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017_The_Economic_DEVELOPMENT_(book4you.org)_165

017_The_Economic_DEVELOPMENT_(book4you.org)_165

THE INITIATIVE FOR POLICY

DIALOGUE SERIES
The Initiative for Policy Dialogue (IPD) brings together the top voices in development to address some

of the most pressing and controversial debates in economic policy today. The IPD book series
approaches topics such as capital market liberalization, macroeconomics, environmental economics,
and trade policy from a balanced perspective, presenting alternatives and analyzing their consequences
on the basis of the best available research. Written in a language accessible to policymakers and civil

society, this series will rekindle the debate on economic policy and facilitate a more democratic
discussion of development around the world.

OTHER TITLES PUBLISHED BY OXFORD UNIVERSITY PRESS
IN THIS SERIES

Fair Trade for All
joseph E. Stiglitz and Andrew Charlton
Economic Development and Environmental Sustainability
Edited by Ram6n L6pez and Michael A. Toman

Stability with Growth
joseph E. Stiglitz, jose Antonio Ocampo, Shari Spiegel,

Ricardo Ffrench-Davis, and Deepak Nayyar

The Washington Consensus Reconsidered
Nards Serra and joseph E. Stiglitz

Capital Market Liberalization and Development
Edited by jose Antonio Ocampo and joseph E. Stiglitz

Industrial Policy and Development
Edited by Mario Cimoli, Giovanni Dosi, and joseph E. Stiglitz

Time for a Visible Hand
Edited by Stephany Griffith-jones, jose Antonio Ocampo, and joseph E. Stiglitz

Debates in the Measurement of Global Poverty
Edited by Sudhir Anand, Paul Segal, and Joseph E. Stiglitz

Overcoming Developing Country Debt Crises
Edited by Barry Herman, jose Antonio Ocampo, and Shari Spiegel

Good Growth and Governance in Africa
Edited by Akbar Noman, Kwesi Botchwey, Howard Stein, and joseph E. Stiglitz

The Economic Development of Latin America since Independence
Luis Bertola and jose Antonio Ocampo

The Economic
Development of Latin

America since
Independence

LUIS BERTOLA
AND

JOSE ANTONIO OCAMPO

OXFORD

UNIVERSITY PRESS

OXFORD

UNIVERSITY PRESS

Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom

Oxford University Press is a department of the University of Oxford.
It furthers the University's objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of

Oxford University Press in the UK and in certain other countries

©Luis Bertola and Jose Antonio Ocampo 2012

The moral rights of the authors have been asserted

First Edition published in 2012
Impression: 1

All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
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rights organization. Enquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the

address above

You must not circulate this work in any other form
and you must impose this same condition on any acquirer

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Data available

Library of Congress Cataloging in Publication Data
Data available

ISBN 978-0-19-966213-5 (hbk)
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Printed in Great Britain by
MPG Books Group, Bodmin and King's Lynn

Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials

contained in any third party website referenced in this work.

Foreword

History and, in particular, economic history has been a subject of abiding interest
for me. It provides us with the raw material from which we can draw important
lessons that enable us to arrive at a fuller understanding of complex social realities
and the viability of economic policies.

Distinguished economists and historians have made valuable contributions to
our understanding of Latin America's economic history. During my time with the
Inter-American Development Bank (IDB), we were fortunate to have a prestigious
team of researchers, headed up by the distinguished economist and historian,
Professor Rosemary Thorp, who produced an extremely valuable study on the
economic history of Latin America covering a large part of the twentieth century.
But more inputs were needed in order to provide a comprehensive picture of the
economic history of the Latin American countries from the time of their inde-
pendence to the present day.

And this is what two very prestigious economists and economic historians-
Luis Bertola of Uruguay and Jose Antonio Ocampo of Colombia-have now given
us. On the occasion of Latin America's celebration of the bicentennial of its
independence, the !hero-American Secretariat (SEGIB) is honored to have been
able to support the preparation of this account of the economic history of Latin
America.

Professors Bertola and Ocampo are prominent scholars in the universities of
Uruguay and Colombia, in the wider academic world, and in international insti-
tutions. Between them, they have been active in the academic affairs of universities
of the stature of Cambridge, Carlos Ill de Madrid, Columbia, Gothenburg,
Harvard, Notre Dame, Oxford, the London School of Economics, and Yale.

Drawing on this wealth of experience, these authors offer us a rigorously
documented picture of two hundred years of economic history of the Latin
American republics. This is no easy task, clearly. This type of research requires
investigators to sift through a wide variety of cultural or ideological viewpoints,
which makes the task all that much more difficult.

At a time marked by the sweeping globalization of economic, political, and
social relations (which is not the first such episode but is very likely the most
intense and most widespread), the challenges that Latin America must overcome
in order to achieve greater internal cohesiveness and to position itself in the
international economy more successfully are more important than ever. Viewed
in that light, one of the most significant contributions made by this analysis of the
region's economic history is its exploration of the interconnections between the
region and the international economy.

The division of this analysis into chapters that trace the major eras in the
region's history seems quite appropriate. I am also glad to see that, while high-
lighting common features, this study consistently recognizes the marked diversity
that is one of Latin America's greatest assets: the diversity that has emerged from
the mixture of indigenous, Euro-American, and Afro-American societies that
came together in the melting pot of Latin America.

vi Foreword

The book also presents an incisive analysis of the region's production special-
ization pattern based on the exploitation of natural resources and exports of
associated commodities. One of the valuable aspects of this examination is its
use of a typology of economic development as a means of structuring what we
know about the different periods and societies involved. While never moving too
far away from the regional context as a whole, this typology focuses on the
variables associated with the colonial powers, types of markets, predominant
export products, labor conditions, and the size of each economy.

In this region of so many shades and nuances, as the authors characterize it, it is
important to identify the development dilemmas that have arisen, which involve
such factors as the difficulty of gaining access to knowledge and technology, the
issues raised by different forms of social organizations, and the problems that the
region has had in providing social protection. And, then, there is the long history
(marked by successes, but also failures} of progress, lags, and disappointments
that have resulted in the region's long-standing institutional instability. This
instability has taken the form of revolutionary processes and heated social and
political clashes, which have generated a multitude of authoritarian regimes
throughout its history.

This book also discusses the extreme volatility and inequality that are so deeply
entrenched in our history and that have weighed upon our societies for so long-
and which must be overcome. Although this inequality ("Latin America's greatest
historical debt," in the words of Bertola and Ocampo) has proved to be quite
intractable, it should not detract from our recognition of the recent achievements
made possible by wisely crafted macroeconomic policies.

Latin America has traveled a long road since the end of the colonial era to
achieve an international presence of a strength that we would never have imagined
possible. And this is clearly demonstrated in the valuable historical series produced
by the United Nations Economic Commission for Latin America and the Caribbean
(ECLAC}, without whose work it would be very difficult to attain a substantive
understanding of where the region stands today. Challenges remain on many fronts,
however: in education, technology, production diversification, fiscal accounts, and
others. And these challenges must be met in order to allow the region to modernize
its economic, social, and political processes more successfully.

This is a time of hopes and harsh realities for Latin America, a time when
environmental problems and climate change are setting limits on the type of
development that is acceptable to what have become the most prosperous regions
of the world since the Industrial Revolution. In the midst of this situation, the
present study provides innovative inputs within the framework of a prestigious
school of historiography thought to help us to find the keys to our still-uncertain
but promising future by drawing upon the essential lessons of history.

Now that we are, fortunately, far removed from the solitude evoked by one of
the region's Nobel Laureates, if we arm ourselves with appropriate mechanisms
for promoting social cohesion and the development of our production systems,
I believe that we may be in a position to write, perhaps more forcefully than
before, a future chapter of prosperity and solidarity for Latin America.

Enrique V. Iglesias
Secretary-General of the !hero-American Secretariat

Preface

The series of events being held to mark the bicentennial of the independence of
most of the countries of Latin America offers an exceptional opportunity to stop
for a moment and look at the path followed by those countries within the context
of world economic history. By the same token, the recent international crisis and
the changes taking place in the world economy, which will continue to pose
challenges and open up opportunities for our countries, oblige us to reflect
upon our past and learn from our history.

The economic history of Latin America over the past two centuries is a history
of development. Its population and per capita GDP have grown enormously.
Although occurring somewhat more slowly, improvements have also been wit-
nessed in life expectancy at birth and education. The percentage of the population
that is living in poverty has been reduced substantially, although with notable ups
and downs.

The region's history is also one of instability-instability brought on by the
volatility of external financial flows and the international terms of trade and by the
resulting business cycles, in which upswings are followed by periods of stagnation
or recession. It is also a history of frequent, sweeping changes in development
policies and models in response to economic, social, and political processes and
ideologies.

Finally, and very importantly, it is a history of inequalities, not only of the well-
known inequalities found within each country, but also of those existing among
countries in the region and, even more so, between the Latin American countries
and the leaders of the world economy. At various periods in time, Latin America
has seen the gap separating it from the more developed countries widen, although
it is also true that, fairly early on in its history, it also distanced itself from the
world's poorest regions.

This volume offers the reader a concise overview of the region's economic
history since independence and summarizes some of the recent developments in
the growing body ofliterature on the subject. Because of their different histories, it
does not, however, cover two economies that are often included as part of Latin
America: Haiti and Puerto Rico.

A great deal has been written on the subject of Latin America's economic
history in recent decades. We have been fortunate to be able to draw upon the
work of excellent studies that have focused on the same factors as we have
examined here. Some of the many such works include the two-volume Historia
Econ6mica de America Latina, by C. F. S. Cardoso and H. Perez Brignoli of 1979,
the six-volume Cambridge History of Latin America from the late 1980s, and the
perceptive work of Victor Bulmer-Thomas, The Economic History ofLatin Amer-
ica since Independence, which was originally published in 1994 with a second
edition in 2003. In addition, there is the large-scale effort promoted by the Inter-
American Development Bank (IDB) and coordinated by Rosemary Thorp that
resulted in Progress, Poverty, and Exclusion: An Economic History of Latin

viii Preface

America in the Twentieth Century, published in 1998, and in the three comple-
mentary volumes compiled by Enrique Cardenas, Jose Antonio Ocampo, and
Rosemary Thorp: An Economic History of Twentieth-Century Latin America,
published in 2000. Yet another key reference work is the two-volume Cambridge
Economic History of Latin America, edited by Victor Bulmer-Thomas, John
Coatsworth, and Roberto Cortes Conde and published in 2006.

All of these extremely valuable works have been a source of inspiration and
information at all stages during the preparation of this book. In addition, there are
a wealth of national histories focusing on different periods, along with articles and
papers dealing with specific aspects and periods of the region's economic history.
To these we should add two volumes published in 2011, Institucionalidad y
Desarrollo Econ6mico en America Latina edited by Luis Bertola and Pablo Gerchun-
off, which cover the economic history of different Latin American regions since
independence, and the Oxford Handbook of Latin American Economics, edited by
Jose Antonio Ocampo and Jaime Ros that deals with the most recent period.

Given the richness of this literature, the task of making additional contributions
is a challenging one. Be that as it may, we believe that this study offers the reader
further inputs in a number of different areas. Although we have not undertaken an
exhaustive review of the recent voluminous and diverse literature, this study does
bring together and present many of the new contributions made to the discussion
of institutions and development, human development, income levels and dispar-
ities, the development of technology, and financial volatility and growth account-
ing; as well as more recent inputs toward long-standing debates, such as those
surrounding the terms of trade and how they relate to real commodity prices.

