The [American] Civil War was bloody and destructive. But both before and after it there were ample economic opportunities for a large fraction of the population, especially in the northern and western United States. The situation in Mexico was very different. If the United States experienced five years of political instability between 1860 and 1865, Mexico experienced almost nonstop instability for the first fifty years of independence. This is best illustrated via the career of Antonio López de Santa Ana.
Santa Ana, son of a colonial official in Veracruz, came to prominence as a soldier fighting for the Spanish in the independence wars. In 1821 he switched sides with Iturbide and never looked back. He became president of Mexico for the first time in May of 1833, though he exercised power for less than a month, preferring to let Valentín Gómez Farías act as president. Gómez Farías’s presidency lasted fifteen days, after which Santa Ana retook power. This was as brief as his first spell, however, and he was again replaced by Gómez Farías, in early July. Santa Ana and Gómez Farías continued this dance until the middle of 1835, when Santa Ana was replaced by Miguel Barragán. But Santa Ana was not a quitter. He was back as president in 1839, 1841, 1844, 1847, and, finally, between 1853 and 1855. In all, he was president eleven times, during which he presided over the loss of the Alamo and Texas and the disastrous Mexican-American War, which led to the loss of what became New Mexico and Arizona. Between 1824 and 1867 there were fifty-two presidents in Mexico, few of whom assumed power according to any constitutionally sanctioned procedure.
When Sierra Leone became independent in 1961, the British handed power to Sir Milton Margai and his Sierra Leone People’s Party (SLPP), which attracted support primarily in the south, particularly Mendeland, and the east. Sir Milton was followed as prime minister by his brother, Sir Albert Margai, in 1964. In 1967 the SLPP narrowly lost a hotly contested election to the opposition, the All People’s Congress Party (APC), led by Siaka Stevens. Stevens was a Limba, from the north, and the APC got most of their support from northern ethnic groups, the Limba, the Temne, and the Loko.
Though the railway to the south was initially designed by the British to rule Sierra Leone, by 1967 its role was economic, transporting most of the country’s exports: coffee, cocoa, and diamonds. The farmers who grew coffee and cocoa were Mende, and the railway was Mendeland’s window to the world. Mendeland had voted hugely for Albert Margai in the 1967 election. Stevens was much more interested in holding on to power than promoting Mendeland’s exports. His reasoning was simple: whatever was good for the Mende was good for the SLPP, and bad for Stevens. So he pulled up the railway line to Mendeland. He then went ahead and sold off the track and rolling stock to make the change as irreversible as possible.
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It is not only that many of the postindependence leaders of Africa moved into the same residences, made use of the same patronage networks, and employed the same ways of manipulating markets and extracting resources as had the colonial regimes and the emperors they replaced; but they also made things worse. It was indeed a farce that the staunchly anticolonial Stevens would be concerned with controlling the same people, the Mende, whom the British had sought to control; that he would rely on the same chiefs whom the British had empowered and then used to control the hinterland; that he would run the economy in the same way, expropriating the farmers with the same marketing boards and controlling the diamonds under a similar monopoly. It was indeed a farce, a very sad farce indeed, that Laurent Kabila, who mobilized an army against Mobutu’s dictatorship with the promise of freeing the people and ending the stifling and impoverishing corruption and repression of Mobutu’s Zaire, would then set up a regime just as corrupt and perhaps even more disastrous. It was certainly farcical that he tried to start a Mobutuesque personality cult aided and abetted by Dominique Sakombi Inongo, previously Mobutu’s minister of information, and that Mobutu’s regime was itself fashioned on patterns of exploitation of the masses that had started more than a century previously with King Leopold’s Congo Free State. It was indeed a farce that the Marxist officer Mengistu would start living in a palace, viewing himself as an emperor, and enriching himself and his entourage just like Haile Selassie and other emperors before him had done.
It was all a farce, but also more tragic than the original tragedy, and not only for the hopes that were dashed. Stevens and Kabila, like many other rulers in Africa, would start murdering their opponents and then innocent citizens. Mengistu and the Derg’s policies would bring recurring famine to Ethiopia’s fertile lands. History was repeating itself, but in a very distorted form. It was a famine in Wollo province in 1973 to which Haile Selassie was apparently indifferent that did so much finally to solidify opposition to his regime. Selassie had at least been only indifferent. Mengistu instead saw famine as a political tool to undermine the strength of his opponents. History was not only farcical and tragic, but also cruel to the citizens of Ethiopia and much of sub-Saharan Africa.
The essence of the iron law of oligarchy, this particular facet of the vicious circle, is that new leaders overthrowing old ones with promises of radical change bring nothing but more of the same.
Inventors in the United States were once again fortunate. During the nineteenth century there was a rapid expansion of financial intermediation and banking that was a crucial facilitator of the rapid growth and industrialization that the economy experienced. While in 1818 there were 338 banks in operation in the United States, with total assets of $160 million, by 1914 there were 27,864 banks, with total assets of $27.3 billion. Potential inventors in the United States had ready access to capital to start their businesses. Moreover, the intense competition among banks and financial institutions in the United States meant that this capital was available at fairly low interest rates.
The same was not true in Mexico. In fact, in 1910, the year in which the Mexican Revolution started, there were only forty-two banks in Mexico, and two of these controlled 60 percent of total banking assets. Unlike in the United States, where competition was fierce, there was practically no competition among Mexican banks. This lack of competition meant that the banks were able to charge their customers very high interest rates, and typically confined lending to the privileged and the already wealthy, who would then use their access to credit to increase their grip over the various sectors of the economy.
