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ELUSIVE ALLIANCES: LOCAL GOVERNMENTS, TRANSNATIONAL CAPITAL, AND REGIONAL DEVELOPMENT IN POST-REFORM MEXICO by Theodore A. Kahn A dissertation submitted to Johns Hopkins University in conformity with the requirements for the degree of Doctor of Philosophy Baltimore, Maryland April, 2017 © 2017 Theodore A. Kahn All Rights Reserved Abstract This dissertation seeks to explain the economic performance of Mexican states during and after the implementation of political and economic reforms by the central government beginning in the 1980s. Existing studies have addressed this question through statistical and econometric analysis that identify proximate growth determinants. By contrast, I focus on how distinct state-level institutions for managing relations among government, business, and labor emerged out of Mexico’s market reforms, democratization, and policy decentralization. These divergent institutions reflected differences in the pre-existing organization of social groups, in particular organized business. Through a paired comparison of two states in central Mexico, Puebla and Querétaro, I show how the active participation of large, modernizing national and transnational manufacturing firms in Querétaro’s local business associations beginning in the 1960s imbued local business with a developmentalist orientation. In Puebla, the lack of incorporation of large firms meant that local business associations continued to be dominated by an insular local business elite with a strong, conservative political identity. Faced with these differences, local politicians pursued divergent strategies in response to reforms at the national level. Governors in Querétaro constructed institutions for cooperation with organized business and labor, which included regular, economy- wide policy coordination; the inclusion of technocratic business leaders in top posts in the state bureaucracy; and informal norms of conciliation and compromise. In Puebla, by contrast, successive governors opted for cooptation and conflict with organized business, which they viewed as a political rival rather than potential developmental partner. Attempts at economy-wide coordination routinely fell victim to partisan fighting, and governments in Puebla prioritized firm- and sector-specific development policies—in particular with Volkswagen, the state’s dominant firm. These institutional differences largely explain the marked divergence in economic performance of the two states after 1985. While Querétaro achieved sustained fast growth, structural transformation, and upgrading over the course of more than two decades, Puebla’s ii economy was characterized by volatile growth, the absence of upgrading, and the continued dominance of the automotive cluster surrounding Volkswagen. Principal advisor: Dr. Riordan Roett Second reader: Dr. Francisco E. González Third reader: Dr. Robert Devlin Committee member: Dr. Ling Chen Committee member: Dr. Ernesto López-Córdova iii Acknowledgements It has been a privilege to spend several years of my life working on a research project of my own choosing. I am therefore grateful to everyone who made the opportunity possible, beginning with my parents, Judith and Steven, and my sister, Lissy, for their unconditional support and consistent encouragement to pursue my interests, wherever they may take me. At SAIS, I have been blessed with outstanding mentors and advisers. Dr. Riordan Roett, who introduced me to the study of Latin America when I was a first-semester Masters student, guided me through each stage of the PhD program with infallible wisdom. His commitment to his students and the region he has studied insightfully for several decades provide a model of what it means to be an educator and a Latin Americanist. Dr. Francisco González has rightfully earned the admiration, loyalty, and friendship of generations of SAIS students, and I feel privileged to have been able to work with and learn from him for an additional four years of doctoral studies. Beyond the innumerable lessons on Mexican politics, history, and culture, he has shown me how to pursue a craft with passion. Dr. Robert Devlin has been an invaluable teacher and mentor since my time in the SAIS Masters program. His work has shaped my thinking on many of the topics central to this dissertation, but more importantly, his belief in my abilities encouraged me to pursue doctoral studies to begin with. I am also grateful to Dr. Ling Chen, whose incisive comments and questions resulted in major improvements to this dissertation and whose impressive scholarly achievements represent both a source of inspiration and a (admittedly highly ambitious) benchmark for my future work. Finally, Dr. Ernesto López-Córdova welcomed me into his office in Mexico’s Finance Ministry during my first week of field work in 2015 and provided thorough feedback on my dissertation prospectus. Through those insights, our subsequent conversations on my research, and the numerous contacts in Mexico he graciously provided, he was instrumental in shaping this project. iv I would also like to thank Dr. Brian Levy, Dr. Peter Lewis, Dr. Matthias Matthijs, and Dr. Bruce Parrott, each of whom provided indispensable encouragement, advice, and inspiration during various stages of my doctoral studies. In Mexico, numerous people made important contributions to this project. I am grateful to everyone I met in Puebla, Querétaro, and Mexico City during my one and a half years of field work, who helped me understand the country in general and the puzzle of divergent development in Puebla and Querétaro in particular. I am especially thankful for the generosity, support, and friendship of José Luis García Aguilar, who first invited me to Puebla in 2014 to teach a summer course at the Universidad Iberoamericana. My time at the Ibero-Puebla, including subsequent stints as a Visiting Professor, was a formative professional, academic, and personal experience that I will always remember fondly. One of the most enriching parts of the doctoral program has been my friendships with my fellow PhD students. It is not an exaggeration in the least to state that I would not have completed this project without Neil Shenai. Neil encouraged me to apply to the SAIS PhD program with the enthusiasm that only he is capable of and provided invaluable support throughout my time at SAIS, from editing my application materials to pouring over my dissertation defense presentation slide by slide. Andrew Whitworth and I have traversed each stage of the PhD program together, remaining in close contact even while on different continents. His companionship, advice, and inimitable English wit helped me weather the more trying moments. During my time at SAIS, Khalid Nadiri has been my econometrics instructor, informal adviser, towering authority on the state, and finally, roommate and friend. He excelled in each of these roles. I met Ryan Connelly during my first day as a PhD student at SAIS, and he quickly became a close and valued friend. Over the past four years, he has provided sharp feedback on my work and ensured that I had more fun than I otherwise would have. v Finally, thank you to Clémentine Brenac for your support, perspective, and humor, which helped me complete this project. vi Table of Contents Chapter 1: Introduction .......................................................................................................1 a. Context: the breakdown of corporatist state-society relations in Mexico ........................... 4 b. The argument: explaining regional economic divergence ................................................. 9 c. Methodology and outline of the dissertation .................................................................. 20 Chapter 2: The Territorial Dimension of Economic and Political Reform: Setting the Stage for Subnational Analysis of Mexico’s Development ............................................................23 a. Territorial Dimension of Developmentalism and Economic Institutions .......................... 25 b. Centralized and Decentralized Development in Mexico ................................................ 46 c. The Results of Reform: Economic and Political Divergence........................................... 63 d. Case selection ............................................................................................................. 67 Chapter 3: Explaining Local B usiness Divergence in Puebla and Querétaro .....................83 a. Organized Business and Development ......................................................................... 85 b. Organized Business in Mexico ..................................................................................... 87 c. Empir ical Analys is ...................................................................................................... 98 d. Economic and Political Views of the Private Sector..................................................... 115 e. Conclusions .............................................................................................................. 129 Chapter 4: The Construction of Institutions for Cooperation in Q ue ré taro , 1979-1991 ....131 Chapter 5: Partisan Rivalry between Government and Business in Puebla, 1981-1993 ....161 Chapte r 6: Consolidation of a Developmental Alliance in Querétaro, 1991-1997 ..............192 Chapter 7: Authoritarian Political Economy and Global Integration in Puebla, 1993-1999 ..........................................................................................................................................216