Many of these debates reflect changing theoretical perspectives. There is virtu-
ally no period of time that has not been examined from a different vantage point
in recent research, as we have tried to show here. A new debate has arisen
regarding development outcomes in the colonial era and the repercussions that
the colonial legacy has had on development during subsequent periods. The
discussion concerning economic development in the decades following independ-
ence has been revitalized. The first wave of globalization (in the late nineteenth
century and early twentieth) continues to draw the interest of researchers, who
have approached it from many different standpoints and are now drawing
comparisons between it and the second wave (starting in the last three decades
of the twentieth century). The period of state-led industrialization (a term that we
have preferred here to the more widely used and misleading expression of
"import-substitution industrialization"), as well, is being regarded and evaluated
differently in the light of previous and, especially, subsequent developments. It
seems clear that the present conjunction of events and trends provides us with an
important framework for the assessment of the outcomes of the recent return to a
market-based approach and the second wave of globalization.

One particularly important step forward in recent research on the economic
history of Latin America is reflected in an increasing interest in studying the
region on the basis of international comparisons. The use of this kind of compara-
tive approach has been one of the central objectives of this book, not only because
there is a need to put successes and failures into perspective, but also because we
need to think about Latin America as an integral part of the world economy
throughout the past two centuries.

Preface ix

In preparing this study, we have been able to take advantage of newly available
statistical work which includes, in particular, the historical series for 1950-2010
recently produced by the United Nations Economic Commission for Latin Amer-
ica and the Caribbean, ECLAC (referred to in this volume simply as the ECLAC
histori<;al series). These have been supplemented with the statistical work of many
other authors, including the work we have done on human development, terms of
trade, and real commodity prices, among others.

This book contains six chapters. Chapter 1 examines the main trends in Latin
American development from a comparative standpoint. We believe that this
discussion provides some new elements and interpretations concerning a broad
range of factors: population, per capita income, volatility and the relationship it
bears to patterns of specialization and irregular access to global capital markets,
income distribution, and human development.

Each of the next four chapters covers a fairly extended phase of development,
with the intention being to place the emphasis on long-lasting processes.
Chapter 2 deals with the decades between the time that independence was won
and 1870. Chapter 3 encompasses the stage of development based on commodity
exports, which covered the period from around 1870 up to 1929 and coincided
with the first wave of globalization. This chapter devotes special attention to
distinguishing the particular features of the complex period between 1914 and
1929. Chapter 4 covers the long period of state-led industrialization (1929-80),
which includes very different subperiods, such as the Great Depression, the
Second World War, and the most classic phase of industrialization, which con-
tinued up to 1980, although some countries began to break away from this
development pattern before that. Chapter 5 presents systematized information
on the years up to 2010, which also encompassed a wide range of events, such as
the lost decade of the 1980s, the process of economic liberalization and structural
reform, the crisis of the final years of the twentieth century, and the boom that
preceded the Great Recession of 2008-9.

For all of these periods, we have tried to strike a delicate balance between the
identification of common elements that will allow us to talk about Latin America
as a region with specific historical (economic, political, and cultural) features,
while at the same time identifying the significant differences existing within this
community of nations. To this end, we have attempted to use different typologies
for different periods in order to capture those specificities more accurately. The
preference in all cases has been for a genuinely comparative approach that allows
us to contextualize the different countries' experiences within the framework of
the region's economic history, rather than simply listing them one after another.
The cases of individual countries are therefore invariably presented as illustrations
of larger regional trends.

The concluding chapter provides a brief historical overview and discusses some
of the main challenges facing the region as viewed in the light of its history.

Our objective has therefore been to provide the reader with an interpretive view
of two centuries of Latin American economic development that is backed up by
rigorous empirical evidence and that blends an attempt to discern common
patterns with an acknowledgement of the region's internal diversity.

Finally, we would like to express our gratitude to all those who have, in one way
or another, made this book possible. We are especially grateful to the Ibero-

X Preface

American Secretariat (SEGIB) and its Secretary-General, Mr Enrique Iglesias, and
to the Fundaci6n Carolina for the support they provided for the initial research,
which led to the publication of a first version of this book, in Spanish, in

December 2010 by SEGIB under the title Desarrollo, Vaivenes y Desigualdad:
una historia econ6mica de America Latina desde Ia independencia. This new

version has been enriched by the inputs and comments of many colleagues and
incorporates a large number of improvements, expansions, and corrections of the
statistical databases used in the 2010 version.

Sebastian Fleitas and Ariane Ortiz provided invaluable assistance. We are also
thankful to Jorge Alvarez, Reto Bertoni, Melissa Hernandez, Jonathan Malag6n,
Eliana Rubiano, Javier Rodriguez Weber, Gustavo Saquier, Sabrina Siniscalchi,
and Juliana Vallejo for their help in building statistical databases, surveying the
literature, discussing issues, and reading the preliminary versions of this book.
. Mariangela Parra-Lancourt updated the real commodity price series from 1865 to
the present. We are also very grateful to Diane Frishman for an excellent transla-
tion of the original book, written in Spanish.

Valuable comments and additional information were provided by Jose Antonio
Alonso, Ricardo Bielschowsky, John Coatsworth, Renato Colistete, Robert Devlin,
Aldo Ferrer, Jorge Gelman, Pablo Gerchunoff, Karl Jaspers, Sandra Kuntz-Ficker,
Bethania Lima, Eduardo Lora, Hector Perez Brignoli, Gabriel Porcile, Carmen
Reinhart, Antonio Tena, and Jeffrey Williamson, among many others with whom
we discussed specific topics of interest.

Luis Bertola would also like to thank the Clemente Estable Fund of the Ministry
of Education and Culture of Uruguay.

We hope that this book proves useful to students of economic history, econom-
ics, and development issues in general, who have been an abiding inspiration for
our work.

Contents

List of Figures xii
List of Tables xiv

1. Latin America in the World Economy, 1810-2010 1
2. The Economic History of the Young Independent Republics, 1810-70 48

3. Globalization, Institution-building, and Commodity-export-led 81
Growth, c.1870-1929 138
198
4. State-led Industrialization
258
5. Turning Back to the Market
6. By Way of Conclusion: The History and Challenges of Latin 268
286
American Development 301

References
Statistical Appendix
Index

List of Figures 6

1.1. Population and per capita GDP growth rates, 1500-1820 21
and 1820-2008 24
26
1.2. Economic crises of Latin America 1820-2008. A. Number
of countries on a currency, external debt, or banking crisis. 36
B. Number of country/years in crisis by period
42
1.3. Share of Latin America in world exports 43
92
1.4. Real commodity prices (1980 = 100). A. Agricultural goods. Ill
B. Total and metals
143
1.5. Latin America and the West 1870-1930: Per capita GDP in 148
1990 PPP US$ (x-axis) and average years of education of
population 15 and above (y-axis} 163
168
1.6. Latin America: Historical HDI relative to developed 174
countries. A. Average years of education. B. Life expectancy 176
at birth. C. Per capita GDP 185

1.7. Historical human development indices 1900-2000:
Latin America (LA7} and developed countries

3.1. Latin America: Terms of trade (1900 = 100}

3.2. Wages in Latin America and other regions, 1870-1929
(Europe 3 = 100)

4.1. External trade indices, 1929-45. A. Simple average for
LA7, 1929 = 100. B. Simple average, including all countries
with available information, 1929 = 100

4.2. Exports of goods and services as a share of GDP (% of GDP at
constant 2000 dollars)

4.3. Indicators ofbalance-of-payments crises, 1950-80. A. IMF
programs. B. International reserves, gross and net of IMF
lending (% of GDP)

4.4. Manufacturing value added as a share of GDP, 1950-2006

4.5. GDP decennial growth rates

4.6. Total factor productivity (simple average, 1960 = 1)

4.7. Inflation rate in Latin America (annual percentage change
of CPI). A. Median. B. Simple average

List of Figures xiii

4.8. Public-sector finances, 1950-85. A. Government revenues 187
and spending as a share of GDP (simple average). B. Fiscal 201
balance as a share of GDP (simple average} 203
206
5.1. Economic growth and trade balance 207

5.2. Net resource transfer(% of GDP at current prices) 209

5.3. A. Real interest rates B. Real non-oil commodity prices 212
(1980 = 100) 217
222
5.4. Dynamics of the Latin American external debt(% of 234
GDP and exports) 238
243
5.5. Comparison of the crises of the 1930s and 1980s. 246
A. Purchasing power of exports. B. Trade balance as % of
exports (vs 1929 and 1980}

5.6. Inflation rate in Latin America (CPI, annual percentage
change). A. Median. B. Mean (annual percentage change
in natural logarithm)

5.7. Central government finances. A. Revenue and expenditure
(% of GDP, simple average).B. Fiscal balance (simple average}

5.8. Trade openness (%of GDP at constant 2000 dollars}

5.9. Latin American GDP growth rate, 1951-2010

5.10. Labor productivity, 1990-2010 vs 1950-80

5.11. Relationship between export and GDP growth, 1990-2010

5.12. Poverty incidence

List of Tables 4
13
1.1. Per capita GDP, population, and GDP, 1500-2008:
Regional averages and ratio to the world average 14
17
1.2. A typology of Latin American economies
1.3. Latin American countries: Per capita GDP, 1820-2008 19
19
(in 1990 international Geary-Khamis dollars) 23
1.4. Growth volatility, 1961-2008
29
1.5. Volatility of GDP and terms of trade: Latin America and 34
its "relevant world" 56
58
1.6. Determinants of volatility, 1870-2008 59

1.7. Export concentration, 1870-1973 62

1.8. GDP growth explained by the evolution of the income 68
elasticities of demand for exports and imports, 1870-2008
74
1.9. Historical indices of human development, 1870-2000 83
2.1. Latin America: Population, 1820-70
2.2. Population structure c.1800 84
86
2.3. Total and per capita exports of Latin America
2.4. GDP and per capita GDP of Latin American countries, 88
89
1820-70 90

2.5. Indicators of institutions and violence in Latin America, 93
1810-70

2.6. Abolition of slave trade, Free Wombs laws, and slavery
in Latin America, 1810-88

3.1. Latin America: Population, 1870-1929
3.2. Gross intercontinental immigration and immigration rates,

1871-1940
3.3. Total exports, per capita exports, and growth rates, 1870-1929
3.4. Structure of world production and exports of commodities,

1913

3.5. Structure of Latin American exports, 1859/61-1927/9
3.6. Latin American trade with United States 1913-27 (percentages)
3.7. Terms of trade and purchasing power of exports

(1870-4 = 100)

List of Tables XV

3.8. Kilometers of railways in Latin America, total and 95
per capita, 1840-1930 97

3.9. GDP and per capita GDP, 1870-1929 100

3.10. Growth of GDP and dynamics of exports and the domestic 101
market, 1820-70
107
3.11. GDP growth explained by income elasticities of demand for
exports and imports: Seven Latin American countries, 110
1870-1929 112
120
3.12. Land prices in Argentina and Uruguay, 1870-1929 122

(indices 1913 = 100) 124

3.13. Purchasing power wages in Latin America (United 125
128
Kingdom 1905 = 100)
131
3.14. Latin America: Social indicators, 1870-1930 146
151
3.15. Inequality in the Southern Cone, 1870 and 1920 152
158
3.16. Gini index of land ownership, 1880-1990 166
169
3.17. Foreign investment in Latin America (in millions of
US dollars) 171
175
3.18. Latin America: Private foreign investment by origin and 180
destination c.1914 (millions of US dollars) 182
188
3.19. Levels of industrialization and urbanization c.1870-1930

3.20. Imports of machinery, total and textiles, of Brazil (1895-1939)
and Mexico (1895-1935), at constant 1990 prices (1900=100),
and share of textiles in total machinery imports

