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The Persistence of Institutions in Mexico?  

Last week we pointed out that one hypothesis about why Why Nations Fail was unavailable in Mexican bookshops is that Carlos Slim owns the biggest book retailer in the country.

Now our point about Carlos Slim is not that he is a “bad guy”. Quite the contrary, he’s just behaving like a normal rational person would, responding to incentives and trying to further his interests.

Slim is in fact just the most recent incarnation of a long history of monopolization in Mexico that stretches far back into the colonial period. His monopolization of media is nothing new. Only the monopolizers and the strategies change.

To see this, ask yourself whether our book would have sold better under the long one-party rule of the PRI? Probably not. It certainly would have gone against the interests of the PRI elites — if they had noticed it. Probably it would have gotten even less media coverage.

To see why, let us turn to the most compelling account of the origins of the PRI and the way it worked is the 2008 book Mexico Since 1980 by Stephen Haber, Herbert Klein, Noel Maurer and Kevin Middlebrook. Though this looks like it is a commentary on contemporary Mexico, in fact it is a penetrating model of the political economy of the PRI and how it collapsed to usher in democracy.

The context for the creation of the party is the Mexican Revolution between 1910 and 1919. After the full-blown revolution stopped, intense violence continued. In 1920 the President Venustiano Carranza was overthrown and assassinated. His successors Álvaro Obregón and Plutarco Calles faced major revolts by the military and their own cabinet ministers in 1923, 1927 and 1929, and a civil war between 1926 and 1929, the Cristero War. In 1928 Obregón was assassinated after being re-elected president.

In response to the potential chaos, Calles crafted in 1929 the Revolutionary National Party (the PNR) that would eventually become the PRI in 1946. The PRI was an institution for incorporating and sharing power between the factious and violent elites who were endlessly scheming to overthrow the system. It also used agrarian reform as a way of consolidating peace in the countryside and creating a vast rural patronage machine to make sure it would win elections.

This new party program was implemented by President Lázaro Cárdenas between 1934 and 1940. In 1938 Cárdenas moved to exert control over the media with a simple strategy. He nationalized the production of newsprint which could not be imported. If you wrote something too critical of the PRI, you wouldn’t get any newsprint to publish on, and that was that.

Hence our guess that Why Nations Fail wouldn’t have sold well under the one-party state of the PRI either.


Why Regions Fail in Mexico  

James was asked by Mexican Senator Zoé Robledo of the political party the PRD how to apply the ideas from our book to explain within country variation. Senator Robledo is from Chiapas, the poorest and most unequal state in Mexico.

Why, Senator Robledo wanted to know? Reasonable question.

We do talk quite a bit about regional inequality in the book, for example about how the US South was poorer than the North because the South had more extractive institutions. We also examine regional inequality in Argentina pointing out that the northwest, where in contract to Buenos Aires and the Pampas there we dense populations of indigenous peoples at the time of the conquest of the Americas.

In consequence such states as Salta and Tucumán had many of the extractive institutions of colonial Spanish America like the encomienda. Today these parts of Argentina are much poorer than Buenos Aires and the places which were neglected during the colonial period (until the Bourbon reforms of the 18th century the Spanish actually made it illegal to export anything from Buenos Aires, instead, if anyone was crazy enough to want to do this, they had to ship it over the Andes and export it from Perú!).

But in Why Nations Fail we don’t talk about this issue in Mexico. So how might we explain why Chiapas other Southern states like Oaxaca and Guerrero are much poorer and more unequal than the Mexican average?

Here is a link to the speech that James Robinson gave at the Mexican Senate last Tuesday in Mexico City trying to tackle this question.

Though we don’t want to spoil the suspense, it turns out that it is because these states have more extractive institutions than the rest of Mexico (a bit like the US South really).


Reading Why Nations Fail in Mexico  

With all this discussion of Slim, monopolies and well, let’s face it, extractive institutions in the air in Mexico, you might have conjectured that Why Nations Fail was selling like hot cakes. Not quite hotcakes but the Spanish Translation has actually done quite well in a number of places. It was even the 5th best selling book in Colombia last year after the autobiography of President Álvaro Uribe and the Fifty Shades of Grey trilogy (…well you couldn’t really have expected us to outsell them!).

