How Mexico vanquished regional corruption through protectionism and deregulation in the 1920s

Before embarking on the following dry economic screed, imagine the following scenario: your country is attempting to wrestle itself out of one of its worst economic crises since its foundation. It is being menaced, both politically and economically, by regional competitors with considerably larger industrial potentials. At the federal level, its institutions are filled with corrupt individuals, whose deals with and fealty to powerful regional landowners are widely known and little cared about. This same government, in an effort to counteract the threat of regional fragmentation as well as to distract from its own various shortcomings, attempts to hide these problems behind a veneer of nationalism, imposing tariffs on important trading partners while dismissing economic regulations as impediments to growth. Throughout this period of your country’s recent history, you have witnessed little other than a gradually worsening economic inequality, as regional power brokers sell lower-quality goods for higher prices while claiming that things could be different if only you and your fellow citizens work hard enough. There are whispers of whether opposition members of the government have enough power to forcibly remake your nation’s economy into a more equitable structure, but nobody knows whether there is enough political will for this to be done. Cynicism abounds. Dark clouds swirl; swarms of locusts descend; oracles on every street corner prophesy doom. Obviously, I’m describing the economic situation in 1920s Mexico. How could you have guessed anything different?
In Business Organization and the Myth of the Market Economy, William Lazonick posits that some governmental regulation is necessary for the growth of an economy, since it pushes businesses to innovate new ways to grow profits despite restrictions. His study, a critique of Marx and Shumpeter’s economic theories, arrives at this conclusion by comparing economic growth to an evolutionary process — if a free market were allowed to exist unimpeded by outside factors (i.e., third-party governmental regulation), the economy would have no reason to continually evolve, and certain businesses would eventually form monopolies over goods and industries, leading to economic stagnation. Businesses must have some limits to push against, or else their complacency would lead to losses of innovation, in turn impeding positive technological and social progress. However, Lazonick’s theories only work in the relative vacuum of economic prosperity, and a different set of rules applies to developing economies that compete with the already established economies Lazonick discusses. Susan Gauss’s Made in Mexico discusses how the Mexican government’s policy of economic protectionism successfully promoted Mexican industrial expansion through the forcible creation of a level playing field within its domestic economic sphere. The government had to (coercively, in some cases) act as an enabler to Mexican industry, rather than as a regulator, seeking to promote nationalistic growth and counter regional monopolies in a manner contrary to the importance Lazonick places on governmental restrictions. However, the Mexican example also reinforces Lazonick’s claim that some governmental regulation is necessary for the positive growth of industry, even if it is not in the way he predicts it to be, due to the Mexican government’s instrumental role in constructing an open market for Mexican investors.
The importance Lazonick places on innovation stems from Shumpeter’s analysis that increasing mechanization leads to increasing fixed costs, thereby impeding both a firm’s ability to hire new labor and to generate profits for reinvestment. In Lazonick’s analysis, Shumpeter claims that “the success of the entrepreneurial strategy appears to depend solely on the energy and ability of the entrepreneur.” Thus, “those who inherit a successful business are not likely to have the energy and creative genius of the original entrepreneur, and therefore, as Marshall argued, ‘a business firm grows and attains great strength, and afterward perhaps stagnates and decays’” (Lazonick 124–125). A successful business venture depends on the amount of effort invested within it, and fades once that creative energy dissipates. However, Lazonick claims that Shumpeter did not account for the creation of corporations during his analysis (Lazonick 127), and therefore discounts the corporation’s ability to repair itself through the multiplicity of ideas its investors generate. Since corporations can be fairly self-reliant in their business practices, the risk of monopoly increases as they are able to outmaneuver less-endowed competitors. Governmental regulations are necessary to combat this, or else market stagnation (and all its sociopolitical implications) will occur. As “Shumpeter argued, the very restrictive practices that economists decry may ‘provide the baits that lure capital on to untried trails’ that result in innovation” (Lazonick 130).
Mexico developed its economy through economic protectionism and deregulation of specific industries, rather than providing challenges for the market to work around. In the 1920s, Mexico found itself operating under a system of crony capitalism. Guass details how “the state, often more preoccupied with political than economic concerns, looked on as a sort of ‘neo-Porfirian’ crony capitalism reestablished itself” (Gauss 25). While this crony capitalism aided in reestablishing political order in the wake of the Mexican Revolution, it also impeded efforts to diversify the economy since party elites were mainly interested in preserving their own economic interests (Gauss 25). To combat this strong regionalistic tendency, Treasury Secretary Alberto J. Pani (1923–1927) sought to centralize governmental economic planning through the use of tariffs and trade protectionism. Doing so would bolster fledgling Mexican industry, since it would face less competition from cheap foreign goods. This act supports the importance Lazonick places on the creation of a strong centralized government as an industry regulator, but it also contradicts his thoughts on the origin of industrial innovation. Instead of governmental restrictions creating barriers around which industrialists had to innovate, Pani’s administration sought to dismantle economic barriers that impeded modernization. Too many factors inhibited risk-taking behavior in post-revolutionary Mexico, and the government had to limit restrictions placed on Mexican industry in order to bolster innovation, rather than follow Lazonick’s example and provide further regulations for industrialists to overcome.