4.1. External trade indices, 1929 = 100

4.2. Indices of production, 1929 = 100

4.3. Sources of economic growth, 1929-45

4.4. Sources of economic growth, 1945-80

4.5. Latin American export sector dynamics

4.6. Manufacturing and agriculture: Growth and shares in GDP

4.7. Share in industrial value-added at the end of the period of
rapid industrialization

4.8. Economic dynamism

4.9. Population, population growth, and urbanization rates

4.10. Latin American exports, 1953-2000

4.11. Share of state-owned enterprises in economic activity

xvi List of Tables 192
201
4.12. Relative importance of urban employment and overall 224
underemployment (% of total employment in each country)
225
5.1. Gross fixed capital formation (% of GDP) 226
228
5.2. Trade openness (%of GDP at constant 2000 dollars) 230
5.3. Real growth of exports of goods and services (average annual 237
241
growth at constant 2000 dollars) 247
249
5.4. Latin America: Compositions of exports of goods, 1990-2008 251
5.5. Exports of goods and services by country, 1990 and 2008
5.6. Intra-regional exports as a share of total exports 252
256
5.7. Indicators of financial development(% of GDP)
288
5.8. Dynamics of productive sectors (annual growth rates)
5.9. Income distribution in Latin America (Gini coefficient) 292
5.10. Population, population growth, and urbanization rates
296
5.11. Labor market indicators
298
5.12. Change in labor market conditions in Latin America,
1990-2008

5.13. Progress toward millennium development goals
A.l. Latin America: GDP (in millions of 1990 international

Geary-Khamis dollars)

A.2. Latin America: Per capita GDP (international 1990
Geary-Khamis dollars)

A.3. Latin America: Volatility of GDP, GDP of "relevant world"
(trading partners), and terms of trade, 1870-2008

A.4. Latin America: Historical human development indices,
1900-2000

1

Latin America in the World

Economy, 1810-2010

INTRODUCTION

Anybody who has written about the economic history of Latin America inevitably
starts out by wondering whether it is possible to make any generalizations at all
about such a large continent, one that stretches so far north and south, with all the
climatic differences which this entails, that is marked by vast mountain chains,
deserts, and rainforests, and that displays such striking variety in terms of its
geography, climate, and natural resources. It has also been the birthplace of a wide
diversity of cultures which have, in turn, undergone radical changes wrought by
colonization, emigration and immigration (both voluntary and involuntary),
trade, and technology transfer.

Yet despite all of this, it does seem possible to talk about the economic history of
Latin America as a whole and to discern a set of features which Latin American
countries share, and these features can serve as a basis for arriving at an under-
standing of the direction in which their economies and societies have evolved. In
this chapter we will attempt to describe some of what appear to be the most
important characteristics of this type. We will also, however, try to refine these
generalizations in two ways. On the one hand, an effort will be made to distil
exactly what is intrinsically Latin American about these characteristics and what
features are shared with other regions of the world; in other words, an attempt will
be made to distinguish between traits of Latin America's development that are
universal or more widespread and those that are not. On the other, without setting
aside the effort to arrive at generally valid observations, we will try to describe the
nuances, typologies, and differences that shape the region's diversity. However,
limitations of space and the lack of certain types of data, as well as our own
limitations, will make it impossible to provide equal coverage of all the different
regions and countries.

Throughout this book we will also try to illustrate the ways in which different
parts of Latin America compare with the rest of the world. The Latin American
region is not part of what is regarded as being the "developed world." None of the
countries in the region has attained uniformly high enough living standards,
educational levels, degrees of competitiveness, or levels of technological develop-
ment to be ranked as a developed country. The failure to, as yet, take this giant
step forward and the persistence of poverty and inequality have not, however,
stopped the region from growing, from raising its population's living standards, or

2 Economic Development of Latin America

from improving its level of human development. Although some Latin American
countries are still very poor and large segments of their populations are still on the
sidelines of modern economic and social development processes, Latin America as
a region has made large strides in bringing about very notable economic, social,
and political changes that have placed it on a development path that has enabled
it, as a whole and in some areas, to attain middle-income status on a global scale.

From the standpoint of the region's production structure, and the above-
mentioned progress notwithstanding, some traits have proved to be very long-
lasting. Since the times of the Conquest, even while the region's ties with the world
economy underwent various changes and. shifts, and even though some countries
have managed to diversify their production structures and gain entry into inter-
national markets for manufactures and services, the bulk of the Latin American
countries have not been able to leave their natural-resource-based production
patterns completely behind them. This also implies that, above and beyond the
fluctuations and differing circumstances seen in different product categories,
Latin America's pattern of trade specialization has held it back from gaining
access to more technologically dynamic segments of the global market or seg-
ments in which the growth of demand is more robust. This pattern of specializa-
tion, along with the region's markedly cyclical access to capital markets, also helps
to account for the highly volatile nature of Latin America's economic growth,
which has undercut its development efforts.

This pattern of specialization, which clearly differs from the more capital-
intensive and technology-intensive pattern of the developed countries and from
the East Asian countries' initially more labor-intensive pattern, but with increas-
ing technological content, is not the actual reason why Latin America is not yet a
developed region, but is instead .simply a manifestation of that situation. Other
countries and regions have been able to leverage their natural resource endow-
ments in ways that have enabled them to bring about sweeping economic changes.
With differing degrees of success at different stages in their development pro-
cesses, the United States, Canada, Australia, New Zealand (a group of countries
that we will call, using Maddison's terminology, the "Western offshoots") and the
European Nordic countries provide examples of countries that have taken advan-
tage of their natural resource .endowments to place themselves upon development
paths that have been more successful than those followed by Latin American
countries. East Asian countries that have based their development strategies on
their abundant labor supply, which shares some traits with some areas of Latin
America, have been much more successful in achieving sustained economic
growth in recent decades and in improving their population's quality of life.
The Latin American region's limited success in terms of economic development
and the insufficient diversification of production structures has made it especially
difficult for it to sustain broad-coverage welfare policies.

This raises the question as to what factors have held Latin America back from
making more radical changes in its economy and society and from doing more to
improve its population's quality of life. The answers to this question cannot be
provided by economic analysis alone. Economic performance is the outcome of a
complex constellation of social, cultural, and political relationships and of how
those factors interact with the geographical setting. Within the realm of develop-
ment theory, there is a long-standing debate about the role of institutions and

Latin America in the World Economy 3

about the ultimate determinants of institutional development. The region's social
structures, the distribution of power and wealth, the role and strength of its elites,
and the complex, often painful process of state-building (which in many cases has
resulted in endemically weak nation states}-in combination with the legacy of
colonial times and the economic and political difficulties that the newly independ-
ent states had in positioning themselves on the world stage-have all been decisive
factors and all have something to do with the successes and failures of Latin
America's economies.

LATIN AMERICA IN THE WORLD ECONOMY:

CONVERGENCE AND DIVERGENCE IN PER CAP ITA GDP

Historical statistics on GDP trends in Latin America are quite limited and do not
provide enough evidence to allow us to make categorical statements, especially in
regard to the nineteenth and earlier centuries. Appendix Tables A.1 and A.2 offer
a new historical data series for Latin America that has been constructed by
drawing on our own estimates and on various sources, particularly ECLAC
estimates for the period since 1950 and the statistics compiled by Angus Maddi-
son for earlier years, which were in turn based on partial ECLAC estimates, those
of other authors and estimates of his own. This new database, which uses the
internationally comparable benchmarks developed by Maddison in 1990 as a
point of reference, is expressed in international dollars at 1990 prices. The results
differ-in some cases quite noticeably-from those provided in Maddison's

1.+.database. An overview is provided in Table

While taking care in assessing these data, it can nonetheless be said that, over
the past two centuries, per capita GDP in Latin America has fluctuated around the
world average while going through three major phases: a decline between inde-
pendence and about 1870 (although only relative to the world leaders of the
industrialization process, which we will refer to here simply as "the West"), an
upward trend in 1870-1980 (although with some ups and downs}, and another
decline since the 1980s. Thus, along with the European periphery, Latin America
was able to join in the wave of modern economic development quite early on and
to become part of what might be described as a "middle class" at the global level.

However, a comparison of Latin America with the West shows a long-run
deterioration that was basically the result of two major downturns from which the
region did not manage to bounce back The gap between the Latin American region
and the West first widened during the years before 1870 and then again during what
has come to be known as the "lost decade" of the 1980s. On the other hand, Latin
America has far outpaced Africa in terms ofeconomic growth and continues to do so
up to the present day. It also outdistanced Asia until the mid-twentieth century, but,
since 1980, just the opposite has been true (and markedly so}.

Recently, in an effort to understand the uneven economic growth rates of
different nations, the concepts of a "little divergence" and a "great divergence"
vis-a-vis the industrialized world have come into use. The Western economies
underwent a major transformation as they transitioned from a pattern of slow

Table LL Per capita GDP, population, and GDP, 1500-2008: Regional averages and ratio to the world average

1500 1820 1870 1913 1929 1940 1950 1973 1980 1990 2008

Per capita GOP (dollars) 776 1,231 2,155 4,194 5,247 5,695 6,740 13,963 15,903 19,500 26,369
West 702 l,l02 1,877 3,671 4,590 4,991 5,642 13,067 14,950 18,750 25,285
Expanded West 538 1,073 1,092
Rest of the world 416 578 602 859 924 1,993 2,442 2,064 2,371 2,711 4,900
Latin America 544 684 772 1,540 2,076 1,003 4,451 5,441 5,067 7,U8
Rest (excluding Latin 575 599 962 1,804 2,038 2,453 4,670
America) 566 820 865 1,958
World 672 880 2,108 4,083 4,512 5,150 7,614
Ratios 0.54 1,538 1,789 0.35
Latin America/West 360 0.56 0.36 3,702 0.36 0.32 0.34 0.26 0.27
West-Latin America gap 0.86 547 1,382 0.37 0.40 4,299 9,511 10,462 14,433 19,250
Gap/Latin America per 0.80 2,655 3,171 1.86
capita GOP 1.79 1.76 2.14 1.92 2.85 2.70
1.83 1.72 1.53 2.91
Per capita GOP (world mean = 1) 1.64 2.45 2.55 3.20 3.42 3.52 3.79 3.46
0.86 2.13 2.73 2.93 0.55 2.68 3.20 3.31 3.64 3.32
West 1.37 1.02 0.68 2.39 2.57 1.02 0.52 0.51 0.53 0.53 0.64
0.86 0.88 0.56 0.52 0.51 1.16 1.09 1.21 0.98 0.93
Expanded West 1.24 0.68 1.00 1.16 0.46 0.44 0.45 0.48 0.61
1.00 0.53 0.48 1.00
Rest of the world 0.95 1.00 1.00 1.00 1.00 1.00 1.00
1.00 1.00
Latin America 0.73

Rest (excluding Latin 0.96

America)

World 1.00

Population {millions) 51 126 208 339 375 401 434 553 577 612 695
West 75 175 268 424 479 520 566 720 756 801 891
Expanded West 363 866 1,008 1,369 1,599 1,780 1,962 3,203 3,684 4,468 5,804
Rest of the world 18 107 130 165 308 360 442 580
Latin America 345 22 40 81 1,492 1,650 1,797 2,896 3,323 4,026 5,223
Rest (excluding Latin 845 967 1,288
America) 438 2,078 2,299 2,528 3,923 4,440 5,269 6,695
World 1,042 1,276 1,793
40 1,967 2,286 2,922 7,723 9,168 11,943 18,337
GOP (thousands of millions) 53 155 449 1,423 2,197 2,593 3,193 9,402 11,296 15,020 22,536
West 195 193 503 1,557 1,519 1,910 2,137 6,613 8,734 12,114 28,438
Expanded West 7 507 619 1,201 1,314
Rest of the world 188 13 194 243 385 5,224 1,896 2,158 3,954
Latin America 492 29 117 1,313 1,655 1,721 6,774 9,874 24,392
Rest excluding Latin 248 587 1,076 16,015
America 2.9% 700 3,716 4,503 5,329 8.2% 20,030 27,134 50,974
World 1.9% 1,122 2,758 5.2% 5.4% 7.2% 9.5% 8.0% 7.8%
Latin America GOP/ 2.6% 4.2%
World GOP

Note: Values are presented in constant 1990 dollars.
"West" includes 12 Western European countries, Australia, Canada, United States, and New Zealand.
"Expanded West" includes 30 Western European countries, Australia. Canada, United States, New Zealand, and Japan.

