Assessing the Obstacles to Industrialisation: The ... - Innovation

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entry to would-be competitors. How then, d ~d the obstacle of a poorlydeveloped cap~tal market affect the development of Mex~can industry?As has alread) been discussed, by the tlme that th~s wave ofindustrialisation was underway in Mexico, the cost of entry to the marketin manufacturing was much higher than it had been in late eighteenth andearly nineteenth centuries when Great Britain began what came to beknown as the First Industrial Revolution. By the late nineteenth centurythe state of manufacturing technology was such that entry into the massproduction of most industrial goods required capitalisations running intomillions of dollars. What had evolved in Europe over a long period oftime, financed through an extended process of reinvestment of profits,now had to be purchased all at once. Entry costs were raised even furtherby the fact that the technology and capital goods that had to be importedwere expensive to ship, to insure in transit, and to set up once they arrivedin Mexico.Manufacturers therefore had to raise initial capitalisations running intothe millions of pesos, but the ability of the economy to mobilise capitalwas restricted. A government-affiliated industrial finance bank could havebeen used to channel capital into manufacturing, but this had already beentried from 1830 to 1842 with very limited success. The idea was neverrevived, even after the conditions for industrialisation became morepropitious. The private banking system could likewise not be counted onto serve as a source of finance capital. Mexico's banking system, still in itsinfancy, was designed to do nothing more than facilitate commerce. Aslate as 1910, the entire banking system still numbered less than yo firms- most of them extremely small enterprises with capitalisations in the areaof only $ryo,ooo. Almost all of these banks were legally constituted onlyto serve as sources of short-term credit, meaning-that they could at mostprovide working capital to manufacturing companies.60Most of the investment capital for Mexican manufacturing thereforecame from the nation's most prominent merchant-financiers. They werethe only group in hlexico with sufficient liquid wealth to finance the veryexpensive plant and equipment that had to be imported. Given the largecapital requirements of the enterprises and the perceived risk inmanufacturing, no one financier would commit all his resources to anysingle project. Instead, several financiers would combine to form a jointstock company. Since the number of major financiers was relatively small- no more than 25 - the overall effect was that a tight clique controlledMexico's most important manufacturing companies.60 For a detailed discussion of banking institutions during the Porfiriato see Hilda SanchezMartinez, 'El sistema monetario y financier0 mexicano bajo una perspectiva historica:el Porfiriato', in La banca, pasadog present?: ensayos del CIDE (hlexico, 1983).
24 Stephen H. HaberThe two most salient characteristics of this class of merchant-financierindustrialistswere that few of them were Mexican by birth and fewer stillknew anything about manufacturing. Of the nine men who made up thefirst board of directors of the Fundidora Monterrey steel mill, for example,only one had any relevant technical experience.61 These were not thetinkerers of the English Industrial Revolution or the productionorientatedengineers and scientific managers of US industry. They werefinanciers whose principal talents lay in making deals to maintain theirmonopoly positions and in manipulating the economic apparatus of thestate to provide them with protection from foreign and domesticcompetition. Their presence on the boards of Mexico's major manufacturingenterprises therefore reinforced the tendency of Mexicanindustry to collude rather than compete.These merchant-financier-industrialists were well positioned to shapegovernment policies to their liking. Indeed, they were the economicbackbone of the Porfirian state: they subscribed to the government'streasury bonds, they sat on the boards of the nation's most importantfinancial institutions and they represented the government in internationalfinancial markets when it borrowed money abr~ad.~' In fact, it was not somuch a case of the state representing the interests of these financiers as itwas that these financiers were the state. They controlled the emission ofpaper money through their ownership of the Banco Nacional de MCxicothere was no government-run central bank. They shaped nationalmonetary and exchange-rate policy through the seats they occupied on theComision de Cambios y Monedas, and they held the strings on the flowof international loans to the Mexican government through theirconnections to the major banks in Madrid, Geneva, Paris and New York.This class of merchant-financier-industrialists used their political andeconomic power to pursue rent-seeking strategies. At the same time,poorly developed capital markets kept other groups from challengingtheir hold on industry. That is, rather than make innovations in newprocesses or techniques as entrepreneurs in some follower countries dld(Germany stands out as a case in point), Mexico's entrepreneurs sought tolimit competition and earn monopoly rents. Given the fact that theirentrepreneurial talents and experience were in commerce and moneylending- not in production - and given the fact that demand for many oftheir products was highly inelastic, this strategy made sense from the pointof view of maximising returns to the firm. Indeed, returns tomanufacturing were low (many enterprises, including some of the61 Fundidora Monterrey, ' Informe Xnual ', I got.Lfexico's most important financiers operated on an international scale and hadconnections to the big foreign banks. See Sanchez Alartinez, 'El slstema monetario'.
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