Mexican actions in the post-revolutionary period seem to support Haber et al.’s notion that an independent third party must mediate between producers and consumers for positive economic growth to occur. However, the Mexican federal government saw itself already competing with regional governments to occupy this position as third-party mediator. Federal Mexico’s battle with regional authorities impeded its ability to set up viable economic plans, and the resulting factionalism led to the over-mechanization that Lazonick feared. Gauss describes how “employers chose technical modernization in order to reassert authority over their factories” (Gauss 168), thereby limiting the power of collective bargaining since workers were less inclined to take actions that could result in the loss of their jobs. Since regional authorities were heavily invested in the success of their personal ventures, their status as third-party mediators was compromised. However, their political power prevented them from falling completely under the sway of the federal government, since they operated with the support of their people based on shared regional cultural identities (Guass 8–9). Gauss claims that the Mexican government ultimately solved this problem through a focus on nationalism. In order to gain economic control over certain regions, the government had to dilute peoples’ emotional ties to their homelands through the enforcement of a national unity to a greater Mexico. By doing so, the Mexican government was able to gain sway over regional affairs in ways that allowed it to override regional economic interests. Regional governments acted as false third-parties in Mexican politics, since their leadership was heavily invested in existing economic structures. As such, the overlapping political and economic spheres in regional governance forced the federal government to treat regional groups as though they were corporate entities, rather than separate governmental and business concerns.
Lazonick’s ideas of governmental regulation apply primarily to already corporatized economies, and thus do not gain traction when applied to the fledgling industrial climate found in 1920s Mexico. However, given the corporate, fraternal nature of Mexican regional governments and business interests, Lazonick’s ideas suddenly find traction. The partnership between anti-industrial business owners and regional political elites turned these regions into corporations in their own right. Instead of regulating industry per se, the federal government found itself instead regulating the combination of these regional governments and preexisting concerns in order to promote industry. The federal government fostered regional innovation by limiting the growth of agrarian-based interests, collective bargaining power, and cheap foreign imports. Doing so demonstrated Lazonick’s claim that “capitalist investment in mechanization generated economic development…not just because the new technologies were effort saving and skill displacing, but also because they permitted a shift in social control over the production process from workers to capitalists” (Lazonick 130). Since capitalists were able to control the growth of their industries free from foreign or regional governmental influence, Mexican businesses were able to modernize and flourish due to the increased revenues they produced.
The development of the Mexican economy complicates Lazonick’s theories on the relationship between industry and government since Mexican regional governments were usually tools of business owners within the region. Gauss’s study shows how Mexican regional economic and political interests were not separate enough to allow efficient regional economic development to occur, thus necessitating federal intervention to manage excessively cooperative local governmental and business concerns. Gauss and Lazonick’s studies both support Haber et al.’s claim that regulating third parties must exist for economies to grow efficiently, and show how this third party must expressly find common goals with labor and capital while limiting its direct participation to ensure a degree of objectivity. Mexican regional governments became too close with those they governed, thus causing economic stagnation due to crony capitalism, which necessitated a larger and more impartial regulatory body to intervene. Indeed, in what became to be known as the “Mexican Miracle,” the Mexican economy grew rapidly from the end of its revolution through the 1980s, albeit with a degree of inequality that perpetuated a degree of instability throughout its growth until it ultimately faltered in 1982.
These events from a hundred years ago throw those unfolding today into an interesting relief: while no historical analogy can be perfectly applied to the present day, they do show the importance of trade protectionism and economic deregulation in bolstering a flagging economy, but only when the larger regulatory body is acting impartially (that is to say, in the national interest), maintaining its respect for regional differences while preserving its jurisdiction over them. The case is made as much for a strong central government as it is for a lack of governmental intervention in economic affairs. Ultimately, some government oversight is necessary to the functioning of a healthy economy, even if this oversight consists of a lack thereof. Again, no case study is a perfect analogy, but to say the least, it’ll be interesting to see how these competing ideologies play out in US politics through the rest of the decade.
Works cited
Gauss, Susan M. Made in Mexico: Regions, Nation, and the State in the Rise of Mexican Industrialism, 1920s-1940s. University Park: Pennsylvania State University Press, 2010.
Haber, Stephen, Armando Razo, and Noel Maurer. The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876–1929. Cambridge: Cambridge University Press, 2003.
Lazonick, William. Business Organization and the Myth of the Market Economy. Cambridge: Cambridge University Press, 1991.
