The Politics of Local Industrial Policy: Evidence from Mexico

• In Event: Subnational Issues in Environmental Policy

Abstract

Can subnational governments design and implement industrial policies that effectively spur rapid technological upgrading? Or do they face barriers inherent to the dynamics of decentralization and local politics?

Effective industrial development policies have been responsible for the increasing technological sophistication in countries that made rapid economic leaps, from Korea and Taiwan to Finland and Ireland. Recent scholarship has found these policy interventions more flexible and experimental and less centralized than once thought. There is also increasing interest among local governments in setting out their own technology and development policies. There is, however, surprisingly little comparative research on how subnational governments have used their policymaking discretion to direct local industrial policy.

Decentralization and devolution of authority have been touted as ways of compelling policymakers to be more responsive to the needs of local communities and, thus, better for democracy and development. However, previous scholarship has established a variety of reasons that the decentralization of policy discretion frequently fails to fulfill this promise: local capabilities differ, authority is used to reinforce the power of local elites, and officials are excessively guided by “hyperlocal” concerns (Smith and Revell 2016). Taking a lead from this scholarship, I hypothesize that subnational governments face pressures that will prevent them from designing and putting in place effective industrial technology development programs.

Data and Analysis
To test this hypothesis, I compare features of effective industrial policy (particularly conditionality and sector-specific targeting) with the behavior of subnational governments with discretion to design industrial interventions. To do so, I focus on the case of the Fondo PyME, a small business support program in Mexico that empowered local officials to shape market interventions for their businesses. I use a novel dataset that includes seven years of state-level interventions funded under the Fondo PyME and a battery of economic and political features. I assess the extent to which states employed their discretion, how they targeted particular industries, and whether they designed interventions to be “passive” or “active” (Schneider 2016).

Tentative Findings and Conclusions
I find significant variation between Mexican states in the design of interventions, there is little evidence of consistent ideological motivations, limited regional (cross-state) development strategies, and little apparent willingness to push existing firms beyond their immediate business needs. At the same time, there is responsiveness to existing sectoral strengths, which is not neatly consistent with the promotion of industries with greater economic impact. I conclude that these findings cast doubt on the ability of most subnational governments to implement effective local industrial policies. Increased sensitivity to local private sector pressure likely undermines the capacity of officials to 1) target strategic – but prospective – industries and 2) to “push” the firms to upgrade technologies by coupling carrots with sticks.

Author

• Steven Samford, University of Michigan