects but also copy-
rights, moral rights and other residual rights which may affect the
artist's reputation and earnings and the collector's ability to make
use of the work of art. With all of the new art laws on the books, as
far as the collector is concerned, he or she is really in the realm of
Believe It or Not.
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Artist-Collector Relations

Rood, William G.

Products Liability in the Small Capital Goods Manufacturing Firm: Problems, Proposals and Pitfalls

Fandel, Rochelle A.

The Response of  Escape Clause  of GATT and Section 201 of the Tariff and Trade Act of 1974 to the Needs of Developing Countries

Balluff, Karien L.

Greenmail: From Backrooms to Boardrooms to Courtrooms

California Western
International
Law Journal
INDEX
VOLUME 18
(1987-88)
Published by the California Western International Law Journal
San Diego, California
© Copyright (1988)
California Western School of Law
1
International Law Journal: Cover
Published by CWSL Scholarly Commons, 2015
2California Western International Law Journal, Vol. 18, No. 1 [2015], Art. 1
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Cover

Conrow, James W.

STRUCTURAL REFORM AND THE DEBT STRATEGY:
THE MEXICAN CASE
James W. Conrow*
I. THE DEBT STRATEGY
The basic purpose of the "Program for Sustained Growth" pro-
posed by Secretary of the Treasury Baker in October of 1985 (also
called the Baker Plan) is to implement a practical debt strategy
recognizing both political and economic realities. It focuses on the
fundamental need for stronger growth in debtor nations as a pre-
requisite to solving the debt problem. Achieving strong growth and
long-term development requires economic reforms by debtor na-
tions to enable them to use domestic and external resources more
efficiently, and supportive financing by the international financial
institutions and the commercial banks.
The success of this strategy ultimately depends on the willingness
of the debtor nations to initiate their own growth-oriented reforms,
including both macroeconomic and structural elements. Most of the
major debtor nations face a number of fundamental problems that
need to be addressed in order to facilitate stronger growth and
development.
First, these debtor nations' economic policies have tended to de-
pend excessively on external borrowing. This has substantially in-
creased those countries' external debt, without improving their abil-
ity to service that debt. While some supplementing of domestic
savings with foreign financing is necessary for rapid growth, so is
avoiding increasing debt at a pace that exceeds the debtor coun-
tries' capacity to service that debt. Debtor countries must reduce
their dependence on foreign borrowing and enhance both domestic
savings and non-debt financial flows to foster stronger growth.
It is essential to ensure that confidence, as the domestic economy
improves, encourages new foreign direct investment and stimulates
the repatriation of flight capital. It is necessary to implement poli-
cies which assist in reducing inflation, assuring positive real interest
rates, and developing the domestic capital and financial markets. In
* Deputy Assistant Secretary, Department of the Treasury.
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addition, a more open investment climate and growth-oriented tax
reforms will facilitate renewed confidence. Only the debtor nations
themselves can create the economic conditions which attract new
capital. For them to succeed, they must make this a top priority.
Second, debtor nations need to shift their development strategies
toward a more externally-oriented approach. In much of Latin
America, for example, highly protective trade regimes and domestic
incentive systems have encouraged inefficient import substitution
and provided a bias against export growth. These policies have
skewed domestic resource allocation, insulated firms from interna-
tional competition, and reduced incentives to control costs and
innovate.
There is a need to stimulate more efficient allocation of resources
and increase production of competitive goods for domestic use and
export. This requires a process of liberalizing trade, more market-
oriented pricing, and setting realistic exchange rates. This should
be attempted in conjunction with development strategies in order to
improve investment productivity.
Third, large public sectors, ranging from 30% to 60% of the gross
national product in most Latin nations, have absorbed a substantial
share of domestic savings and investment. During the 1970s and
the early 1980s, the number of state-owned enterprises increased
dramatically. For example, in 1982 Mexico had more than a thou-
sand public sector enterprises. Such enterprises tend to be heavily
subsidized and contribute to large government deficits.
II. PROGRESS UNDERWAY
Despite the relatively short period that has passed since the debt
initiative was proposed, considerable progress has been made.
First, many debtors are already taking important steps toward
increasing savings and investment, improving their economic effi-
ciency, converting public enterprises to private enterprises, and en-
couraging the return of flight capital.
Second, the International Monetary Fund (IMF) has negotiated
new standby programs with eight out of fifteen major debtors since
October 1985, including new loan commitments of $4.7 billion.
Third, the World Bank has negotiated $2.9 billion in new policy-
based loans with ten major debtors, and is discussing nearly $5 bil-
lion in additional policy-based loans for the fifteen major debtors.
Aggregate World Bank loans to these debtors increased by 40%
during its 1986 fiscal year. A substantially larger share of loans are
