Author(s): | Beatty, Edward |
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Reviewer(s): | Sokoloff, Kenneth L. |
Published by EH.NET (June 2002)
Edward Beatty, Institutions and Investment: The Political Basis of
Industrialization in Mexico before 1911. Stanford: Stanford University
Press, 2001. xii + 296 pp. $55.00 (cloth), ISBN: 0-8047-4064-X.
Reviewed for EH.NET by Kenneth L. Sokoloff, Department of Economics, University
of California, Los Angeles.
Between 1877 and the onset of its Revolution in 1910, Mexico was governed by
the regime of Porfirio Diaz. Under Diaz, Mexico enjoyed its longest period of
political stability since the country had gained independence, as well as a
path of early industrialization that involved dramatic expansions of both
mining and manufacturing output. Diaz and his associates were quite effective
at consolidating power and embarked on a program of reforms that effectively
broadened and deepened the role of the national government in the economy. It
has long been recognized that this era marks a key juncture in the development
of the Mexican economy, but scholars have differed in the extent to which they
have credited or blamed the Diaz regime for the various positive and negative
features of what happened, and of what was to happen, to the country. Some have
argued that the policies that were put into place under Diaz provided a
necessary foundation for the evolution of an industrial economy, and they
generally point to the sharp acceleration of growth and structural change
achieved during these decades as support for their view. Others, however,
highlight the close ties between leading figures in the Diaz regime and the
companies that benefited disproportionately from the policies enacted, how the
bulk of the population seems to have realized little if any improvement in
their material welfare during this period, and how the Porfiriato gave way to
the long and bloody Mexican Revolution. Although explicit counterfactuals are
seldom posed, this alternative perspective implicitly questions whether the
policies of the Diaz government were the best that could have been undertaken
for Mexico overall.
In an extremely well written and thoroughly researched monograph, Edward Beatty
explores a subset of the institutional changes put into place under Diaz, with
particular attention to the administration and effects of, as well as the
motivation behind, these policies. Particularly distinctive is his portrayal of
the principal economic policymakers as virtual technocrats who were imbued with
liberal ideas and attempting to implement a coherent and fair-minded strategy
for promoting long-term economic growth in Mexico. In so doing Beatty downplays
the notion that they were unduly influenced by the possibilities that they or
their close relatives and associates could extract private gains from the
authority of their public offices. Although his appraisal is qualified by an
acknowledgement that the economic opportunities created by the Diaz policies
did little for the mass of the population, the general conclusion seems to be
that the institutions were important in fostering the rapid growth of the
Mexican manufacturing sector and in leading a relatively backward economy onto
a path of sustained development. The study focuses on three specific areas of
economic policy: import tariffs; intellectual property institutions; and the
New Industries (Industrias Nuevas) program that provided tax and other
incentives to entrepreneurs who organized firms in industries new to Mexico.
The basic argument is that the Diaz policies were inspired by the vision that
Mexico needed a modern industrial sector in order to realize sustained growth,
and that it was thus socially desirable for the government to take action to
raise the incentives for investment in manufacturing and other industrial
activities. Beatty suggests that the boom in industrial production that got
under way in the mid-1880s and continued through the first decade of the
twentieth century is evidence that these policies, taken as a whole, were
indeed very effective.
The first institutional change Beatty examines is the adoption of a
protectionist pro-industrial tariff policy that occurred during the late-1880s.
He observes that up until then the growth of the Mexican economy had been based
primarily on mining and the expansion of railroads that was intended to support
such extractive industries. Both the volume and the technology of manufacturing
production were rather modest until the 1890s, at which time “investors began
sinking substantial amounts of capital in commercial agriculture as well as in
the domestic manufacture of products that had formerly been imported or
produced by hand.” Drawing on statements offered by the relevant policymakers,
ad valorem tariff schedules, his own meticulous calculations of effective rates
of protection, as well as industry-specific production and foreign trade
series, Beatty argues that the Diaz government understood the basic logic of
the infant-industry rationale for tariffs and opted for a strongly
protectionist tariff policy in order to stimulate higher rates of investment in
manufacturing industries that were thought to have potential for surviving
international competition or be otherwise supportive of long-term growth. He
shows how imports of manufactured goods such as bottled beer and cotton cloth
fell while domestic production of those items rose over the years from 1890 and
1910, and suggests that high tariff protection was largely responsible for this
sort of pattern across a range of manufacturing industries. Although conceding
that a substantial depreciation of the silver-based peso relative to foreign
gold-based currencies that progressed up to 1903 reduced the degree of
protection offered by ad valorem tariffs, he contends that the levels were
still high enough to provide an ample incentive for investment. In short,
Beatty seems to accept the idea that more investment in manufacturing was
better than less (even if the cost was higher prices to consumers), and judges
Diaz’s high-tariff policy — one that became something of a fixture until very
recently in Mexican economic policy — as being extremely effective in
promoting that goal.