Not in Mexico. In fact the leading bookseller in Mexico, Sanborns, does not stock it (James checked recently at the branch in the Centro Histórico next to Porfirio Díaz’s wonderful Palacio de Bellas Artes – they didn’t have it and hadn’t heard of it).


But then someone suggested a simple explanation: Sanborns is owned by Carlos Slim.



Why Nations Fail in Mexico  

If there is one country in Latin America where you might have thought the analysis of Why Nations Fail was relevant, it would be Mexico. In the first chapter of our book we traced the economic and political history of Mexico and showed how and why it diverged from that of the United States. We ended the chapter with a discussion of how the difference between how Carlos Slim made his money (monopolies) and Bill Gates made his money (innovation) is telling about the economic problems of Mexico.

This doesn’t come as news to most Mexicans, though it does come as a surprise to Bill Gates apparently since he has recently claimed that Carlos Slim was good for the Mexican economy.

Last year Mexicans elected a new President Enrique Peña Nieto who took office in December. There were quite a few skeptics about whether Mr. Peña Nieto was up to the job (he made several highly publicized gaffes during the campaign). But since getting into power he has turned out to be something quite different from his detractors.

First, he immediately signed a multiparty pact with the opposition parties the PRD and the PAN (the party of outgoing President Felipe Calderon). This “Pact for Mexico” outlined a large number of policy priorities, but one of the ones prioritized by Peña Nieto was educational reform.

Such reform faced a big obstacle in the teachers union headed by Elba Esther Gordillo known as “La Maestra” (the schoolteacher). La Maestra has used the union like a personal fiefdom for two decades, enriching herself and blatantly intervening in elections (the teachers count the votes in Mexico, which turns out to be particularly useful in close elections such as the one in 2006 when La Maestra backed President Calderon and he won a hotly contested election by a narrow margin – 233,000 votes).

Perhaps the most unfortunate aspect of all of this seems to be that the teacher’s union controls the hiring and training of teachers. One result is that Mexico has a terrible education system. Peña Nieto’s response to this obstacle was have La Maestra arrested for charges of embezzlement. Another priority was to completely re-vamp telecommunications regulation with serious attempts to increase competition and challenge Slim’s monopoly. The statements of the Finance Minister Luis Videgaray show clearly that the government understands the connection: less extractive economic institutions, faster economic growth and less inequality in Mexico.

How come there is now seemingly a move towards dismantling extractive economic institutions in Mexico?

Our framework in Why Nations Fail suggests one answer. Since 2000, Mexico has moved towards more inclusive political institutions, and one implications is mounting pressure to make economic institutions less extractive.

But history suggests this is the optimistic interpretation. Carlos Slim acquired his telecom monopoly during the Presidency of Carlos Salinas de Gortari. Salinas was seen at the time as a reformer, just like Peña Nieto, and was of course from the same party, the PRI. He brought a wave of “market reforms” to Mexico, like the telecom privatization. But this didn’t really change Mexican institutions. Rather, these reforms can be interpreted as an attempt by Salinas to develop a new political base by creating a group of wealthy oligarchs, politically beholden to him. In reflecting on this, it is good to ask who actually appointed La Maestra in the first place? (Answer: Salinas.)

So the big question for Mr. Peña Nieto is: a move towards inclusive institutions or the Iron Law of Oligarchy in action? Did he arrest La Maestra because he really wants to reform Mexico’s education system or is it because he’s mad at her for abandoning the PRI and backing Calderon’s PAN in 2006?


Efficient Organization among Pirates?  

In our last post, we discussed pirate democracy, based on Peter Leeson’s The Invisible Hook, a great and thought provoking read.

Our main argument was that democratic elections and checks on leaders that emerged in pirate ships illustrate a more general point: if we want to understand democracy, we should think not about the idea of democracy extending back to the Ancient Greeks, but about the incentives that democracy creates and the distribution of political power among different groups in society that underpins democracy.

