|Author(s):||Bortz, Jeffrey L.|
Published by EH.NET (March 2003)
Jeffrey L. Bortz and Stephen Haber, editors, The Mexican Economy, 1870-1930: Essays on the Economic History of Institutions, Revolution, and Growth. Palo Alto, CA: Stanford University Press, 2002. xvii + 348 pp. $60 (cloth), ISBN: 0-8047-4207-3; $24.95 (paperback), ISBN: 0-8047-4208-1. Reviewed for EH.NET by Philip Keefer, Development Research Group, The World Bank.
One of the most important and difficult puzzles in the social sciences is why some countries have experienced sustained economic growth and most have not. Though consensus has emerged that the role of the state is at the center of this puzzle, the specific attributes of states that generate economic development are puzzling. For example, research into the role of democracy in economic growth has yielded persistently ambiguous results. It allows one to conclude, at best, that democracy helps growth, but not that it is a necessary or sufficient condition for growth. The volume edited by Bortz and Haber carefully evaluates this question from the opposite perspective. Contributors to the volume ask, “Under what conditions do autocracies grow, especially since they lack institutional guarantees against state expropriation of investors?” Their laboratory is Mexico, and they seek to explain why Mexico grew during the autocracy of Porfirio D?az.
Bortz and Haber conclude that financial imperatives that had grown more acute by the time D?az came to power drove the regime to innovate financial and trade regulations that raised the rates of return to specific investors and exporters. Ultimately, the distributional consequences of these arrangements precipitated the Mexican Revolution. The contributions fall short of fully proving all dimensions of this argument — a daunting task indeed — but they are nonetheless convincing on many margins. They document high rates of return and the regulatory arrangements that gave rise to them; they uncover evidence that cronies — people close to the government, or relatives of D?az, or both — shared substantially in the rents; and they estimate the sizable inefficiencies generated by these arrangements. They further show, in the contributions related to labor markets, that when political unrest weakened the cronies, the arrangements benefiting the cronies were dismantled.
Noel Maurer and Stephen Haber, in two chapters (one jointly and one by Maurer alone), argue that banking under D?az was concentrated and existed to channel loans to cronies. This was inefficient, not surprisingly: entry restrictions significantly suppressed deposit and loan growth relative to the counter-factual of more competitive banking (Maurer). Moreover, the financial sector largely failed to channel resources to the most productive enterprises, as Maurer and Haber show by demonstrating that productivity and output growth in textile firms with access to bank credit were no faster than in those without.
The authors could make even more of the punch line suggested by these results. The regime needed to extract rents from the financial sector, but could only do so by expanding the size of the sector. Of course, the greatest rents would flow from ensuring that the most efficient enterprises received credit. However, cronies did not own these. So the regime encouraged new financial institutions — expanding financial sector activity and the total rents to be obtained from the sector — but did not encourage competition, which would have cut out the cronies. The failure of productivity growth is the consequence of the second, but overall growth nevertheless occurred because the overall volume of credit rose. The regime therefore accelerated growth by increasing the intensity with which factors were used, which some have argued also fueled growth in countries dubbed East Asian miracles.
Carlos Marichal makes the case that, through the creation of Banamex, Mexico was able to re-open its access to external credit markets. He argues, “For foreign investors, the role of this private agency in guaranteeing public debt service was absolutely fundamental for regaining confidence in Mexico” (p. 106). To make this point, Marichal needs to argue that Banamex solved the two long-standing obstacles to lending to Mexico: tremendous fiscal pressures and a government with no institutional constraints on default. In the end, however, it is not clear which specific aspects of Banamex organization solved these two problems, although Marichal usefully and in great detail describes the relationship among the Mexican government, Banamex and foreign creditors. Instead, foreign investors seemed to overcome their fear of default by the same two methods that are emphasized in the book as a whole: high rates of return and the involvement of cronies, and Banamex was just one of many arrangements that the government could have used to accomplish this.