Source: Own elaboration based on Maddison (2008) and Statistical Appenclix. Tables A. I and A.2

6 Economic Development of Latin America

1.80
1.60

1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00

West Rest of the Latin Rest of the World
Expanded World America World
West
(excluding
lil Per Capita GOP 1500-1820 LA)

u Population 1500-1820

u Per Capita GOP 1820-2008

fiil Population 1820-2008

Figure 1.1. Population and per capita GDP growth rates, 1500-1820 and 1820-2008

Source: Table 1.1

economic growth between 1500 and 1820-during which these economies' expan-
sion was mainly accounted for by the growth of the population and, to a lesser
extent, an increase in per capita GDP-to a different pattern, starting in about
1820, in which per capita GDP growth was a far more important factor than
population growth (see Figure 1.1). During the first of these periods, the growth
pattern of the "rest of the world"1 (which encompassed what is now regarded as
the developed world, including Latin America) was entirely extensive and was
slower than the pace achieved by the West, thereby giving rise to the "small
divergence." By the time that this process reached its end, the differences in per
capita income levels were still small compared to the differentials that exist today.
During the second period, although the growth rates of the "rest of the world" also
rose, the increase in that group's per capita GDP proved to be, in the long run, no
more than a third as much as that achieved by the West. This was the origin of the
"great divergence," after which the gaps between these two groups' levels of per
capita income were very large indeed.

Ever since the time of independence, Latin America appears to have followed a
growth pattern similar to that of the "rest of the world," with the upswing in its
growth rates being driven by the same factors as the rest: population growth
accounts for some 60 percent of its total economic growth, whereas annual growth
rates for per capita GDP in Latin America have been only three-fourths as high as
the rates achieved by the West. Between 1820 and 2008, the gap between Latin
America and the West widened from 0.8 to 2.7 times Latin America's per capita
GDP or, in other words, the region went from having a per capita GDP of slightly

1 We exclude "the larger West," which aside from what we call "the West" (the leaders of the
industrialization process, made up of the major European powers and the "Western offshoots"), also
includes other Western European economies and japan, which joined the ranks of the leaders later on.

Latin America in the World Economy 7

more than one half of that of the West, to having one of slightly more than one
fourth.

It is extremely difficult to talk with any certainty at all about the levels of per
capita income during the colonial period, and the figures on population growth
during that time are also highly debatable. If we go by Maddison's highly
speculative assumptions, it would seem that there was a substantial gap between
Latin America and the West during the colonial period, although it did not
increase to any significa11t degree during those years and, in Mexico, it may
have been quite small at some point in time. During the early years of coloniza-
tion, standards of living and, in particular, life expectancy at birth plunged. Then,
however, the survivors of the Conquest and the colonizers saw somewhat of a
recovery in their income levels, with the result that the gap at the end of the
colonial period may not have been much greater than it was at its start.

In sum, while the West's growth pattern was extensive and entailed fairly slow
rates of increase, the gap between it and Latin America was sizeable but was not
widening. When the West's growth pattern changed to one marked by larger
productivity gains, Latin America began to fall further behind and the gap
widened to substantial proportions, even though Latin America's pace of growth
also picked up. Consequently, although the original gap and the legacy of the
colonial period are subjects that attract a great deal of interest, the fact remains
that new growth patterns emerged during the Industrial Revolution that radically
changed the economic landscape and international relations. It would therefore be
difficult to argue that the region's more recent history is nothing more than a
reflection of its colonial past.

THE STAGES OF DEVELOPMENT IN LA TIN AMERICA

There is a major debate going on at the present time as to the accuracy of the
statement that there was a long hiatus in Latin America's development after the
countries won independence as a result of the major conflicts and internal
political instability that ensued, and that this situation did not change until the
first wave of globalization2 finally pulled the region along in its wake. This debate
will be examined in detail in the following chapter. As we will show, the general
idea that the first decades following independence were not good ones for the
region in economic terms relative to the countries that are today part of the
developed world is still valid. It is also true, however, that, if we look a bit more
closely, we see that there are significant differences, even across different regions
within single countries. Be that as it may, between 1820 and 1870, the per capita

2 The terminology used here is in line with the recent tendency to refer to the worldwide economic
expansion of the late nineteenth centmy and early twentieth century as the first wave of globalization.
Some authors prefer to use this term to refer to the stage marked by the conquest and colonization of
the Americas during the sLxteenth centmy. But if"globalization" is understood as the process of market
Integration, then it would not apply to the period prior to the late nineteenth centmy, which involved a
process in which political and military, rather than economic, forces prevailed.

8 Economic Development of Latin America

GDP gap between Latin America and the West swelled from 0.8 to 1.8 times the
level of the former. While some countries and former colonies of other regions of
the world (the "Western offshoots") grew rapidly, and even though Latin Amer-
ica's economies were not stagnant by any means, the fact remains that, in terms of
the potential that seemed to be opened up when such natural-resource countries
won their independence, the first decades of independence appear to have been a
time when the countries missed an opportunity to match the pace of the more
dynamic economies.

Between 1870 and 1980, in very different contexts and with some fluctuations,
Latin America improved its global ranking, in contrast to the decline registered by
the "rest of the world" up to the mid-twentieth century. What is more, Latin
America's share of world output climbed steadily, rising from 2.6 percent in 1870
to 5.2 percent in 1929 and to 9.5 percent in 1980 (see the last row in Table 1.1).
Even so, the region was unable to narrow the gap with the West, which remained
fairly stable during this period and actually widened somewhat during some years,
especially between 1950 and 1973, when the Western economies marked up
record-breaking growth rates during what was known as the "golden age" of
capitalism. This was a time when the region was witnessing a population explo-
sion and when the more developed economies in the region were having trouble
finding a way to sustain their growth paths (see below). A more detailed examin-
ation of the situation shows that the gap with the "Western offshoots" widened
but that it narrowed in relation to the industrialized countries of Europe up to
1929, while the opposite occurred after the Second World War.

This long period encompassed two completely different phases, however, not
only in the history of Latin America but in that of the entire world. The first of
these phases corresponds to the first wave of globalization and, in Latin America, a
stage in which commodity exports were expanding. This first wave began to wane,
in many ways, starting with the First World War and then collapsed altogether
during the Great Depression of the 1930s. This also marked the beginning of a
new phase of Latin American development which we will refer to as the era of
"state-led industrialization." At the international level, this phase began with a
severe global economic crisis but ended with the emergence of a second wave of
globalization starting in the 1960s.

Since 1980, Latin America has not only been lagging further behind the developed
economies, but has also lost ground vis-a-vis the world average. While many nations,
especially in Asia, have joined others on a rapid economic growth path, Latin
America has grown at a substantially slower pace. As a result, the region's share of
world output slipped from 9.5 percent in 1980 to 7.8 percent in 2008.

Latin America's economic performance has thus been marked by a certain
duality, inasmuch as it has generally turned in an above-average performance
(except during the first few decades after independence and the last few decades of
the twentieth century and the first of the twenty-first), but, at the same time, has
never closed the gap between it and the West. What is more, that gap widened
further during these two phases of relative retrogression and, to a lesser extent,
during the "golden age" that followed in the wake of the Second World War.

However, this somewhat disappointing pattern of lights and shadows is not a
reflection of stagnation or of inertia. Since independence, the region's per capita
income has increased by a factor of 11, and, if we factor in its population growth,

Latin America in the World Economy 9

then we can see that GDP has increased by a factor of284, whereas the GDP of the

West has expanded by a factor of 118.

This economic expansion has been coupled with thoroughgoing structural,

institutional, and political changes, which have been brought about by both

national and international factors that ultimately had a profound impact on the

Latin American population's lifestyles, culture, and quality of life.

All of this has occurred against a backdrop of deep inequalities within the

region, which were already clearly apparent as early as 1820. Until about 1913, the

degree of inequality among the Latin American countries increased as part of a

tendency that, according to Gelman (2011), had begun at around the time that the

countries were winning their independence. Argentina and Uruguay had high

income levels from early on and, by 1870, Chile and Cuba had joined the ranks of

the high-income countries. ·

Starting in the 1910s, however, this trend began to change as the high-income

countries grew more slowly and a number of other countries, such as Brazil,

Mexico, Colombia, and Venezuela, among the larger nations, and Costa Rica and

Panama, among the smaller ones, began to grow more rapidly. As the growth rates

of the countries that had been more successful in the nineteenth and early

twentieth centuries declined and these new growth centers emerged, a process

of income convergence among the Latin American countries took place. At the

same time, however, there was a numerous group of low-income countries that

continued to lag behind.

Events after 1980 also led the countries in different directions. While most

economies tended to lag, some were quite strong: Chile, the Dominican Republic,

Colombia during the "lost decade" of the 1980s, and Peru during the first decade

of the twenty-first century. The result was that per capita GDP rates tended to

converge up to 1990 and then began to diverge again.

A TYPOLOGY FOR AN ANALYSIS OF THE

LA TIN AMERICAN COUNTRIES

It is extremely difficult to find any typology for the Latin American countries that
provides equally useful insights into their development process throughout the
200 years that have passed since independence. Certain characteristics were
decisive during the colonial period but, as a consequence of economic growth,
structural change, and social developments since that time, new traits or factors
have taken on greater importance and capture the existing differences more
clearly. Thus, one typology may be more informative in one period but may
contribute less to the analysis in another. To complicate matters further, the
information available for use in analyzing the different countries and their
performance does not always provide full coverage of the different cases. The
fact that some of the larger countries exhibit sharp differences from one sub-
national region to the next and the lack of disaggregated data constitute yet
another difficulty.

10 Economic Development of Latin America

Nonetheless, some countries and regions have exhibited a number of specific
features that have remained in place over time and that even today have retained a
certain explanatory power.

As discussed by Cardoso and Perez Brignoli (1979), the Latin American
societies have been shaped by the interaction of three different societies that
came together in the Americas: those of the pre-Columbian indigenous popula-
tion, Europe, and Mrica. The coalescence of these societies within different social
and environmental contexts gave rise to three major types of colonial societies
which may be understood as outgrowths of the dominant European society but
which also developed specific traits of their own. Drawing upon the ideas of these
authors, who in turn based their work on many other attempts to construct
typologies in this area (Furtado 1976; Sunkel and Paz 1970; Cardoso and Faletto
1971),3 we will use the following criteria:

(a) The type of colonial power. The choice of this criterion has been a contro-
versial one, especially in terms of its use to differentiate the colonies of highly
mercantilist countries, such as Spain and Portugal, from the English colonies.
While it is true that no former Portuguese or Spanish colony has yet become· a
developed country, there are many former English, Dutch, French, and Belgian
colonies that have not reached that status either. While this factor is important, it
is not as decisive as some authors, including Landes (1999), have described it as
being. Others have rejected this characterization because they have seen it as
attributing importance to the genetic make-up of certain population groups rather
than to the specific qualities displayed by different societies over a given period of
history. Clearly, however, a Hispanic heritage is not at odds with development.
For the purposes of this analysis, the relevant difference is between the Spanish
and Brazilian colonies.

