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Mexico’s Century of Crony Capitalism

By: Oswaldo Toscano - @otoscano_ec - Apr 2, 2015, 10:18 am
Petroleum extraction in southern California in the mid-20th century.
Petroleum extraction in southern California in the mid-20th century. (Nosolosporting)

EspañolA New York Times article published November 9, 1913, makes reference to the incestuous relationship between politics and business magnates in the Mexico of the era. The news story, given the picturesque headline Rival Oil Giants in Mexican Broils, details the conflict of interests between the dictator Porfirio Díaz, Rockefeller’s Standard OilFrancisco Madero, and the Waters Pierce Oil Company.

Porfirio Díaz, who held the presidency on nine occasions between 1876 and 1911, had decreed a series of measures to attract foreign investment in order to lift Mexico out of economic stagnation. Only one company related to the petroleum business was operating in the entire country: the Waters-Pierce Co., a subsidiary of Standard Oil.

With the measures adopted by Diaz, several external backers showed their interest in investing in the Mexican petroleum business and competing with the North American giant. Among them, the English industrialist Weetman Dickinson Pearson, and US oil tycoon Edward L. Doheny. The former founded the Mexican Eagle Petroleum Company, the latter the Mexican Petroleum Company.

Relying more on political favors than on free-market mechanisms, these two entrepreneurs dominated the petroleum industry throughout the first quarter of the 20th century. Pearson was a construction magnate who had already benefited from huge public works concessions thanks to his close friendship with Diaz. Among the privileges awarded to him were works on Mexico’s railways, the construction of Mexico City’s Grand Canal for drainage purposes, and the building of the docks at Veracruz.

In 1906, Pearson founded the Mexican Eagle firm, having just obtained petroleum concessions from the government. Elevated to the British peerage a few years later, Pearson, now dubbed Baron Cowdray, named Colonel Porfirio Díaz Jr. minority shareholder, and bestowed the presidency of the company upon former ambassador to Washington, governor of Chihuahua state, and Porfirio Diaz’s right-hand man Enrique Creel, in order to cement his privileges.

He also gave key positions to Guillermo de Landa y Escandón, governor of Mexico’s federal district; and the banker Fernando Pimentel y Fagoaga and Luis Riba, both tied up in Diaz’s financial and business dealings.

In the case of Doheny, he acquired hugely extensive tracts of land and sought to influence the approval of laws to permit oil extraction at the smallest possible cost. Years later, Doheny would be implicated in the US Teapot Dome scandal, accused of offering a $100,000 bribe to US Secretary of the Interior Albert Fall for the lease of navy petroleum reserves at cut-price crony rates.

What’s clear is that both Pearson and Doheny dominated the Mexican petroleum industry of the period. According to some historians, the executives of Standard Oil and the Waters Pierce Oil Company, seeing themselves relegated to third place in Mexico, threw their support behind Francisco Madero in the 1911 revolution that brought him to power, albeit for a short period: he was killed in 1913.

Many historians group these historical episodes under the archetype of the expansion of capitalism in underdeveloped countries, without clarifying that the existence of commodities alone doesn’t equal the existence of market capitalism: free-market institutions are also necessary.

Instead, the model implanted in Mexico is what’s known as crony capitalism, capitalism among friends, or mercantilism. Businessmen don’t compete for the goodwill of consumers, but that of those in power. This story could be told time and again about Mexico. Furthermore, a cursory look at history shows that his has been the predominant model of social organization in Latin America.

Market mechanisms, even today, are supplanted by political favoritism. According a study by the Friedrich Naumann Foundation for Freedom, while Mexico has made important advances in opening up to external trade and developing a stable currency, it hasn’t been able to make the necessary institutional reforms, above all with regard to the regulatory environment and the system of property rights, that favor economic freedom. This facilitates the arbitrary awarding of resources without due transparency and competition, and necessarily mires elected officials in corruption.

For that reason, the answer to the question raised by Nobel Prize winning economist Paul Krugman on his recent visit to Mexico as to when a “Mexican miracle” will appear is thus: when Mexico’s institutions are completely aligned to the free market. Promoting greater intervention in the economy by the government only encourages the mercantilism that has already benefited the country’s political and economic elites so much, and done so little to improve the quality of life of ordinary Mexicans.

Oswaldo Toscano is studying for a doctorate in History at Guatemala’s Universidad Francisco Marroquín, and holds a masters degree in political economy from SMC University. He writes for media outlets in Ecuador, Colombia, and Spain. Follow @otoscano_ec.

Translated by Laurie Blair.

Oswaldo Toscano Oswaldo Toscano

Oswaldo Toscano is an Ecuadorian professor, businessman, and columnist for outlets in Ecuador, Colombia, and Spain. A History PhD candidate at Francisco Marroquín University in Guatemala, he also studies at SMC University for a master's degree in political economy. Follow him: @otoscano_ec.