Whereas Beatty appears to regard the tariff policies of Diaz as conducive to
growth, he is much more circumspect about a second area of economic policy —
the reform of the patent system that culminated in the new laws of 1890 and
1893. He suggests that the Mexican policymakers were much influenced by the
evident success of the intellectual property institutions of the North Atlantic
economies, and were convinced by the liberal arguments that greater security in
property rights — in this case to technology — meant higher levels of
investment. Noting that a high fraction of the patents that were granted went
to foreigners, however, Beatty raises the possibility that it may not have been
advantageous for a follower country like Mexico to strengthen the property
rights to inventions. If Mexico was primarily an importer of inventions, and
the real cost of transferring technology across the border was low (such that
the new technologies would have diffused to Mexico even without patent
protection), then foreign inventors were the principal, and perhaps the only,
beneficiaries of the new patent system. Indeed, Mexican productivity growth may
well have been hampered by the patent system if its effects were confined to
reducing the rates of technological diffusion and supporting monopolistic
industrial structures.
The third economic policy that Beatty treats is Industrias Nuevas, begun in
1893 to protect infant industries by offering tax and tariff exemptions
(generally for capital good or raw materials, but sometimes for the actual
finished products) to enterprises that were novel to Mexico. Working with the
materials contained in the files of a sample of the individuals and firms that
applied for such subsidies, he demonstrates how the great majority of those who
sought these forms of support for new investment were not able to obtain
approval or carry the project forward (despite their generally having very
impressive connections). Overall, since such a small number of the applications
ultimately led to productive enterprises, Beatty concludes that the program
played only a very small role in Mexico’s early industrialization. Despite its
limited impact, Beatty believes that Industrias Nuevas is representative of
Diaz policies more generally, and for that reason documents the workings of the
bureaucracy administering Industrias Nuevas in some detail. In his view, the
evaluation and oversight revealed in the memoranda and correspondence between
the bureaucracy and the applicants suggest a high degree of professionalism.
Moreover, he argues that the entire program was designed to make the process of
firms applying for government support or subsidies more systematic, and to base
the award of such assistance on a solid economic basis. His clear implication
is that those who label or labeled (as many contemporaries did) the program as
one that was merely engaged in providing privileges to cronies of government
officials have grossly overstated their case. Beatty does acknowledge that
seemingly objective criteria and characteristics of the program, such as the
minimum size of firms and the cost of the application process, appear to have
restricted approval of exemptions to a small minority of highly financed and
well connected firms, but holds nevertheless that the professionalism reflected
in the bureaucratic record and the simple workings of objective economic
advantage do not support claims that the program was corrupt. The policymakers
and administrators, he contends, were trying to implement coherent plans for
the promotion of industrialization. If they were not so successful, it was
because of the enormity of the challenges they faced in the underdeveloped
Mexican context — not because of a lack of commitment or integrity on their
part.
There is no doubt that Beatty is a careful researcher who has written a very
fine book that offers rich and fascinating detail about the crafting and
conduct of economic policy under the Diaz regime. Some scholars may not be
fully persuaded by the account that he offers however. One issue is whether
evidence from bureaucratic memoranda and correspondence are sufficient to prove
that the federal bureaucracy operated in “relative freedom from political
considerations”. A more important concern, at least from my point of view, is
whether his findings sustain the notion that the institutional changes made by
the Diaz regime were a significant contributor to growth. Beatty seems to
presume that inducing more investment in manufacturing was good for growth,
without much discussion of whether this was the best use of Mexico’s scarce
capital resources. Moreover, even he seems skeptical about whether the patent
system reforms and the Industrias Nuevas program had much of a positive impact.
He does argue that the tariff policies of the Diaz regime were important in
promoting investment in manufacturing after 1890, but the direct evidence for
this theoretically well-founded effect is — as he notes — less than
overwhelming. In puzzling over the data he presents, I was instead struck by
the potential explanatory power of the radical depreciation of the silver-based
peso (along with other silver-based currencies) relative to gold-based
currencies that occurred between the mid-1880s and 1903. The steep fall in the
value of the peso (silver) undoubtedly raised the relative price of tradables
— such as manufactures, mineral resources, and certain agricultural outputs —
as compared to non-tradables, and would be expected to have stimulated higher
investments in firms producing tradables (as well as to have hammered producers
of non-tradables). International finance theory thus provides an alternative
explanation for the shifts in investment and output during the late Porfiriato
that Beatty seeks to explain. It may be the case that the institutional changes
made by the Diaz regime were less of a factor in the growth of Mexican
manufacturing (and mining) over this period than world economic conditions.
Despite these caveats, this is a book that all serious students of Latin
American economic history should read. It offers enormous insight and an all
too rare glimpse into the evolution and workings of selected strategic
institutions in Porfirian Mexico.
Kenneth L. Sokoloff received his Ph.D. in Economics from Harvard University in
1982, and is Professor of Economics at the University of California, Los
Angeles and a Research Associate of the National Bureau of Economic Research.
He has published on a wide variety of topics in economic history and
development economics, including: the sources of productivity growth during
early industrialization (in the U.S. and East Asia); long-term change in the
rate and organization of inventive activity; intellectual property institutions
in developing economies; and factor endowments, institutions, and differential
paths of development in the economies of the Americas.
Subject(s): | Markets and Institutions |
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Geographic Area(s): | Latin America, incl. Mexico and the Caribbean |
Time Period(s): | 20th Century: Pre WWII |