We also questioned Peter Leeson’s interpretation, which explains the emergence of pirate democracy solely on the basis that this was the efficient arrangement for pirates — a specific instance of what we have dubbed elsewhere “the efficient institutions view”.

Peter Leeson has now followed up with a post, providing additional arguments supporting the idea that pirate democracy emerged because it was the efficient organization, and more generally defending the efficient institutions view.

Of course Leeson wrote the book on the subject, so we cannot disagree with the facts he presents.

Nevertheless, our interpretation differs.

First of all, we find the general presumptions upon which the efficient institutions view rests fairly unconvincing. What are exactly the forces that will ensure that institutions are efficient? And efficient for whom?

After all, Why Nations Fail is all about the ubiquity of extractive economic and political institutions that are blatantly inefficient. How can we understand, if not as highly inefficient for economic prosperity and for the majority of the population, regimes such as North Korea? We cannot appeal to their ephemeral nature easily either, since many of these are not exactly short lived. (Wonky note: here by “inefficiency”, we are not referring to Pareto inefficiency. Such regimes, under some circumstances, could lead to Pareto efficient equilibria given the existing set of economic and fiscal instruments. But they are “inefficient” from the viewpoint of maximizing the economic surplus in society or the size of the “economic pie” so to speak).

Second, there is a bit of an internal inconsistency to the efficient institutions view. Let us illustrate this with the example of pirates. Suppose that in fact democracy was adopted by pirates because it was the “efficient organization” for them. That would presumably mean that it furthered the ability of pirates to raid and ransack as many ships as possible. But is this really efficient from the viewpoint of society? Most people would presume that the damage that pirates cause is much greater than the benefits to themselves, especially because the prospect of piracy is likely to discourage commerce and investment. So in a world of complex economic, social and political relationships — i.e., the world we live in — even if efficiency at the level of some subunit can be ensured, this will typically be at the expense of inefficiency at some more aggregate level. But then how can we talk of efficient institutions prevailing in the society at large?

Third, Peter Leeson’s superior knowledge on this topic notwithstanding, we did not find his interpretation that compelling. Leeson notes that a democratic organization, with a more equal distribution of political power and better checks on leaders, was efficient for pirates. Probably right. But the same reasoning suggests that it would have also been efficient for many other businesses and social and political organizations. But we see nondemocratic organizations persist in many of those spheres. So where are the efficient institutions?

Our hypothesis— truly nothing more than a hypothesis, since we are not experts on the history of pirates — is that what distinguished pirates from much of the rest of society at the time was the distribution of de facto political power (in fact, the distribution of de facto political power was at the center of our theory of democracy in our previous book, Economic Origins of Dictatorship and Democracy, and we are still keen on this idea).

The lower strata of society until the 19th century did not have much de facto power pretty much anywhere else in the world around that time, so they could not make effective demands for a level playing field or for direct economic transfers or for political change meant to support these economic outcomes. As a result, there was no need for those currently holding de facto and de jure power to make concessions to them — particularly political concessions to further increase their political power and participation.

This was possibly different among pirates for the reasons that Leeson masterfully recounts: all pirates had cutlasses.

Now Leeson is right that there are other factors that may have made a democratic organization less costly among pirates than for other businesses. For example, a democratic organization on the factory floor, by shifting the ex post say on pay and profits to workers, may make it harder for the ex ante investments of the entrepreneur to be rewarded.

But in contrast to this reading of the purely efficiency-based view, workplaces have also become more democratic over the more recent past. Most notably, trade unions in many countries had a lot of say on many decisions of the factory throughout the latter half of the 19th century and much of the 20th century. But perhaps even more telling are economic cooperatives. These, following the Rochdale Principles named after the Rochdale Society of Equitable Pioneers founded in 1844, typically specify “democratic member control” as a defining characteristic. We would also hypothesize — once again without having studied the history of such cooperatives in detail— that the more democratic nature of today’s workplace and the much more democratic organization of cooperatives isn’t just because ex ante investments of entrepreneurs have become less important, but also at least in part because the de facto distribution of power on the factory floor has shifted towards trade unions and workers.