Paolo Riguzzi’s contribution is a fascinating look at the development of mortgage lending in Mexico. He tantalizes the reader with the following comparison: both Mexico and Argentina adopted laws to make mortgage lending easy. Mortgage lending boomed in the former but the financial sector failed to respond in Mexico. Riguzzi evaluates and excludes a lack of demand for mortgages as the explanation, pointing instead to entry restrictions in banking. His argument is persuasive — even more so given the ample evidence in earlier chapters for these restrictions. However, the chapter ends without an answer to the question that could seal the argument: did Argentina have fewer entry restrictions on banking?
The scene shifts to trade in the chapters by Sandra Kuntz Ficker and Edward Beatty. Kuntz Ficker documents tremendous non-tariff trade barriers and huge scope for discretion and arbitrariness in the administration of trade regulations — a familiar litany indeed for those working on developing countries today. Presumably, though the point is not made, such arbitrariness was simply an additional barrier to entry for those who did not benefit from relationships with cronies, and an additional way to create rents for cronies. There is no growth-enhancing story to be told here — in isolation, her chapter would suggest that Mexican policies under D?az should have suppressed growth. Beatty, though, documents a shift in tariff barriers under D?az that replaced a tariff system that was intensely but almost randomly protectionist to one that benefited some clearly defined industries at the expense of other industries and consumers. Their chapters raise two questions for future research: do cronies and leaders really benefit from deeply arbitrary regulatory systems? And why had earlier leaders not thought to rationalize their protectionist strategies?
In labor, as well, Jeffrey Bortz and Aurora G?mez-Galvarriato document significant change in the regulatory regime, this time in the aftermath of the D?az regime, on the eve of and after the Mexican Revolution. Bortz shows that the labor regime shifted dramatically towards the protection of worker, and especially union, interests. G?mez-Galvarriato contends that this was not an inevitable consequence of revolution, as one might expect. It occurred because, prior to the revolution, weakening governments confronted with significant labor unrest allowed workers greater freedom to organize as unions. Once organized, though, the labor movement became an even more imposing constraint on government, and one that successive governments had to appease in order to pacify the country. Wage rates rose, but she finds that productivity did not fall, likely because the unions had effectively become residual claimants in the textile firms that she analyzes and had significant incentives to maintain worker discipline. The methodological approach of many chapters prompts suggestions for how to approach future research in this area. Those familiar with the economics literature on these topics might wonder why there are not more citations to the literature (e.g., on the measurement of determinants of productivity growth using firm level data; on the measurement of financial market inefficiency). The average reader is therefore left somewhat adrift in judging whether the chapters contribute to general questions related to financial market development or trade, for example, or only to the Mexican historiography of these issues. The average reader with an econometric bent might also be more convinced if greater efforts were made to justify the econometric specifications that are chosen and to provide a greater sense of their robustness. For example, some chapters use random effects specifications without commenting on the strong assumptions about the error term in such a specification and without presenting results from ordinary least squares and fixed-effects regressions that are typically reported as robustness checks.
Still, the contributions of the volume rise far above these methodological concerns. Among the most important of these contributions is perhaps the following: the authors elevate the importance of several questions for future research in economic history and economic development. First, all autocrats have cronies, but few dictatorships grow for any sustained period of time. Why was D?az different? Why, for that matter, was Suharto different? Second, their illumination of the specifics of how one particular autocracy circumvented the absence of formal investment-promoting institutions suggests that we should also be pursuing the converse question: under what conditions do democracies exhibit robust institutional controls that minimize the risk of investor expropriation? This last is a theme pursued in a growing literature. For example, what are the effects of democratic political competition rooted in the long-examined phenomenon of clientelism? The implications of this literature are that under many circumstances, democratically-elected decision makers have scarcely greater ability to reassure investors abou the security of their assets than do dictatorships. This literature, however, has not benefited from the rigorous and careful case studies that are essential for progress and that are found in the Bortz and Haber volume.
Philip Keefer is Lead Research Economist in the Development Research Group of the World Bank and has published extensively on the relationship between the security of property rights, political institutions and economic growth. He is currently examining the influence of clientelism on government decision making in democracies.
|Subject(s):||Markets and Institutions|
|Geographic Area(s):||Latin America, incl. Mexico and the Caribbean|
|Time Period(s):||20th Century: Pre WWII|