Social Foundations of Limited Dictatorship: Networks and Private Protection during Mexico’s Early Industrialization

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 G?mez Galvarriato, Department of Economics, Centro de Investigaci?n y Docencia Econ?micas (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 D?az 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 D?az?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 G?mez Galvarriato is Associate Professor in the Economics Department of the Centro de Investigaci?n y Docencia Econ?micas 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.