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

Institutions and Investment is a case of the new institutional economic history at its best. A rigorous theoretical framework enhances its serious archival work, strong narrative, and convincing analysis. Economic historians of the belle epoque have long debated whether processes of industrial expansion observed in Latin America around 1900 should be interpreted as "industrial growth" or "industrialization." Proponents of the former view depict increasing industrial investment and manufacturing output as industrial growth: domestic demand, capital, and key inputs were export-dependent. For Mexico, at least, Beatty has settled the dispute: after the 1890s, industrialization took hold. This book argues that several key indicators capture domestic manufacturing's potential to induce broader structural change: the flow of funds into manufacturing (usually into relatively large-scale, capital-intensive units, notwithstanding lucrative returns available in other sectors), the diversity of local industrial output (including wage goods, intermediate products, and some capital equipment), the substitution of domestic manufactures for imports, and the displacement of artisan goods by factory-produced lines. These features imply that manufacturing was beginning to challenge investment opportunities such as land, finance, and export production and that local factories were competitive with alternative external and domestic suppliers. Investment flows, as well as forward linkages, also suggest that industry was effectively integrated into the emergent national economy. Although the sector accounted for barely 12 percent of aggregate economic activity in 1910, manufacturing grew as the result of a broad program designed to stimulate industrialization.

Arguably, the book's principal contribution is Beatty's attention to the political economy of "institutional innovation"—that is, the development of an industry-friendly environment by means of a conscious, coordinated project intended to restructure the Mexican economy. Hence, domestic manufacturing expanded at the very moment that foreign suppliers aggressively target Mexican markets. The Porfiriato is presented as delivering more than simple "order" by making Mexico a secure place for doing business. Prefiguring strategies of the 1940, technocrats of the late Porfiriato favored industry as much as the export sector and domestic industrial entrepreneurs more than their foreign counterparts. Beatty attributes a Gerschenkronian vision to the governing elite, as well as a desire to create opportunities for mutual self-enrichment. Drawing on liberal and positivist prescriptions of material progress, "national development" provided the ideological underpinning for a growth spurt designed to close the development gap between Mexico and the industrialized nations of the North Atlantic. Legal reforms radically restructured property rights and depersonalized administration, reducing transaction costs and limiting uncertainty. Policy innovation was substantive and capable of delivering a modern economy—albeit within a political and social context that was distinctly unmodern. Institutions and Investment assesses the efficacy of the role of government in fomenting growth by exploring initiatives in three areas: tariffs, taxation, and patents.

In advancing the case for an explicit, effective, "developmentalist" Porfirian state, Beatty challenges traditional assessments of the regime as largely passive with respect to the economy or as narrowly engaged with external actors. Beatty rejects as insufficient accounts that characterize industrial growth during the period as export-led, that acknowledge pro-industry policy only as ad hoc and firm-specific, or that consider it largely driven by exchange depreciation (until Mexico joined the gold standard). Tariffs, patents, and tax concessions may have had a limited impact, but they are not the whole explanation for the particular pattern of development in manufacturing during the Porfiriato and probably resulted in a process of industrialization that was fraught with inefficiencies. Nevertheless, concerted, coherent government action was largely responsible for the industrial growth spurt that occurred in the decades immediately prior to the revolution. The result was a national economy that was significantly more integrated and diverse than the stereotypical primary, export economy.

Historians of Porfirian Mexico will recognize Institutions and...