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ECONOMIC STRUCTURE OF MEXICO
now based on structural policy reforms.
Finally, the commercial banks have agreed in principle to provide
$10.3 billion in new loans including a $7 billion package for Mex-
ico, a $320 million new money package for Nigeria, and a $220
million oil facility for Ecuador. The commercial banks have re-
scheduled nearly $110 billion in outstanding debts since October
1985. Other financing packages and rescheduling are also under
discussion.
All of this has been done while external forces have been condu-
cive to growth. International interest rates have declined by nearly
four percentage points since 1984, saving the major debtors over
$11 billion in interest payments annually. Recent fluctuations in the
exchange rates among the major currencies should improve the ex-
port potential of debtors vis-h-vis countries with appreciating cur-
rencies. Furthermore, efforts are under way to achieve stronger
growth in other industrial nations, and to open global markets
through the new multilateral trade negotiations. Both should con-
tribute to stronger markets for debtor nations' exports.
Progress in the United States economy may herald improvement
for the others. The United States economic expansion is extending
into its fifth year, exceeding in duration five of the previous seven
expansions. There is every indication that it will continue unabated
through 1987 and beyond. Inflation has decreased drastically since
the early 1980s (with 1986 having the lowest rates than any year in
more than two decades). Employment increased by 2.5 million jobs
in 1986, and the prime interest rate declined by two full percentage
points during the year.
These figures reflect solid economic performance, and should set
the stage for a year of increased real economic growth and employ-
ment in 1987. Indeed, real growth is expected to average 3.25%
during this year, one percentage point higher than the 1986 aver-
age. This should additionally benefit developing countries, support-
ing their efforts to achieve stronger growth under the debt strategy.
III. THE MEXICAN ECONOMIC PROGRAM
The Mexican program fits squarely within the overall debt initia-
tive, and provides an excellent example of those countries that are
moving toward less government-directed, more market-oriented
economies as a prerequisite to stronger growth. The Mexican pro-
gram is based on a comprehensive three-year economic plan devel-
oped by the Mexicans. The plan is supported by a $1.5 billion
1987]
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CALIFORNIA WESTERN INTERNATIONAL LAW JOURNAL
growth-oriented IMF standby program. This program exists in con-
junction with $2.7 billion in net new disbursements by the World
Bank and Inter-American Development Bank, in support of struc-
tural reforms, and with a $7 billion new money package by com-
mercial banks. The Mexican program includes a number of impor-
tant structural reforms, which require detailed discussion.
IV. PRIVATIZATION
The current Mexican government recognizes that reducing the
role of the public sector in the Mexican economy is necessary for
revitalizing, increasing efficiency, and enabling it to compete inter-
nationally. The government, therefore, has set the target of reduc-
ing the number of public companies from 1155 (in 1982) to 500 by
the end of 1988. By mid 1986, the Mexican authorities had author-
ized reductions in the number of parastatals to 697 through sales,
transfers or mergers. This was no easy task. For example, the liqui-
dation of a steel mill in Monterrey resulted in a sizeable number of
workers being displaced.
Unfortunately, the reduction in the number of parastatals has
not proportionately impacted on the budget. About 75% of paras-
tatal subsidies are concentrated in three entities-the Agriculture
Marketing Agency, the Federal Electric Company and the Mexi-
can Fertilizer Company. This concentration is one area of the fed-
eral budget where the Mexican government expects to make more
progress in the future.
V. TRADE LIBERALIZATION
Mexico has also made progress in increasing the international com-
petitiveness of its economy. Of key importance was the decision to
join the General Agreement on Tariffs and Trade (GATT). As part
of its accession to GATT, Mexico has undertaken significant trade
liberalization measures, replacing licenses with tariffs for all but
436 of its import items and reducing tariffs on over 4,000 import
items. Mexico has also announced new export promotion measures
consisting of tax rebates, credit facilities, relaxation of exchange
controls, and automatic approval of imports to be used in produc-
tion for export.
In support of these trade liberalizing measures, Mexico has re-
ceived a World Bank trade policy loan for $500 million. Additional
trade policy loans are now under consideration to support further
reforms.
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ECONOMIC STRUCTURE OF MEXICO
VI. FOREIGN DIRECT INVESTMENT
Mexico has also made progress in one area that received consid-
erable criticism in the past-foreign investment. During the past
year, the Mexican government has begun applying its foreign in-
vestment law more liberally, realizing that relying mainly on exter-
nal borrowing to finance economic development puts too heavy a
burden on the economy. The government has reduced red tape for
foreign investors trying to receive approval to purchase Mexican
equities; more applications have been approved. For example, IBM,
Hewlett-Packard, and Honda have received permission to establish
100%-owned subsidiaries. Recently, the government also introduced
changes in its intellectual property law, which have partially satis-
