The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876-1929

Published by EH.NET (May 2004)

Stephen Haber, Armando Razo, and Noel Maurer, The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876-1929. New York: Cambridge University Press, 2003. xx + 382 pp. $75 (hardcover), ISBN: 0-521-82067-7.

Reviewed for EH.NET by Gary Libecap, Department of Economics, University of Arizona.

A large body of research, summarized in Acemoglu, Johnson, and Robinson (2004) underscores the importance of institutions — property rights, rule of law, stable political structures — for economic growth. In this book, Haber, Razo, and Maurer examine what they claim is a puzzle in political economy: why is it that political instability does not necessarily translate into economic stagnation or collapse? As such, the book raises a challenge to the institutions and growth literature. By focusing on political instability in Mexico between 1876 and 1929 when some sectors, at least, advanced, the authors argue that governments in many less developed countries do not have to enforce property rights as a public good. Rather, they can enforce them selectively as private goods, with the resulting rents shared among politicians and the asset holders. Property rights enforcement allows for investment and trade to take place within the privileged sectors, and it occurs through a variety of commitments made by politicians, even in the presence of broad political instability. The book offers a well-written analytic economic history of this period in Mexico and the authors argue that they have provided a generalizable framework about the interaction of political and economic institutions for better understanding economic history and growth.

In Chapter 1, Haber, Razo, and Maurer claim the prediction that political instability will have strongly negative impacts on economic growth is not borne out empirically. This lack of fit sets the stage for the case study presented in their book. Especially during the period 1911-1929, when Mexico underwent extreme instability after the fall of Dictator Porfirio Diaz until the rise of the Partido Nacional Revolucionario, the economy should have performed badly. Investment and output should not have grown, and the rate of growth should have declined relative to the ten-year period before 1911. But many important industries, such as mining, petroleum, and textiles, performed well. The authors admit that they do not examine the difficult question of whether or not observed Mexican growth equaled what it might have been had there been political stability and broad enforcement of property rights. They advance two arguments in the chapter. One is how political and economic elites form coalitions to sustain economic activity on their behalf and how these coalitions endure political instability. I think that in this argument the authors are on solid ground. The second argument is that there is no necessary connection between political instability and economic stagnation. This is the key point of the book, but I am less convinced of this claim and not quite sure what lessons might be drawn from it for understanding the broader bases for sustained economic growth.

Chapter 2 outlines the analytical framework, drawn from political science and economics on instability, credible commitments, and economic growth. The authors describe various ways in which private commitments might work to constrain government from arbitrarily confiscating property rights and the rents associated with them. One option is third-party enforcement, such as by an outside government with an interest in a particular economic sector. Another is vertical political integration (VPI) whereby government officials and asset holders form coalitions, sharing the returns from protecting those assets, restricting entry, and barring (likely) disruptive technological change. Chapter 3 discusses VPI coalitions from 1876 to 1929 in Mexico, detailing how political and economic elites interacted to assist and constrain one another. Conditions during Porfirian Mexico, the revolution of 1910-1914 against Porfirio Diaz, the civil war of 1914-1917, and post civil war instability (1917-1929) are described. Chapter 4 begins the analysis with discussion of the Mexican financial system. Banks were protected from new entrants and segmented monopolies were enforced. State politicians with economic and political ties to the banks helped constrain the actions of the federal government. Forced loans nevertheless were required. Detailed measures of financial risk and return are provided in this chapter, characteristic of the empirical richness of the book. Chapter 5 turns to cotton textiles, paper, steel, brewing, cement, cigarettes, and power generation. Again the authors conclude that political instability did not bring about the collapse of manufacturing, but rather industry did well with protections provided through VPI coalitions. Chapters 6, 7, and 8 examine the all-important petroleum, mining, and agricultural sectors, where production and investment expanded. Mafia-like organizations protected the oil fields, refineries, and mines, and the U.S. government acted as a third-party source of guarantees. In agriculture staple production expanded and exports boomed. Major land reform did not take place until the more politically stable 1930s. Chapter 9 sums up the historical evidence and returns to the puzzle raised earlier. Haber, Razo, and Maurer conclude that the effects of political instability vary depending on which polity is affected, the technological and organizational features of the economy, and the nature of the political system that specifies and enforces property rights. In the case of Mexico the VPI networks sustained critical industries during political upheaval.

All in all this is an impressive volume with useful and clever statistical measurements of the performance of various parts of the economy, and it certainly is a valuable addition to the economic history of Mexico. The authors are persuasive when they conclude that key parties were able to do reasonably well during chaotic times. My concern is how this case study and the analytical framework associated with it fit within the literature on the institutional underpinnings of economic growth. The efforts of the VPI coalitions and U.S. intervention in Mexico did not place the country on the path for long-run development, as the authors admit. Rather, the descriptions provided in the book are similar to what is commonly refereed to as “gangster capitalism” in Russia after 1989. They also seem descriptive of the protections provided the Nigerian oil industry in the past twenty years, yet little broad-based growth improving the lives of the country’s population has taken place. And there are many other examples. This book provides an especially well-done description of political and economic maneuvering, or rent seeking, in Mexico. But the case for effective institutions and economic growth remains.

Reference: Daron Acemoglu, Simon Johnson, and James Robinson, Institutions as the Fundamental Cause of Long-Run Growth, May 2004 NBER Working Paper 10481, forthcoming in the Handbook of Economic Growth.

Gary D. Libecap is Anheuser Busch Professor of Economics and Law at the University of Arizona and Research Associate, NBER. Current publications include “The Allocation of Property Rights to Land: U.S. Land Policy and Farm Failure in the Northern Great Plains,” with Zeynep Hansen, Explorations in Economic History, April 2004 and “Small Farms, Externalities, and the Dust Bowl of the 1930s,” with Zeynep Hansen, Journal of Political Economy, June 2004. He is currently working on the Owens Valley water transfer to Los Angeles, 1905-1935, the source of Los Angeles’ growth and the background for the movie Chinatown. It is part of a broader study of the role of legal and political institutions in promoting or blocking development of water markets.