Government-Business Relations and Regional Development in Post-Reform Mexico

Puebla and Querétaro, two industrial states in central Mexico, have experienced dramatic economic divergence since Mexico initiated market reforms in the mid-1980s. Querétaro has enjoyed rapid growth for three decades, accompanied by economic transformation and upgrading into knowledge-intensive sectors. Puebla, by contrast, has had mediocre growth, and its GDP and exports have been highly concentrated in the automotive sector. Most explanations of regional economic divergence in Mexico point to geography and factor endowments such as human capital and infrastructure. However, Puebla and Querétaro had remarkably similar socioeconomic profiles when Mexico began to open its economy in 1985. This chapter presents this empirical puzzle, which the rest of the book address. It also previews the book’s core argument, which explains subnational economic divergence as a result of distinct patterns of interaction among local governments, business associations, and labor unions during and after Mexico’s market reforms and democratization.

The wave of economic and political transitions across the developing world in the 1980s and 1990s led to divergent outcomes within countries. This chapter reviews the literature on subnational variation in response to national-level economic and political reform and argues that existing research has not fully applied the lens of government-business relations to analyzing economic outcomes at the subnational level. While differences in the pattern of interactions between local authorities and firms are clearly relevant to subnational economic performance, the mechanisms are likely to differ from those at the national level. To underscore this point, this chapter proposes a set of analytical guidelines for understanding subnational government-business relations. The chapter then introduces the book’s argument, which shows how the decisions of large firms shaped the organization of the local private sector in Puebla and Querétaro, leading to different patterns of government-business relations (sometimes also including labor) and, consequently, economic divergence.

Organized business in Puebla and Querétaro exhibited systematic differences in their political and economic preferences beginning in the 1980s. This chapter provides evidence that business associations in Querétaro supported growth-enhancing policies such as economic integration and investments in education and infrastructure, while their counterparts in Puebla tended to demand protection from competition and industry-specific subsidies. Puebla’s peak business chambers also had strong partisan preferences against the PRI, while organized business in Querétaro was non-partisan. These differences arose because Querétaro’s business associations successfully incorporated large, foreign and domestic manufacturing firms into their ranks starting in the 1960s, while in Puebla, large firms opted out of business associations, ensuring these organizations continued to be dominated by local firms in traditional sectors. Differences in the organization and preferences of business associations had major consequences for the pattern of interaction between the public and private sectors in the two states.

The 1980s brought a series of economic shocks, beginning with Mexico’s historic debt default and subsequent economic crash in 1982 and continuing with its rapid trade liberalization in 1985. In response, local officials, business associations, and labor organizations in Querétaro developed effective mechanisms for coordination, which smoothed the state’s adjustment to economic hardship and laid the groundwork for a globally competitive economy. The most visible manifestation of local cooperation was the Tripartite Commission, a monthly forum for consultation and dialogue among government, business, and labor that lasted into the twenty-first century. Coordination allowed the state to implement a clear strategy to enhance productivity, build industrial infrastructure, and promote technological sophistication, a set of policies strongly influenced by Querétaro’s modernizing business associations, which were led by large, globally integrated manufacturing firms. As a result, the state economy recovered rapidly from the 1982 crisis and experienced remarkably fast growth during Mexico’s “lost decade.”

The relationship between state governments and organized business in Puebla was highly contentious throughout the 1980s and 1990s. Business associations responded to the economic shock of 1982 by supporting opposition PAN candidates for local office, leading to attempts by PRI governors Guillermo Jiménez Morales and Mariano Piña Olaya to co-opt and confront private sector leaders. In this context, coordinated efforts to respond to economic change in Puebla failed. Instead, adjustment to Mexico’s trade liberalization occurred through firm and industry-specific actions, with limited inputs from local government. This pattern of government-business relations can be explained by the organization of the private sector. A traditional, conservative elite dominated local business associations, making organized business a political threat rather than a developmental partner for local governments. Meanwhile, Volkswagen and other large firms did not participate in business associations and instead pursued unilateral actions to adjust to economic change, largely outside of local institutions.

The administration of Enrique Burgos in Querétaro (1991–1997) drew on close relations between officials, organized business, and labor to implement a clear strategy to achieve global competitiveness in response to Mexico’s trade opening and deepening market reforms during the 1990s. The state’s strategy prioritized technical education and research, industrial infrastructure, and firm-level productivity gains. Importantly, these policy outputs had a cross-cutting, “economy-wide” logic rather than being specific to individual sectors, a reflection of the influence of the state’s strong, encompassing business associations. In addition to regular dialogue with organized business and labor, Burgos brought private sector leaders into his government as top economic officials. The administration witnessed a major expansion of research, higher education, and industrial park infrastructure; increasing productivity; and deepening linkages with the global economy. The economic crisis of 1994–1995 did not produce major social, political, or economic upheaval in Querétaro.

The 1990s witnessed the further politicization of the relationship between the state government and local business in Puebla. As this chapter shows, initial attempts by Governor Manuel Bartlett Díaz (1993–1999) to win over local business leaders through various concessions failed to avoid government-business conflict during the 1995 mid-term elections. The opposition PAN, supported by local business chambers, defeated the PRI in the race for mayor of Puebla for the first time in history. After the election, Bartlett curtailed relations with organized business leaders, undermining cooperation on economic policies. Instead, the government supported the efforts of the auto sector to transform itself into a global economic powerhouse, helping Puebla recover from the 1995 crisis but at the cost of growing economic concentration. As a result, the differences between local firms and the automotive enclave in Puebla were more pronounced than ever as NAFTA, Mexico's historic free trade agreement with the United States and Canada, took effect.

This chapter describes how the first decade of the twenty-first century saw the continuation of a decades-long pattern of contentious relations between local government and business in Puebla. The administration of Melquíades Morales (1999–2005) managed to keep the peace with the private sector, aided by the governor’s selective provision of favors. However, conflict broke out again during the turbulent administration of Mario Marín (2005–2011), who immediately became engulfed in a major political scandal after taking office. In order to stave off opposition from local business, Marín attempted to co-opt segments of the business community through the distribution of public contracts and other benefits, exacerbating divisions within the private sector and leading to a further deterioration of governance in the state. In this context, attempts at public-private cooperation faltered, and Puebla once again failed to diversify its economy or upgrade existing industries beyond the auto enclave.

The broad features of economic governance in Puebla and Querétaro lasted into the second decade of the twenty-first century, as this chapter discusses. The course of the economy in Querétaro continues to be shaped by cooperation among main stakeholders, even as the lead actors and formal structures have changed. By contrast, development strategies in Puebla still revolve around individualized relations between officials and dominant firms, above all Volkswagen and, in recent years, its affiliate Audi. These cases, which illustrate how the political organization of the local private sector shapes economic governance in profound ways, have important implications for the study of subnational development more broadly. They also offer lessons for policymakers in government and international organizations, which are discussed in closing.