Economic History of Latin America

Question
Why is it that a region rich in natural resources failed to match the development of other areas that were no more developed than Latin America in 1500?
Country Argentina Brazil Mexico U.K. U.S. 1820 97 112 312 276 1870 420 101 110 668 567 1913 804 169 143 1025 1344 1950 1013 309 282 1439 2384

Population
Population of 90-120 million (1500) was reduced drastically in 100 years because of war, forced work and disease. In 18th century the population of L.A. was about 13 million.
Mexico's population (millions) 18 16 14 12 10 8 6 4 2 0 1532 1548 1568 1580 1605 1650 1700 1793 1850

Spanish America
Objective: immediate discovery of gold Roots of Conquistadors were in Spain despite Encomienda and the right to use indigenous labor.
slow development of non-mining industries

Mercantilism: belief that a countrys wealth and prosperity increase with the amount of gold and silver in its coffers.
requires trade surplus. Spain tried to monopolize trade routes to and from colonies.

Brazil
The Portuguese found no obvious deposits of gold and silver to stimulate colonization. The indigenous population were more scattered. Exports of brazilwood, used for dye, were the first basis of Portuguese economic activity. After the allocation of huge land, sugar became an important cash crop. Massive imports of African slaves began in the late 1500s. Prior to the discovery of gold(1690) and diamond(1729), the failure to find precious metals had established agriculture as the early basis of Portuguese taxation of Brazil. Policies were less restrictive than those of Spain.

Mercantilism
As the economy shifted from feudalism to marketoriented relations, silver and gold represented the ability to buy goods from other regions.
the accumulation of bullion as a goal in itself.

With Industrial Revolution, economist shifted their interest to more productive assets and to the benefits of commerce. However, trade is not a zero-sum game. Mutual gains.

Monoculture, Dutch Disease

International price of silver increased
Production factor moved to silver mining sector.

With the wealth obtained from silver, local producers could import manufactural goods. (overvaluation) As a series of commodity booms occurred in the late nineteenth century, Dutch disease infected the region even after independence. Monoculture
ex1) Holland's experience with natural gas ex2) Mexican oil boom (1977). Oil is curse or blessing?

Dutch Disease and Resource Curse Thesis

Dutch disease
Coexistence of booming and lagging sectors in an economy due to a temporary or sustained increase in export earning. Is there anything inherently growth-inhibiting? Isnt it just the structural effect of boom-induced growth?

Resource curse thesis

A mineral boom leads to net economic loss, as the present value of the positive effects are more than offset by the present value of negative effects. Externalities in manufacturing sector. Solve with Subsidy? Linkage effects, economies of scale in manufacture Rent-seeking activity. Demand for protection and govt spending. Wrong, too optimistic projections.

Natural Resources and Growth

Dependent variable: real per capita growth rate of GDP 1970-89
LGDP70
-1.921 -6.243 R2=56

SXP
-7.806 -2.942

SOPEN
2.167 3.845

INV7089
0.085 2.679

BUR
0.370 3.153

Const.
12.472 6.304

No. of observations=56

LGDP70: real purchasing power parity adjusted GDP per capita in 1970 SXP: Share of primary exports in GDP in 1971 SOPEN: the fraction of years during 1965-90 in which the country is rated as an open economy (Sachs and Warner) INV7089: ratio of real gross domestic investment to real GDP averaged over 1970-89 BUR: The bureaucratic efficiency index in Mauro (1995).

Source: Sachs and Warner Natural Resource Abundance and Economic Growth

Agricultural Development
Mercantilist policies and the pull of resources toward mining dampened incentives for agricultural development, particularly in Spanish America. Encomienda > concentration of landholdings > latifundio: market oriented. minifundio, mita system: labor-intensive

Hacienda
a central feature of the Latin American rural landscape. Similar to feudal: isolated economic communities, exchange of access to land for a portion of its output Differences: Production in latifundios aimed at world market, not self-sufficiency, political roots (hacienda: conquest feudal: protection) Results
political structure: landed aristocracy Inequality of income, rural poverty

Additional Factors
Early Conquistadors accumulated their wealth in Spain. High saving ratio > Weak domestic demand provided few incentives for the establishment of industries. > later argument for demand pull growth

Independence and Entry into the World Economy

The golden age: 1870-1914
Strengthening of Latin Americas trade links with the rest of the world Export expansion and growth of world trade in primary products

Stalled progress: 1914-1930 The 1930s

Why is Latin America Underdeveloped?

A Radical View
Dependency theory Capital imports are invested in the traditional commodity export sector, with two consequences
Declining relative export prices Little linkage effect

MNCs are unambiguously harmful

Mainstream Interpretation
The big push Foreign aid Export promotion Savings and foreign exchange Human capital Laissez-Faire

The Big Push

Demand in developing countries is too small to justify investment
Economies of scale Consequence: oligopolistic market structure

Implication
Governments should act to create demand. Increased government spending is justified on the grounds that it not only helps stimulate immediate economic growth but induces a long-run expansion of the economy by attracting more investment.

Problems
How to cope with shortages of capital and crowding out effect? Is big government good? How about inflation?

Foreign Aid
An alternative way to raise incomes and demand Problems
Inadequate funding (commercial loans became more important) Rent-seeking activity Appreciation of the real exchange rate Current account deficit Short-run effect of demand stimulation Consumption vs. investment

Export Promotion
Reach economies of scale Benefit domestic consumers Provide jobs and income to stimulate domestic demand Policies required, but difficult to be accepted
Devalue to encourage exports Cut real wages to compete in world markets Reduce government spending to prevent inflationary erosion of the exchange rate Eliminate protection of domestic firms to force them to compete internationally

Savings and Foreign Exchange

The factor that constrains growth in developing countries is capital shortage. Far from stimulating consumption through deficit spending, governments should encourage higher savings rates and tax to finance public investment in infrastructure. Two-gap model
Savings constraint Foreign exchange constraint

Human Capital
Governments should direct more attention to education. Problems
Misdirected Nutrition Public spending

Laissez-Faire
Argument: Growth has mainly been hampered not by lack of resources but by massive government interference with market mechanism.
Political interest, waste, inefficiency, etc

Economic liberalization and deregulation are required to reduce the distortionary effects of government intervention. Critics: Economic development cannot occur without government help.
Infrastructure, education, etc