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The first president of the United States, George Washington, was also a successful general in the War of Independence. Ulysses S. Grant, one of the victorious Union generals of the Civil War, became president in 1869, and Dwight D. Eisenhower, the supreme commander of the Allied Forces in Europe during the Second World War, was president of the United States between 1953 and 1961. Unlike Iturbide, Santa Ana, and Díaz, however, none of these military men used force to get into power. Nor did they use force to avoid having to relinquish power. They abided by the Constitution. Though Mexico had constitutions in the nineteenth century, they put few constraints on what Iturbide, Santa Ana, and Díaz could do. These men could be removed from power only the same way they had attained it: by the use of force.
Díaz violated people’s property rights, facilitating the expropriation of vast amounts of land, and he granted monopolies and favors to his supporters in all lines of business, including banking. There was nothing new about this behavior. This is exactly what Spanish conquistadors had done, and what Santa Ana did in their footsteps.
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Globalization made the large open spaces of the Americas, its “open frontiers,” valuable. Often these frontiers were only mythically open, since they were inhabited by indigenous peoples who were brutally dispossessed. All the same, the scramble for this newly valuable resource was one of the defining processes of the Americas in the second half of the nineteenth century. The sudden opening of this valuable frontier led not to parallel processes in the United States and Latin America, but to a further divergence, shaped by the existing institutional differences, especially those concerning who had access to the land. In the United States a long series of legislative acts, ranging from the Land Ordinance of 1785 to the Homestead Act of 1862, gave broad access to frontier lands. Though indigenous peoples had been sidelined, this created an egalitarian and economically dynamic frontier. In most Latin American countries, however, the political institutions there created a very different outcome. Frontier lands were allocated to the politically powerful and those with wealth and contacts, making such people even more powerful.
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The contrast between how Bill Gates and Carlos Slim became the two richest men in the world—Warren Buffett is also a contender—illustrates the forces at work. The rise of Gates and Microsoft is well known, but Gates’s status as the world’s richest person and the founder of one of the most technologically innovative companies did not stop the U.S. Department of Justice from filing civil actions against the Microsoft Corporation on May 8, 1998, claiming that Microsoft had abused monopoly power. Particularly at issue was the way that Microsoft had tied its Web browser, Internet Explorer, to its Windows operating system. The government had been keeping an eye on Gates for quite some time, and as early as 1991, the Federal Trade Commission had launched an inquiry into whether Microsoft was abusing its monopoly on PC operating systems. In November 2001, Microsoft reached a deal with the Justice Department. It had its wings clipped, even if the penalties were less than many demanded.
In Mexico, Carlos Slim did not make his money by innovation. Initially he excelled in stock market deals, and in buying and revamping unprofitable firms. His major coup was the acquisition of Telmex, the Mexican telecommunications monopoly that was privatized by President Carlos Salinas in 1990. The government announced its intention to sell 51 percent of the voting stock (20.4 percent of total stock) in the company in September 1989 and received bids in November 1990. Even though Slim did not put in the highest bid, a consortium led by his Grupo Corso won the auction. Instead of paying for the shares right away, Slim managed to delay payment, using the dividends of Telmex itself to pay for the stock. What was once a public monopoly now became Slim’s monopoly, and it was hugely profitable.
The economic institutions that made Carlos Slim who he is are very different from those in the United States. If you’re a Mexican entrepreneur, entry barriers will play a crucial role at every stage of your career. These barriers include expensive licenses you have to obtain, red tape you have to cut through, politicians and incumbents who will stand in your way, and the difficulty of getting funding from a financial sector often in cahoots with the incumbents you’re trying to compete against. These barriers can be either insurmountable, keeping you out of lucrative areas, or your greatest friend, keeping your competitors at bay. The difference between the two scenarios is of course whom you know and whom you can influence—and yes, whom you can bribe. Carlos Slim, a talented, ambitious man from a relatively modest background of Lebanese immigrants, has been a master at obtaining exclusive contracts; he managed to monopolize the lucrative telecommunications market in Mexico, and then to extend his reach to the rest of Latin America.
There have been challenges to Slim’s Telmex monopoly. But they have not been successful. In 1996 Avantel, a long-distance phone provider, petitioned the Mexican Competition Commission to check whether Telmex had a dominant position in the telecommunications market. In 1997 the commission declared that Telmex had substantial monopoly power with respect to local telephony, national longdistance calls, and international long-distance calls, among other things. But attempts by the regulatory authorities in Mexico to limit these monopolies have come to nothing. One reason is that Slim and Telmex can use what is known as a recurso de amparo, literally an “appeal for protection.” An amparo is in effect a petition to argue that a particular law does not apply to you. The idea of the amparo dates back to the Mexican constitution of 1857 and was originally intended as a safeguard of individual rights and freedoms. In the hands of Telmex and other Mexican monopolies, however, it has become a formidable tool for cementing monopoly power. Rather than protecting people’s rights, the amparo provides a loophole in equality before the law.
Slim has made his money in the Mexican economy in large part thanks to his political connections. When he has ventured into the United States, he has not been successful. In 1999 his Grupo Curso bought the computer retailer CompUSA. At the time, CompUSA had given a franchise to a firm called COC Services to sell its merchandise in Mexico. Slim immediately violated this contract with the intention of setting up his own chain of stores, without any competition from COC. But COC sued CompUSA in a Dallas court. There are no amparos in Dallas, so Slim lost, and was fined $454 million. The lawyer for COC, Mark Werner, noted afterward that “the message of this verdict is that in this global economy, firms have to respect the rules of the United States if they want to come here.” When Slim was subject to the institutions of the United States, his usual tactics for making money didn’t work.
From Acemoglu & Robinson’s Why Nations Fail:
More (#2) from Why Nations Fail:
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More (#1) from Why Nations Fail:
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