(b) The type of market into which each society is most fully integrated. Here, a
distinction can be drawn among export economies, economies that are subsidiary
to export economies, national markets, and border or marginal zones. These
various activities are not necessarily taking place in discrete sectors; they may
overlap, although to different extents and in different ways, in each country or
region.

(c) The main type of commodity, particularly in export activities: mining,
agriculture, or forestry. In the case of agricultural products, there is an important
difference between temperate and tropical climates, because of both the nature of
the production processes in these two zones and the types of competition or
complementarity that production in these climatic zones entails vis-a-vis buyer
markets. Indeed, specific commodities give rise to different options for techno-
logical development and social organization, although this does not mean that
there is a strict deterministic correlation between the types of resources that a
country has and the path that its technological and institutional development will
take, as argued by a number of highly influential authors in recent years (Enger-
man and Sokoloff 1997). It is, however, true that different products offer the
possibility of different types of forward and backward production linkages. Export
and competing markets also have different structures. This covers the entire

3 For a discussion of these typologies, see Bertola and Williamson (2006).

Latin America in the World Economy 11

range, from products in which some of the countries of the regio~ have
monopolies or oligopolies (usually for a limited perio~ of time), sue~ as mtr~tes,
coffee or rubber, to those commodities (mainly troptcal or subtroptcal agncul-

tural 'goods) in which Latin American countries compete with regions with

abundant, relatively inexpensive labor (Asia and Mrica), to agricultural products
in which the region competes with developed countries that are less rich in ~atural

resources and have higher wage levels (wheat, maize, meat, wool) (see Lewts 1969

and 1978; Bertola and Williamson 2006). One factor that, in particular, is going to
become increasingly important is the capacity of different economies to alte~ a~d
diversify their export structure in ways that will increase value added. Thts, m

turn, will determine what their trade balance will look like, based on the techno-

logical content of the goods and services that they produce and the .factors
determining the competitiveness of the products that they. export and. tmp~rt.
Nonetheless, the way in which the domestic market evolves (1.e., the way m whtch

the structure of consumption and production changes) will also have a strong
influence. In this respect, the progress made in terms of industrialization and ~he
development of modern services will be the key indicators of production

diversification.
(d) One pivotal aspect of this structure is the different ways i~ whi~h the

transition is made to the kind of wage-based labor market that ts typtcal of

modern capitalist economies and that is now prevalent throughout the region as

well. Even though all the Latin American countries have converged toward these

types of labor relations, the starting points for those transitions have been very

different and have left a very strong mark on the various societies that is still
glaringly evident in their labor relations an~ the~r positions i~ the internation~l
economy. Cardoso and Perez Brignoli have tdentlfied three maJOr types of transi-

tions. The first type was made by the areas that we will call "Indo-European"
regions, where indigenous and mestizo groups constitut~ a large portion of ~e

population. These regions are, for the most part, located m ':hat were the maJ?r
centers of pre-Colombian civilization, and they became the pillars of the colomal

structure, in which ranching and farming, indigenous campesino (peasant) com-
munities and mining activities were all combined. Various forms of forced labor

were still in use in these areas until well into the twentieth century. The second
type of transition was seen in societies where P~,rsons of ~fric~n de~cent have had
a strong presence, which we will refer to as Euro-Afncan regwns. They a~e
primarily located in tropical agricultural areas (although they are also found m
some mining regions), where the importation of slaves, the ~evelopme~~ of a
slave-labor-based economy, and the complex process involved m the abohtton of

slavery have been pivotal factors. Finally, there are the "Euro-American" societies.

These societies are located in the temperate zones of the Southern Cone, where
very few members of the original population survived and where .Europe~n
immigration has been the main factor in the growth of the populatwn, or m

enclaves within one of the other two types of societies.
(e) Finally, size is another important variable. Starting in the twentie~h ce~tury,

once the processes of social change, industrialization, and the diverstficatton of
production were in place and moving forward, the size of a c~untry seems to have
taken on particular importance because it influences the poss~ble scales of prod~c­

tion and the available opportunities for diversifying productwn. In the followmg

12 Economic Development ofLatin America

discussion, we will see how this factor can take on a significant explanatory value in
relation to the development of different countries, especially during the period of
state-led industrialization.

When all of these criteria are combined, they open up a wide range ofpossible sets
of conditions and development paths. In fairly large countries, many of these
differing traits exist alongside one another in varying combinations. This is
especially the case in Brazil, Colombia, and Mexico. But even in smaller countries,
such as Ecuador, a diverse mix of conditions can be seen, with tropical plantations
prevailing along the coast and the structures typical of societies with a large
contingent of indigenous peoples in the highlands. Consequently, any attempt
to establish a one-to-one correspondence between these sets of characteristics and
specific countries will inevitably be no more than approximate.

Nevertheless, when the criteria set out in (c) and (d) above are combined, a
powerful typology can be constructed that captures a large part of the conditions
existing in Latin America, especially up to the early decades of the twentieth
century. Table 1.2 illustrates how the Latin American countries can be classified in
terms of these criteria, with the help of some tailor-made definitions to help
characterize a few particularly ambiguous cases.

From the standpoint of the societal traits and production structures of the
different countries, they can be grouped, on a fairly reasonable basis, into three
categories: (i) countries where the hacienda, the indigenous communities, and
mining activities have predominated in primarily Indo-European societies; (ii)
countries in which tropical plantations have been the predominant economic activity
in what are for the most part Afro-American societies; and (iii) countries in which
Euro-American societies based on temperate-zone agriculture or mining have pre-
dominated. The word "predominant" has been used repeatedly because, in each and
every case, there is a mixture of these traits. Predominantly Euro-American societies
can even be found in tropical regions (e.g., Costa Rica, the Antioquia and Santander
regions in Colombia, the Venezuelan Andes and the tobacco-growing area of Cuba,
whose production structures date back to colonial times).

Once into the twentieth century, however, as labor markets evolved, as income
levels rose, and as domestic markets expanded, the differences between the first
two groups seem to have become more closely related to the size of the economies
involved rather than the differences in their initial conditions. In both cases, there
continued to be a relatively abundant supply of low-cost labor. In analyzing the
events of the twentieth century and the first decade of the twenty-first, we will
therefore continue to use three categories: the category of the temperate-climate,
newly settled Euro-American economies of the Southern Cone will remain the
same, but the other two groups will be merged and then subdivided into the large
and medium-sized countries (Brazil, Colombia, Mexico, Peru, and Venezuela)
and the smaller economies.

Table 1.3 shows how, between the time that independence was won and 1913,
but especially between 1870 and 1913, the disparities between different Latin
American countries were on the rise, as illustrated by the coefficient of variation
in per capita income levels. Between 1913 and 1990, the trend changed, and their
income levels converged. However, since 1990 intraregional divergence has been
on the rise once again.

Latin America in the World Economy 13

Table 1.2. A typology of Latin American economies c Xy z
AB

Indo- Afro- Euro- Large Medium Small

American American American

1. Subsistence agriculture and mining X y z
1.1. With strong mining export sector y
Brazil X y z
Chile Colombia z
Peru Cuba y z
Mexico Dominican y z
Bolivia Republic y z
Colombia Venezuela y z
Venezuela Panama
1.2. Without strong mining export sector z
Ecuador Costa Rica z
Paraguay z
Guatemala Argentina z
El Salvador Uruguay z
Honduras
Nicaragua
2. Tropical agriculture

3. Temperate-zone agriculture

Chile

Summary

Untill930 .

1. A. (except Chile and Venezuela): Bolivia, Colombia, Ecuador, El Salvador, Guatemala, Honduras, MeXICO,

Nicaragua, Paraguay, and Peru
2. Band C: Brazil, Costa Rica, Cuba, Dominican Republic, Venezuela, and Panama

3. A and C: Argentina, Chile, and Uruguay

Since 1930
1. and 2. Z: Bolivia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, and Paraguay, Peru, Cuba,

Dominican Republic, and Panama
1 and 2. X and Y: Brazil, Colombia, Mexico, Peru, and Venezuela

3. A and C and 2.C: Argentina, Chile, and Uruguay
Highlights: South of Brazil; North of Mexico; Peruvian and Ecuadorian coa~ts; ~olombian ~ribbean; Panama as a

logistic settle; Central American countries have tropical agriculture; Costa Rica ts Euro·Amencan.

Source: Authors' elaboration

Table 1.3. Latin American countries: Per capita GDP, 1820-2008 (in 1990 international Geary-Khamis dollars)

1820 1870 1913 1929 1940 1950 1973 1980 1990 2010

Argentina 998 1,468 3,962 4,557 4,342 5,204 7,966 8,367 6,433 11,820
Bolivia 597 694 2,045 2,604 2,695 2,197 2,987
Brazil 710 758 1,051 1,154 1,544 3,758 5,178 4,920 6,762
Chile 607 1,320 3,058 3,536 3,312 3,755 4,957 5,660 6,401 13,229
Colombia 695 676 1,589 1,868 2,161 3,546 4,244 4,826 6,982
Costa Rica 1065 845 1,555 1,733 1,930 4,230 4,902 4,747 7,876
Cuba 733 1,688 1,244 2,108 2,313 2,724 2,957 3,997
Ecuador 651 2,327 1,055 1,109 1,607 3,258 4,109 3,903 5,278
El Salvador 460 815 1,216 1,298 1,739 2,653 2,454 2,119 3,447
Guatemala 683 840 1,613 2,571 1,955 3,140 3,772 3,240 4,172
Honduras 1,231 2,106 1,672 1,544 1,195 1,353 1,715 1,971 1,857 2,464
Mexico 713 1,696 1,788 2,283 4,831 6,164 6,085 7,832
Nicaragua 588 570 1,024 1,694 1,328 1,564 2,813 2,095 1,437 1,889
Panama 832 790 1,854 4,068 4,824 4,466 9,198
Paraguay 2,155 3,197 1,892 1,569 1,419 2,015 3,218 3,281 3,819
Peru 692 1,010 1,895 2,289 4,001 4,248 3,008 5,844
Dominican Republic 727 1,559 3,716 1,071 1,982 2,403 2,471 5,361
Uruguay 1,461 4,194 2,813 3,536 4,501 5,034 6,630 6,465 11,706
Venezuela 1,956 2,879 5,310 9,788 10,213 8,313 9,434
Average 1,373 5,247 1,993 2,442 4,451 5,441 5,067 7;272
Average "West" 906 5,695 6,740 13,963 15,903 19,500 27,356
Weighted average by groups 1,963
Gronp 1 3,673 1,270 1,780 2,220 4,163 5,072 4,890 6,674
Group 2 1,071 4,276 1,351 1,855 4,134 5,392 5,054 6,935
Group 3 1,426 4,065 4,801 6,964 7,540 6,426 12,204
Medium-sized and large countries 1,551 2,035 4,379 5,585 5,307 7,193
Small countries 1,663 2,779 3,204 2,941 4,398

Ratios 0.55 0.37 0.37 0.37 0.35 0.36 0.32 0.34 0.26 0.27
0.30 0.32 0.25 0.24
LA average/"West" 0.58 0.32 0.33 0.37 0.31 0.33 0.30 0.34 0.26 0.25
0.48 0.34 0.22 0.24 0.24 0.28 0.50 0.47 0.33 0.45
Group 1/West 0.71 0.31 0.35 0.27 0.26
Group 2/West 0.88 0.81 0.71 0.30 0.20 0.20 0.15 0.16
0.26 0.27 0.27
Group 3/West 0.68 0.68 1,678 3,169
Medium-sized and large countries/West 0.29 0.37
0.25 1,914 3,349
Small countries/West 0.38 0.46

Standard deviation (LA7) 166 362 1,226 1,264 1,181 1,562 2,645 2,515
Coefficient of variation (LA7)
Standard deviation (LA19) 0.24 0.39 0.63 0.52 0.50 0.49 0.50 0.41
Coefficient of variation (LA19) 2,037 2,193
1,289

0.53 0.46 0.40

Notes
Group l includes Bolivia, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay. and Peru.
Group 2 includes Brazil. Costa Rica, Cuba, Dominican Republic, Venezuela, and Panama.

