Gomez Galvarriato on Razo, _Social Foundations of Limited Dictatorship: Networks and Private Protection during Mexico's Early Industrialization_

[Book Reviews in Economic and Business History]

Published by EH.NET (September 2008)

Armando Razo, _Social Foundations of Limited Dictatorship: Networks and 
Private Protection during Mexico's Early Industrialization_. Palo Alto, 
CA: Stanford University Press, 2008. xv + 246 pp. $65 (hardcover), ISBN: 
978-0-8047-5661-7.

Reviewed for EH.NET by Aurora Gómez Galvarriato, Department of 
Economics, Centro de Investigación y Docencia Económicas (CIDE).


Recently political scientists who study the political economy of 
development have become increasingly interested in economic history to 
the benefit both disciplines. Armando Razo’s book is welcomed as part of 
this research agenda. It tries to solve an important puzzle: Why can 
some countries develop under dictatorships? If property rights need to 
be well-defined and well-enforced for investment to take place, then an 
institutional framework that constrains the government from preying on 
society is also required for economic growth to occur. Investors need to 
believe that the government will respect their property rights in order 
to invest. In democracies the commitment problem is solved through 
self-enforcing institutions, such as a separation of powers or the 
existence of multiple veto points, which constrain the government to 
respect its own laws. How is it solved under those dictatorships where 
those institutions do not exit, and yet they manage to grow?

Razo proposes a “network theory of private protection” (p.7) to answer 
this question. His idea is that rational dictators can credibly commit 
only to provide private, rather than public protection to property 
rights since there are no institutions to provide public enforcement. 
Thus, only if political and economic actors merge their interests will 
they acquire the necessary protection to invest, sharing the profits of 
economic activity. However, this protection would have a limited 
character unless there exists a social network that allows the private 
protection to expand beyond the closer circle of firms where government 
officials have vested interests. The author develops these insights into 
a game-theoretic model that is an important contribution to the 
understanding of dictatorships and their impact on the economy.

The book encounters some problems when it tries to apply the theory to a 
concrete historical case study: the long reign of Porfirio Díaz in 
Mexico between 1876 and 1910. The main problem rises from the fact that 
the Porfiriato did not resemble the dictatorship in Razo’s model as much 
as the author would like. Recent historiography has shown, in various 
ways, that Porfirian Mexico’s institutional framework was more complex 
and that there existed stronger legal and political constraints to the 
dictator’s power, than the author acknowledges. The Porfirian judicial 
system, for example, a subject unexplored in the book, appears to have 
set important limits to the executive government.

If unprotected property rights were an easy prey to the dictator, it 
seems that it would be easy to find several cases of expropriation 
during Díaz’s regime. However, the only examples of expropriation 
carried out during the Porfiriato that the author finds were those that 
took place as part of the process of disentailment and privatization of 
church and common lands. Although in Porfirian Mexico many abuses were 
committed in the pursuit of this policy, expropriations were undertaken 
not as arbitrary acts of the dictator, but as part of a liberal program, 
with a legal basis in the Constitution of 1857, that considered that 
property should be individual rather than corporative or communal. 
Actually, the objective of this policy was to reinforce individual 
property rights in order to promote economic growth, following the 
example of the English “enclosure movement,” among others.

In order to prove that during the Porfiriato the government specified 
property rights to benefit a few protected firms, and that private 
protection was allocated to firms with higher expected rents, an 
econometric analysis is carried out using data of the companies 
registered in the Mexico City Public Registry of Property and Commerce 
from 1886 to 1907. The regression results indicate that these firms’ 
durations were significantly and positively correlated with the firm’s 
capital, and with the dummies for corporation and foreign investment. 
Given that the author considers that a firm’s duration represents the 
length of the concession granted by the government to the firm, his 
point seems to be well proven. The problem is that these firms’ 
durations were not defined by the government, as the author believes, 
but were freely chosen by the partners of the companies when they 
registered them with a notary, as the Commercial Code established. 
Partners who chose that their firm should be a corporation also chose a 
long duration, usually 99 years, but those who decided to establish a 
partnership, chose a shorter duration, given that in this type of 
company property cannot be transferred from one partner to another 
without legally dissolving it. Since foreign investment was usually 
placed in corporations and these companies normally had a larger capital 
than partnerships, the results obtained are the expected ones. However, 
the interpretation of these results is inaccurate since during Porfirian 
Mexico, as in other countries with commercial codes based on the French 
legal system, most firms did not require a government concession to be 
established. The sole exception was those firms placed in sectors that 
used public resources or provided a public service, such as railway and 
mining companies, or banks of issue, which represent a small percentage 
of the firms in the data base analyzed.

The book is more successful in showing that there existed a closely-knit 
social network of businessmen and government officials during Porfirian 
Mexico. This is an important contribution both to the history of the 
Porfiriato and to social network analysis. It underscores the importance 
of social networks for economic development. However, the important 
presence of public officials in Razo’s network is largely driven by the 
sources used, which are strongly biased towards large firms in those 
sectors in which a government concession was necessary and in which 
foreign investment was mostly located. In order for a concession to be 
given to a foreign investor, federal law required that a firm have at 
least one public official on its board. Thus, it is not clear that the 
causality of the large presence of public officials in the network is 
related to the need of protection.

In spite of its problems, this book is an important contribution to the 
political economy of development and to economic history. It opens up 
many questions and offers several new provocative explanations -- to 
historians of the Porfiriato regarding the nature of the regime, and to 
the historians of dictatorships, in general. It also opens up important 
questions about the ways in which public officials and businessmen 
relate in different institutional contexts, and how this interaction may 
shape economic development. It makes clear that the term “dictatorship” 
encompasses a vast array of institutional possibilities that must be 
specifically defined for each particular case. Moreover, it indicates 
which are the institutions, both formal and informal (including those 
that exist within social networks), that deserve greater scrutiny for 
understanding how economic growth can take place under a dictatorship. 
In so doing it takes our understanding of institutions in economic 
history one step further.


Aurora Gómez Galvarriato is Associate Professor in the Economics 
Department of the Centro de Investigación y Docencia Económicas A.C. 
(CIDE).  She has published several articles on the economic and business 
history of Mexico and Latin America. She is currently working on a book 
about business and labor in the Mexican textile industry.

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