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

Stephen Haber's elegant and (to those who had not stopped reading economic history by then) influential Industry and Underdevelopment in Mexico, 1890-1940 (Stanford, 1989) was one of the first attempts by a historian to complicate the economic policies and behavior of the Porfirio Díaz regime—previously seen as quintessentially export-oriented—by demonstrating the surprising strength of industrial growth and the lasting effects of the particular nature of that growth. One of Haber's students has now, in turn, complicated his mentor's interpretation of early industrialization in Mexico in an equally elegant and perhaps, now that economic history is somewhat more fashionable than in 1989, even more potentially influential volume. Beatty uses the tools of the "new institutional economics" to argue that at least after 1892, the Díaz regime pursued a reasonably consistent policy of import substitution, bearing many of the characteristics of the more famous import-substitution programs of the post-1940 period. He takes policy seriously, asking which of the policies adopted in pursuit of the goal of import substitution were successful or not, and why. It is an ambitious task, admirably concluded.

Historians have offered three explanations for pre-1910 industrialization, none of which has until now been subjected to statistical tests or to rigorous test of the historical record. The first explanation is that industrialization occurred more or less as a by-product of export-led growth and had little to do with government intervention or policy. The second is that depreciation of the silver peso offered de facto protectionism by making imports more expensive. The third explanation agrees with the first that the export boom played a crucial role by expanding consumer demand for manufactured goods, but it differs by assigning a significant, albeit inconsistent, role to government, which is seen as having encouraged the development of certain industries along lines dictated by patronage and personalist politics. Using clearly explained statistical methods, nicely supplemented with qualitative material and case studies, Beatty tests all three of these explanations in the course of proposing an alternative—that the Díaz government consciously and conscientiously framed laws and administrative practices that would promote import-substituting industrialization.

Beatty identifies a number of institutions and policies that might have played a role: among them banks, the abolition of internal customs taxes, and the establishment of a modern commercial code. But he chooses (presumably because of their susceptibility to systematic quantitative analysis) to focus on tariff policy, patent policy, and tax exemptions. (In a perfect world, Beatty might have paid more attention to the ways in which some of these other institutions affected industrial development. This observation is by no meant to imply that he should have written a different book, but it is always a good idea to consider how important the institutions not chosen for study might be).

In a slightly disconcerting organizational decision, Beatty begins with the strongest case (tariffs) and ends with the weakest (tax exemptions through the Industrias Nuevas program). Tariff policy, Beatty finds, was used aggressively, and successfully, by the government to protect a wide range of products. Industrialization-minded policymakers, however, were convinced that tariffs were not enough; reforms of patent law were necessary as well. Beatty shows that patent laws, deemed a success by contemporaries, brought "few benefits and unexpected consequences." Unlike in the United States, Mexican patent law was intended not to stimulate domestic inventiveness but to protect the property rights of foreign patentees so that they would be willing to bring foreign technologies to Mexico. Most of them would have been brought to Mexico without patent protection, since internal demand was high enough to support the industries that used them, so long as they enjoyed tariff protection. The law only abetted the formation of monopolies, as foreign firms (or the Mexican firms that bought their patent...