Political Instability and Economic Performance: Evidence from Revolutionary Mexico

What is the relationship between political instability and economic growth? This article examines this question using insights from the new institutional economics applied to a canonical case: revolutionary Mexico. The authors argue that investment and growth during and after the revolution were less affected by political instability than one might predict based on the extant theoretical and empirical literature. They find that while investor expectations, output, and productivity were sensitive to the interdiction of factor and product markets during the years of intense revolutionary violence (1914-17), the periods of political instability before (1910-13) and afterward (1918-34) had relatively minor effects on investor confidence, investments in new plant and equipment, rates of entry and exit by firms, industrial structure, and productivity growth.