Institutions and Investment: The Political Basis of Industrialization in Mexico before 1911

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.