Group 3 includes Argentina, Chile, and Uruguay.
The group of medium and large countries consists of Brazil, Colombia, Mexico, Peru, and Venezuela.
The group of small countries consists of Bolivia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, and Dominican Republic.

"West" includes 12 Western European countries, Australia, Canada, United States, and New Zealand.
LA7 refers to the seven largest Latin American economies.
LA19 refers to all Latin American countries in the sample.

Source: TableA.2 and 2.4

16 Economic Development of Latin America

The increasing divergence that arose between the time of independence and
1913 is largely a result of the strong growth experienced during that period in the
relatively richer (Group 3) countries of the Southern Cone. Around 1913, this
group of countries had achieved income levels that were quite close to the
average for what we generally call the West, or what is today considered to
be the developed world, while the Afro-American and Indo-American lower-
income economies (Groups 1 and 2) were growing very slowly. By 1913, their
income levels had fallen by approximately 30 percent relative to their richer Latin
American neighbors.

The convergence of the Latin American countries that began around 1913 was a
net effect of different factors. On the one hand, the growth of the economies of the
Southern Cone began to flag, moving them away from the income levels existing
in the West-at first at a moderate pace, but then, from the 1950s on (when the
developed economies were experiencing a golden age), much more rapidly. Signs
of any narrowing of this gap did not begin to reappear until the last decade of the
twentieth century and the first decade of the twenty-first. The historical trends in
Cuba have been even more adverse, since it has experienced an uninterrupted,
long-term divergence with the industrialized world ever since the 1920s, moving
from its ranking as the economy with the fourth-highest per capita income level in
the region in 1913 to one of the lowest-ranking countries in this respect now. This
trend has been in evidence both before and after the Cuban revolution.

Another important factor behind the convergence of the Latin American
economies has been the strong performance of medium-sized and large countries
other than those of the Southern Cone. This group of countries, after having
lagged behind the industrialized world prior to 1913, began to reduce the income
gap until the mid-twentieth century and then maintained relatively stable income
levels vis-a-vis the developed countries during their "golden age." They also
substantially narrowed the gap between them and the richer Latin American
countries from 1913 on and especially during the period of state-led industrializa-
tion. Fairly broad-coverage information for the smaller and poorer countries is
available only from 1950 on. While these countries had average incomes levels
that were far lower than those of the leading Latin American countries, they did
manage to narrow the gap up until the 1970s, which also helped to reduce the
coefficient of variation. The countries in that group that have been more success-
ful over the long term have been Costa Rica and Panama.

After 1990, as noted earlier, the diverging trend seen in 1820-1913 made a
reappearance, but it is still too early to tell whether this is the start of a lasting
trend or whether it is simply the result of short-run circumstances.

CONVERGENCE,DIVERGENCE,ANDINTEGRATIONINTO
THE WORLD ECONOMY

Convergence, divergence, and volatility

There are two major interrelated factors that lie behind these trends of conver-
gence and divergence. Some Latin American countries have experienced periods

Latin America in the World Economy 17

of burgeoning growth ("economic miracles," to use the term that gained popular-
ity when Brazil embarked on its growth surge of the 1970s) and have reduced the
income gap vis-a-vis developed countries, but have not been able to sustain this
convergence. The other factor is the high levels of volatility displayed by all the
countries of the region.

Some Latin American countries have grown very rapidly at some junctures in
their history and have attained fairly high levels of per capita income, but, so far,
as a rule, they have not been able to sustain those growth rates. Rather than closing
the gap with developed countries, these convergence episodes have been cut short.
This indicates that the Latin American countries have experienced "truncated
convergence" (to use the term coined by Ocampo and Parra 2007), and have
therefore alternated between convergence and divergence regimes relative to the
leading countries (Bertola and Porcile 2006). Some of the "economic miracles"
have lasted for quite a long time, as exemplified by Argentina in the three decades
leading up to the First World War, Venezuela between 1920 and 1960, and Brazil
and Mexico during the four decades that preceded the debt crisis of the 1980s.
These growth phases have, however, usually been followed by severe crises which
distance these same countries from the developed world.

The volatility of economic growth in the Latin American countries has been
another typical feature. Experiences at the international level seem to indicate that
when economic growth surges, its volatility increases as well. This may be due to
the nature of international trade cycles, business cycles, population shifts and
international migration, fluctuations in capital flows, and even the transition from
one style and pattern of technological change to another. At the same time, when a
higher level of economic development is reached, the degree of economic volatility
tends to decline, but it does not disappear altogether, as the deep global crisis
experienced since 2007-8 has clearly indicated.

Be this as it may, everything seems to indicate that the volatility of the Latin
American economies exceeds the norm. Table 1.4 shows the level of volatility
present in different groups of countries as measured by their income levels during
the last half-century (since 1960). As we have seen, Latin America is a very
heterogeneous region in this respect, as it includes low-, mid-, and high-income
countries. Nevertheless, as a whole, the region still exhibits greater volatility than

Table 1.4. Growth volatility, 1961-2008

Average growth rate Standard Coefficient of variation
deviation

OECD 3.35 1.66 0.49
High income: non-OECD 5.86 3.21 0.55
Upper middle income 3.81 2.45 0.64
Middle income 4.69 1.83 0.39
Lower middle income 5.86 2.39 0.41
Low income 4.08 1.85 0.45
World income 3.64 1.51 0.42

Latin America and Caribbean 3.91 2.63 0.67

Source: Authors' estimations using GDP growth rates (PPP) data from the World Development Indicators (World
Bank)

18 Economic Development of Latin America

any other group of countries with similar income levels. This higher level of
volatility is not, however, correlated with higher GDP growth rates.

It is difficult to gauge how much of the sluggishness of the Latin American
economies is associated with this factor. It is no easy task to factor in all of the
problems that a high degree of volatility brings with it in terms of social,
corporate, institutional, and political stability and the possibility of planning
medium- and long-term investments. While innovation is closely related to
iterative and cumulative synergies, the gradual accumulation of knowledge and
emergence of innovation are seriously hindered by economic instability. This
situation is compounded by what are, in general, procyclical fiscal and macroeco-
nomic policies, which have tended to exacerbate, rather than dampen, other
shocks that adversely affect production activity (Kaminsky, Reinhart, and Vegh
2004; Ocampo and Vos 2008).

Some authors (Fanelli 2008) have described this feature of Latin American
economic performance as "excess volatility" relative to the levels seen in other
economies that are at a similar level of development.

One significant aspect of Latin America's economic volatility has to do with its
position in the international economy. While, since the Industrial Revolution,
industrialized countries have specialized and positioned themselves in capital-
intensive goods, and the Asian countries have relied on their abundant supply of
labor, and while both of these groups have increasingly focused on the accumula-
tion of technological knowledge, the Latin American countries have relied pri-
marily on their natural resources as a means of positioning themselves in the
global economy. But the supply and demand for thl'!se resources have been subject
to ups and downs, and the prices that they bring have been extremely volatile. In
addition, the fact that these countries' production structures are concentrated in a
relatively small number of commodities makes them more vulnerable to changes
in demand and prices and has made it more difficult for these economies to adapt
to changing circumstances.

The markedly procyclical nature of international capital flows to developing
countries also contributes to this excessive volatility. This was pointed out by
Triffin (1968) in respect of the first wave of globalization and was also identified
during the second (Ocampo 2008b). As a result, when international trade has had
positive growth effects, economic activity has been boosted further by capital
inflows. On the other hand, when the international business cycle enters into a
downturn, the effects of the slump in the demand for commodities and in
commodity prices are amplified by the sudden stop and even the reversal of
capital flows.

Table 1.5 shows the weighted average volatility for all of Latin America (the
figures of individual countries are given in Appendix Table A.3). The data series
are broken down by trend and cycle, and estimates are given for each of these
components. It is interesting to note that volatility has not tended to decline in
either of these respects. The level of volatility has fluctuated and was particularly
high during the interwar period of the twentieth century, but there has been no
downward trend since then. Table 1.6 shows that there is no clear-cut correl-
ation between average income levels and the degree of volatility. Nor is there a
very close correlation between growth rates and volatility; in other words, having

Latin America in the World Economy 19

Table 1.5. Volatility of GDP and terms of trade: Latin America and its "relevant world"

1870-1913 1914-1944 1945-1980 1980-2008 TOTAL

Volatility of GDP-Latin America

Associated with the trend 2.4% 3.1% 1.8% 2.4% 2.9%
5.6% 2.7% 2.6% 3.9%
Associated with the cycle 3.8% 8.7% 4.6% 5.1% 6.8%

Total 6.2% 4.0% 1.9% 0.6% 2.5%
5.0% 2.9% 0.9% 3.2%
Volatility of GDP-relevant world 9.0% 4.8% 1.5% 5.6%

Associated with the trend 0.8% 5.6% 4.6% 3.9% 4.8%
10.8% 8.1% 8.3% 8.9%
Associated with the cycle 1.8% 16.4% 12.6% 12.1% 13.8%

Total 1.7%

Terms of trade volatility 3.3%
Associated with the trend 6.2%
Associated with the cycle 6.1%
Total

Note: The "relevant world" refers to GDP growth of trading partners (see main text).
The volatility of the trend and the cyclical component are calculated as the standard deviation of the growth rate as a
percentage of the trend.

Source: Table A.3

Table 1.6. Determinants of volatility, 1870-2008

Total Share of the Average per Average Terms of trade
volatility first product capita GDP growth rate volatility

Argentina 6.9% 23% 5,129 1.6% 9.1%
Brazil 5.4% 54% 2,170 1.7% 14.1%
Chile 7.4% 40% 4,156 1.9% 12.7%
Colombia 2.9% 49% 2,320 1.7% 16.2%
Costa Rica 5.9% 53% 3,449 2.0% 12.9%
Cuba 11.6% 77% 1,866 1.9%
El Salvador 6.7% 70% 1,994 1.3% 9.6%
Guatemala 7.9% 64% 2,613 1.7% 17.9%
Honduras 5.4% 43% 1,604 0.9% 17.9%
Mexico 4.8% 31% 3,500 1.8% 14.3%
Nicaragua 9.0% 40% 1,797 0.8% 8.6%
Peru 5.6% 29% 2,548 2.2% 19.1%
Uruguay 7.4% 38% 4,240 1.5% 9.3%
Venezuela 8.4% 63% 4,408 2.6% 14.1%
Correlation 0.441 0.013 0.045 16.9%
coefficient 0.062

Note: The correlation coefficient is calculated as the cross-correlation between the variables and total volatility.
Source: Authors' elaboration based on Tables A.3, 1.7, and A.2

a fast or slow growth rate will not make a difference in terms of the level of

volatility.
Another aspect of volatility is the frequency and severity of financial crises,

whether they are external debt crises, balance-of-payments crises (identified by
sharp exchange-rate adjustments), or banking crises-or, commonly, a mix of
them. The upper part of Figure 1.2 depicts the historical variations in the

20 Economic Development of Latin America

frequency of financial crises. In every case, the peaks follow periods of hefty capital
inflows that had their origin, as has been analyzed in a vast amount of the
literature,4 in what are essentially international business cycles: the boom in
external financing that followed upon independence, the boom that preceded
the international crisis of 1873 (which marked the start of a long worldwide
period of deflation), the Great Depression of the 1930s, the Latin American debt
crisis of the 1980s, and the new series of crises in the developing world that began
in East Asia in 1997, with the last two of these crises merging into what can be seen
as a single long, drawn-out crisis. These crises enveloped almost all the Latin
American countries (and, in some cases, all nineteen of them5) in one way or
another. The boom of the 1880s also triggered an international financi\)J crisis: the
1890 Baring crisis, whose international epicenter was Argentina, but whose
impact in the region was more limited, with only Argentina and Uruguay being
severely affected. Only two of the major international financial booms have not
been followed by financial crises in the region: the boom that preceded the
First World War and the one that gave way to the severe worldwide recession
of 2008-9. In both cases, however, the booms were followed by regional recessions
and in the first case by the abandonment of the gold standard, following in the
footsteps of European nations. This was the most important harbinger of the
collapse of that standard during the Great Depression of the 1930s.