fied United States Government demands for patent protection.
Finally, in the sensitive pharmaceutical area, the Mexican gov-
ernment has agreed to provide full patent protection for production
processes phased in over ten years, and has made changes in ge-
neric labeling requirements. Additionally, the government has
pledged non-discriminating marketing rights to non-Mexican firms.
Nevertheless, in this area as in others, there is concern about the
use of local content and export performance requirements. Further
progress should be made to reduce impediments to foreign
investment.
VII. DEBT/EQUITY SWAPS
Closely linked to promotion of foreign investment is a new Mexi-
can policy permitting debt/equity swaps. Under these provisions,
foreign investors who have purchased Mexican government foreign
debt obligations (mainly from commercial banks at a substantial
discount) can exchange these debt instruments for pesos at the
Central Bank for nearly the original peso value of the debt. A simi-
lar program in Chile is considered to have contributed to an expan-
sion of foreign investment inflow there.
The swap program in Mexico encourages tourism investments or
export-oriented industries that will expand foreign exchange earn-
ings. Working capital and the purchase of imported goods cannot
be financed through swaps because such transactions are not per-
manent additions to Mexico's capital stock.
The biggest attraction of debt/equity swaps could be for resi-
dents who take advantage of the discount on Mexican debt instru-
ments to repatriate some of the vast sums of money and liquid in-
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CALIFORNIA WESTERN INTERNATIONAL LAW JOURNAL
vestments held abroad. Current regulations also exclude foreign
portfolio investors from using swaps to purchase Mexican financial
assets.
Nevertheless, between May 1986 and mid-January 1987, the
Mexican government retired almost $520 million in public sector
debt under its program for substituting public sector debt with in-
vestment. The auto industry has dominated the debt/equity swap
program with $340 million equivalent in peso disbursements.
Chrysler's was the largest swap at $110 million, while Ford has had
a $50 million swap. In total, 130 applications for swaps were re-
ceived and 60 have been approved so far. Reportedly 70 debt/eq-
uity swap applications were received in January 1987 alone, verify-
ing the popularity of the program. The Mexican government
estimates that $660 million in private sector debt was converted
into equity in Mexican debtor companies in 1986.
The potential of the debt/equity swap facility as an instrument
for encouraging foreign capital inflows is considerable. The poten-
tial for this result is considerable, as has clearly been demonstrated
in Chile and other countries. According to the Mexican govern-
ment, however, the swaps' impact on the country's $100 billion plus
debt service burden is marginal. Apparently, the program's infla-
tionary impact was considerable causing the government of Mexico
to suspend it in early November 1987. The program is expected to
resume at reduced levels.
CONCLUSION
The debt strategy, economic program, privatization, trade liber-
alization, and foreign investment are some of the areas where the
Mexican Government has made recent progress in its overall effort
to improve the efficiency of the economy. The task has not been
easy, nor is it complete. Much remains to be done, and the govern-
ment is committed to continue the effort.
When one reads about Mexico in the United States press, the
focus is usually on what is wrong with the Mexican economy.
While Americans recognize that Mexico's economic problems are
not fully resolved, we are also concerned that, regarding Mexico,
we are quick to criticize and slow to praise. Mexico needs our sup-
port to achieve stronger economic growth and to improve the qual-
ity of life for its citizens. We must provide that support for a grow-
ing Mexican economy. It is in their interest as well as our own.
For the debt strategy to succeed, it is essential that all of the
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ECONOMIC STRUCTURE OF MEXICO
following elements be met:
First, industrial nations must maintain sufficiently strong growth
in their own economies, and they must provide access to their mar-
kets for developing nations' exports. Trade protectionism can only
hurt everyone.
Second, the commercial banks must do their part in providing
new loans to the debtor nations, and must resolve among them-
selves any differences about base periods for new loans, exit vehi-
cles for those who want to stop lending, and similar issues.
Third, it is essential to maintain creditor nations' and United
States Congressional support for multilateral development banks.
In addition, it is important for the United States to restore quickly
its funding shortfalls to the multilateral development banks. If
these shortfalls continue, our allies might conclude that we are not
committed to these organizations. Such an unwarranted conclusion
would adversely affect the ability of the United States to continue
to exercise leadership in the multilateral development banks and in
the broader international economic arena. This would, in turn, limit
the effectiveness of United States action to achieve crucial foreign
policy objectives.
Finally, the debtor nations themselves must maintain the pro-
gress now under way by continuing their efforts to improve their
growth prospects through additional reforms at home.
With patience, sensitivity, and mutual effort in all of these areas,
the international debt situation can remain manageable in the pe-
riod ahead.
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