The lower portion of Figure 1.2 shows how the composition of these crises
changed over time, focusing on periods when this phenomenon was particularly
intense. As the figure makes clear, debt crises have been the most common
problem in Latin America since independence. Steep devaluations associated
with balance-of-payments crises have been frequent since the First World War,
and this situation was also the main factor behind the crises that occurred between
the mid-1950s and mid-1960s, which were not preceded by a boom in external
financing. Finally, the most recent type of crisis has been in the banking sector,
and these crises have become increasingly frequent since the 1980s. As a result,
since the 1930s, most crises have been "dual" crises (combined debt and balance-
of-payments crises) and, since the 1980s, many of them have been triple crises (the
above two plus banking crises). Actually, in recent decades, we should also add in
a number of other dimensions, such as high inflation (which, in Latin America,
has historically been closely correlated with balance-of-payments crises), balance-
of-payments collapses, and, in fewer cases, domestic debt crises.6

There has also been a notable degree of convergence between external trade
cycles and capital flows. Crises are usually triggered by sudden export collapses
that occur in the midst of critical international conjunctures (1873, 1890, 1913,
1929, 1973, 1979, 1997, 2008) and that also lead to plummeting commodity prices,

4 See, particularly for Latin America, Bacha and Diaz-Alejandro (1982), Marichal (1989), Stallings
(1987) and, for the more specific case of the debt crisis of the 1980s and the years leading up to it,
Devlin (1989). For the global situation, see also the now classic work of Charles Kindleberger (a recent
edition can be found in Kindleberger and Aliber 2005) and the more recent analysis of Reinhart and
Rogoff (2009), which is the source of the data used to construct Figure 1.2.

5 From the 1960s on, the figure does not include Cuba and thus covers eighteen, rather than
nineteen, countries.

6 These are the different dimensions covered in the analysis of financial crises presented by Reinhart
and Rogoff (2009).

Latin America in the World Economy 21

A. Number of countries on a currency, external debt, or banking crisis

18 'J1
r1416
"t12 1'\1\A
lf
10 ~
\I\

Ifl., 1 n \1
8 \N\1\ ' II I

"6 _l AI Mnaul

' v \4 ~II 'V

2

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r\ 1"\ l ~
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u \

~

B. Number of country/years in crisis by period

140

120 - .
100 -
~~-

80 _ . <
~~-

60 - ~~-

40 - ~~- ~~- -- f- -

.... - --·=-------- -20 -, -- ~~- f- 1-
0 1828-
1876- 1914- 1930- 1957- 1981- 1994-

1837 1885 1923 1939 1966 1990 2003

•Currency 3 4 20 41 34 109 41

External Debt 125 103 51 112 16 124 45

•Banking 0 3 6 3 1 47 52

Figure 1.2. Economic crises of Latin America 1820-2008. A. Number of countries on a
currency, external debt, or banking crisis. B. Number of country/years in crisis by period

Notes:

The definitions of crises according to Reinhart and Rogoff are the following:
Currency crisis: annual devaluation greater than (or equal to) 15 percent with respect to US dollar (or the relevant

currency)
External debt crises: outright defaul~ on payment of debt obligations including principal or interest.
Banking crisis: bank run that leads to the closure, merging. or takeover by the public sector of one or n\ore financial

institutions. If there are no runs, the closure, merging, takeover, or large-scale government assistance of an important
financial institution (or group of institutions) that marks the start of a string of similar outcomes for other financial
institutions.

Source: Database for Reinhart and Rogoff (2009) kindly provided by the authors

22 Economic Development of Latin America

which in turn translate into trade deficits. More often than not, these crises
coincide with a contraction in the supply of external financing, which is usually
abundant when exports are on the rise.

Integration into the world economy

One possible hypothesis is that volatility is brought about by external factors:
either fluctuations in external markets or fluctuations in the terms of trade of each
country (and are then amplified by the procyclical behavior of capital flows, which
unfortunately cannot be factored into the following exercise).

Table 1.5 traces the fluctuations occurring in those parts of the world that
have an impact on Latin America (which we will refer to here as the "relevant
world") via its exports7 and its terms of trade, measured as an unweighted
average for all the Latin American countries (these figures are also given in
Appendix Table A.3). The first of these variables reflects the growth in demand,
while the second reflects the impact of international price movements. It is
important to note that Latin America experiences more volatility than its
"relevant world" does (even though the Latin American countries themselves
are part of that "relevant world"). However, the terms of trade appear to be the
factor that transmits greater volatility to the region, although its impact varies
from one country to another.

The figures do not provide any clear indication that fluctuations in the terms of
trade have subsided as time has passed. What Table 1.6 does show, however, is
that there is a fairly close correlation between volatility and export product
concentration. The second column gives the percentage share of total exports
represented by the country's most important export commodity. Table 1.7 pro-
vides a broader range of information, including the shares of the three most
important export commodities between 1870 and 1970-3. This provides irrefut-
able evidence of the extreme concentration in a very few product categories that
has characterized the Latin American economies throughout their history. In the
closing decades of the twentieth century, despite efforts to diversify exports, the
vast majority of the countries of the region continued to rely on commodity
exports and exports of natural-resource-based manufactures (see Chapter 5).

This pattern of specialization has been a subject of debate for many years. In the
long tradition of the structuralist school of thought, the persistence of this pattern of
production has been seen as the main reason for the region's failure to grow more
rapidly. While classical and neo-classical schools of thought have not regarded
sectoral specialization as being a serious problem in terms of development, structur-
alist thinkers have emphasized that the growth of international demand and tech-
nological progress have strong sectoral biases and that, therefore, patterns of
specialization have a decisive impact on a given production sector's ability to boost
productivity. If we look at growth trends over the last three decades, it becomes clear

7 The "relevant world" for each Latin American country has been identified on the basis of annual
variations in the GDP of each of the destination countries for its exports, weighted according to the
share of total exports that it represents from year to year.

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b'...... ~>- :"s' 0
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24 Economic Development of Latin America

12% ~~~~~~ ·--~-----

2%

Oo/o+mmrrmmmmmrrmrrmmmmmrrmrrmmmmmrrmrrmmrrmmrrmrrmmmmmrrmmmmmmmrrmmmmmm

,coco~coCO~coO:J~coe;,~coe;,~e;,<::>e~;,<::>e~;,"-~e;,"~e;,<v~e;,'V~e;,"J~e;,"J~~~e;,b<~e;,<o~e;,<o~e;,ro~e;,ro~~~e;,'\~e;,CO~e;,CO~e;,O:Je~;,O:J~<::><::>~<::><::>co

1 - IAL19 · AL18 (excludes Cuba)

Figure 1.3. Share of Latin America in world exports

Source:
Tena-)unguito and Federico (2011) from 1820 to 1940; OXLAD from 1941 to 1949; and ECLAC from 1950 onwards.

The data for Colombia 1865-1910 is extracted from Ocampo (1984). In the case of Cuba, the information comes
from ECLAC until 1970 and IMP since 1990.

World total according to Maddison (1995) until1992 and FMI for the rest of the period.

that the fastest-growing economies in the developing world have been those that
have diversified their production the most and, in particular, that the larger the share
of industrial production and ofhigh-technology manufacturing exports, the higher a
given economy's economic growth rate has been (Hausmann, Hwang, and Rodrik
2007; Ocampo, Rada, and Taylor 2009).

Latin America's share in world exports is illustrated in Figure 1.3. The first wave
of glo~alization came at a time when world trade was based on an exchange of raw
matenals and food products for manufactures. At that point, Latin America was in
a good position, given its pattern of specialization. Its share of world exports thus
climbed from 6 percent at the start of the 1880s to somewhat over 8 percent in the
years leading up to the Great Depression of the 1930s (or from 5 percent to
7 perc~nt, if we exclude Cuba). The region topped this threshold for a few years
followmg the Second World War, but this was more a result of the devastation
that the Second World War left in its wake than a sign of any further progress by
Latin America.

The collapse of the international division of labor that had characterized the
first wave of globalization was followed, after the Second World War, by the
predominance of intra-industry trade among developed countries and by growing
~rotectionism against agricultural products and textiles coming from the develop-
mg world. In this setting, and given the biases generated by industrialization
policies, Latin America's share of world trade sank to somewhat less than 4 percent
in the early 1970s (excluding Cuba),8 or, in other words, to a level three percentage

. 8 The data for Cuba fo~ the 1970s and 1980s have not been included in the figure because they were
mflated by that country s trade agreements with the Soviet Union and the Council for Mutual
Economic Assistance.

Latin America in the World Economy 25

points lower than it had been during the boom of the 1920s. When the second
wave of globalization began to open up more export opportunities for developing
countries in the 1960s, and when Latin American countries began to shift their
economic policies toward an emphasis on export growth in the closing decades of
the twentieth century, the region was able to regain some of the ground that it had
lost, but it was still far removed from the levels that it had reached during the first
wave, with a share of about 5.5 percent in global trade in recent years, versus the
7 percent mark (excluding Cuba) that it had reached at the end of the first wave of
globalization.

Trends in the terms of trade

One important factor has been the trend in the terms of trade for commodities
relative to the trend in the terms of trade for manufactures (see Figure 1.4). When
these trends are examined at the global level, it can be seen that they have varied a
great deal in different periods (Ocampo and Parra 2010; Erten and Ocampo 2012).
Starting in the late nineteenth century, but especially during the boom that
preceded the First World War, the real prices of agricultural and mineral products
trended upward. The disarray that prevailed in the aftermath of the First World
War and, in particular, the worldwide deflation of 1920-1 and the 1929 depres-
sion turned this trend in commodity prices around, however. This change in the
trend came about in stages (or as the downward phases in long-term cycles),
rather than as a steady decline. The first strong reduction came in the 1920s and
covered all commodities. The second took place in the 1980s and 1990s and was
characterized by a sharp drop in the prices of agricultural goods and a more
moderate one (which is not statistically significant) in mining products. As a
result, between the decade leading up to the First World War and 1998-2003, the
terms of trade for commodities (other than oil) fell by 60 percent, with tropical
agricultural products being the hardest-hit and mineral products being affected
the least. Real oil prices also fell, but that decrease came later than the drop in non-
oil commodity prices (the 1930s and 1940s) and, although they also plunged in the
1980s, they maintained a substantial part of the ground gained during the two oil
shocks of the 1970s. The commodity price boom that began in 2004, which was
driven by demand from China and was stronger in mining and energy products
than in agricultural goods, has prompted many people to think that the world may
be returning to the patterns observed during the first wave of globalization, which
worked to the benefit of commodity producers, but it is still too early to determine
whether or not this is part of a long-term trend.

The deeper long-term downturn in tropical goods prices gives us reason to take
a serious look at one of the versions of the Prebisch-Singer thesis about the terms
of trade.9 This version refers to the existence of stark structural and institutional
differences between the manufacturing sector in industrial countries and the
production of tropical goods sectors in more backward regions. In the latter,

9 For a discussion of the various versions of the Prebisch-Singer thesis, see Ocampo and Parra
(2003).

26 Economic Development of Latin America

A. Agricultural goods
300.0 ,----~------------------------

100.0 -j-----------1
50.0

- - Tropical agriculture Non-tropical agriculture
B. Total and metals
300.0 .----------------

J-- Metals Total J

Figure 1.4. Real commodity prices (1980 = 100). A. Agricultural goods. B. Total and metals

Source: Ocampo and Parra (2010) and Erten and Ocampo (2012)

labor tends to be in ample supply and the history of the labor-market institutions
that exist in those areas has been one of forced labor and very weak unionization.
Markedly oligopsonic markets are also a characteristic of international commod-
ity markets. In contrast, manufacturing goods markets tended to be oligopolistic
and, in industrialized countries, which have generally dominated those markets,
workers have been better organized. This asymmetric market pattern has also
been highlighted by Lewis (1969 and 1983), who has also underscored the fact that
international migration has tended to be segmented into two different types of
flows: European labor migrating to new settlement areas (including South

Latin America in the World Economy 27

America), and Chinese and Indian workers who migrated to tropical zones and
who were expressly barred from new settlement areas after a certain point by
destination countries (as exemplified by, in particular, the "white Australia"
policy). These asymmetries have also been incorporated into other typologies of
Latin American development which have underlined the fact that, unlike the
temperate-zone, new-settlement countries elsewhere in the region, tropical Latin
American areas have had to compete in international markets that are dominated
by countries with low per capita incomes and extremely low wage levels (Bertola
and Williamson 2006).

The trends in the relative prices of non-tropical agricultural goods also fit in
with another version of the Prebisch-Singer thesis, although only after a few
corrections have been made. This version refers to the structural changes that
occur in both production and demand as the development process moves forward.
Demand shifts toward higher-quality products that can meet new needs and that
entail an industrialization process that is followed by an expansion of the share of
services sectors. In these situations, the long-term trend is toward a low income-
elasticity of demand for commodities, which would make it seem difficult to
account for the upswing in relative commodity prices experienced during the
first wave of globalization. As explained by Rowthorn and Wells (1987), however,
the trend in the income elasticity of demand for certain goods is not linear. As
major changes occurred in income levels in Europe and the United States and as a
meat- and wheat-based diet gained currency and was substituted for other, less
nutritional products, the income elasticity of the demand for these goods came to
be much higher than it was for others. The income elasticity for coffee underwent
a similar, temporary upswing during the period when it was ceasing to be a luxury
product and becoming a mass consumer good (Ocampo 1984: ch. VII). Once this
"gastronomic transition" had been made,10 the demand curve began to display a
low income-elasticity,, as apparently occurred in the European countries after the
1920s. This trend was heightened by the agricultural protectionist policies intro-
duced at that time, which are still in evidence today in the developed world.
A similar situation to the one seen in the late nineteenth and early twentieth
centuries is now being witnessed in the Asian economies.

The situation with respect to mineral products, including fossil fuels, is quite
different. Many of these products are not renewable and are subject to strong
supply constraints, although, of course, those restrictions are variable depending
on the available technology and the cost associated with their extraction and
transport from remote areas. These markets are also subject to strong rigidities,
particularly after periods when investment has been low, which have an impact on
prices for what are sometimes quite lengthy periods of time, since the lead time for
investments can be quite long. This production sector is also more likely to be
taken over by monopolies or oligopolies than (tropical or non-tropical) agricul-
ture. In addition, the demand for these products is not inelastic. In fact, it can be

10 The "technophysiological evolution" (Fogel 2009) that has resulted in significant increases in
longevity and changes in body characteristics during the last three centuries, which are unquestionably
related to changes in diet, will be discussed below.

28 Economic Development of Latin America

highly income-elastic during certain stages of development, as has occurred in
China in recent decades.

In discussions concerning the impact of the terms of trade, a recurring issue is
the influence of the double-factorial terms of trade, which take into account
changes in relative levels of productivity. In any event, only a very small part of
the decline in the agricultural sector's terms of trade can be accounted for by the
relative increase in agricultural productivity in the second half of the twentieth
century.

The trade balance

One ofthe interpretations ofthe theory devised by ECLAC about the development
of the Latin American countries, or of countries on the periphery of the world
economy, places emphasis on the trend in these countries' trade deficits, rather
than focusing on the deterioration in their terms of trade (Rodriguez 2006: chs 3
and 5). The main idea is that the fundamental problem of commodity exporters is
that, no matter how much effort they devote to export promotion, the income
elasticity of the demand for imports will inevitably be higher than the income
elasticity of the demand for their exports. This idea has been expressed by
Prebisch, Singer, Seers, and others and has been taken up by Thirlwall, who sees
it as simply being one of the determinants of convergence and divergence in
income levels. 11 Krugman has also drawn attention to this relationship, although
he places more emphasis on the supply side. Nonetheless, whether the emphasis is
placed on demand components (as in post-Keynesian theories) or on supply (as in
neo-classical theories) or on the interaction between supply and demand (as in the
evolutionary and neo-Schumpeterian models that focus on technological change),
the basic idea is that economic development entails structural change and that, if
that change is insufficient, there will be a long-standing tendency to run trade
deficits and that, while subject to expansion and adjustment processes, the
economy's growth rate will be determined by its relative propensities to export
and import.

Table 1.8 depicts these relations for seven Latin American countries in different
stages and for the period 1870-2000 as a whole. 12 The unweighted averages for
this entire period, which are shown in the last row, indicate that estimates of
relative long-term growth fit in very well with a simple model that explains growth
based on the relationship between the income elasticity of demand for exports and ·
imports. In almost all of the countries, this fit is very good over the long term,
although it is less so for specific periods. This is attributable to the high volatility of
the terms of trade and capital flows, which have a positive or negative impact on
the relative growth rate during shorter periods of time. In the aggregate, Latin
America's per capita GDP relative to that of the West dropped from 36 percent in

11 See also Bertola and Porcile (2006) and Cimoli and Porcile (2011).
12 Strictly speaking, this exercise should include relative export and import price indicators or the
real exchange rate, but information on these variables is not available for this length of period; in
addition, these variables may not necessarily reflect changes that have a significant impact over the very
long term.

Latin America in the World Economy 29

Table 1.8. GDP growth explained by the evolution of the income elasticities of demand for
exports and imports, 1870-2008

1T <ftr y z y/z y* yly*

Argentina 4.7 2.0 2.3 2.8% 1.4% 2.0 3.1% 0.9
1870-1913 -2.0 -3.6 0.6 1.1% 0.6% 1.7 0.4% 3.1
1914-1944 0.3 1.8% 2.4% 0.7 0.7% 2.4
1945-1980 1.0 3.4 0.7 1.0% 2.0% 0.5 1.4% 0.7
1980-2008 2.2 3.2 1.0 1.5% 1.6% 0.9 1.7% 0.9
1870-2008 1.9 1.9
Brazil 0.2% 0.9
1870-1913 3.1 23.3 0.1 0.2% 1.7% 0.1 1.4% 1.4
1914-1944 0.4 0.9 0.5 1.9% 3.0% 0.7 3.1% 1.3
1945-1980 16.4 1.8 9.0 4.1% 0.3% 11.9 1.0% 0.8
1980-2008 1.9 4.8 0.4 0.8% 2.5% 0.3 1.6% 1.0
1870-2008 2.4 2.5 0.9 1.6% 1.7% 0.9
Chile 2.2% 0.9
1870-1913 3.3 1.9 1.8 2.0% 1.3% 1.6 2.1% 0.4
1914-1944 -0.6 -1.0 0.6 0.9% 3.5% 0.3 1.0% 1.4
1945-1980 0.7 1.3% 1.4% 1.0 3.9% 0.8
1980-2008 3.4 4.8 2.3 3.0% 1.7% 1.8 1.5% 1.1
1870-2008 3.7 1.6 0.8 1.7% 1.8% 0.9
Colombia 1.7 2.0 0.7% 0.8
1870-1913 2.1% 1.2
1914-1944 0.9 2.1 0.4 0.5% 1.6% 0.3 2.3% 1.0
1945-1980 0.8 1.3 0.7 2.6% 3.2% 0.8 1.8% 0.9
1980-2008 3.5 2.3 1.5 2.3% 1.5% 1.5 1.7% 1.0
1870-2008 2.6 2.5 1.0 1.7% 1.8% 0.9
Mexico 1.8 2.0 0.9 1.7% 1.9% 0.9 4.4% 0.4
1870-1913 -0.1% -10.0
1914-1944 1.9 0.8 2.3 1.8% 1.9% 1.0
1945-1980 -0.2 10.5 -0.0 0.7% 3.4% 0.2 3.4% 0.9
1980-2008 2.4 3.2% 2.1% 1.5 1.0% 0.9
1870-2008 3.9 1.6 1.0% 2.7% 0.3 1.6% 1.0
Uruguay 2.5 6.5 0.4 1.7% 2.4% 0.7
1870-1913 1.9 2.9 0.7 1.3% 0.8
1914-1944 -2.1% -0.5
1945-1980 3.7 3.2 1.2 1.0% 1.1% 0.9
1980-2008 -0.1 0.1 -0.8 1.1% 2.7% 0.4 0.8% 2.2
1870-2008 2.3 1.7% 2.7% 0.6 1.8% 0.9
Venezuela 0.7 1.5 0.3 1.7% 1.9% 0.9 1.1% 1.1
1870-1913 1.4 2.1 0.9 1.2% 2.0% 0.6
1914-1944 1.2 0.5 4.8% 0.5
1945-1980 5.9% 0.9
1980-2008 1.6 0.7 2.3 2.3% 2.1% 1.1 2.9% 1.0
1870-2008 2.0 1.3 1.5 5.1% 4.0% 1.3 0.0% 0.7
5.3 2.6 2.1 3.0% 1.4% 2.2 2.9% 0.9
Average (1870-2008) 1.1 68.8 0.0 0.0% 1.9% 0.0
2.4 1.8 1.3 2.7% 2.2% 1.2 1.7% 1.02

1.89 2.18 0.89 1.7% 1.9% 0.89

.: income elasticity of demand for exports by foreign countries
'" income elasticity of import demand by Latin American countries
y: GDP growth rate
y*: GDP growth rate with balance of payments equilibrium, estimated as y=eip*z
z: growth rate of each country's "relevant world" (trading partners)

Source; Authors' calculations

30 Economic Development of Latin America

1870 to 27 percent in 2008. This type of exercise may account for the overall drop
in Latin America's GDP from 36 percent to 31 percent. The remaining four
percentage points of the decrease can be accounted for by other factors, such as
a deterioration in the terms of trade, over-indebtedness, or even population
growth. 13

When looking at more specific time periods, it proves to be difficult to find time
frames that fit all the countries. It is noteworthy, however, that in all cases the
relationship between the countries' growth and the portion of that growth that can
be accounted for on the basis of trade elasticities (the last column of the table) is
greater during the period of state-led industrialization (1945-80) than it is during
either of the two phases of export-led development (1870-1914 and 1980-2008)
and that this portion is less than 1 during the export development phases. This is
in keeping with the interpretation of the period of state-led industrialization that
will be presented in Chapter 4, which belies the "Black Legend" which the more
orthodox literature has woven around it. The interwar period (1914-44) was
much more varied, but exports did decline in foqr of the countries and showed
less elasticity in all of them except Venezuela. Growth capacity, under this set of
circumstances, depended on the countries' ability to cut imports in order to keep
their balance of payments in equilibrium.

DEVELOPMENT AND THE ENVIRONMENT

Human history can be seen as the story of how populations, economies, and the
environment have interacted and of how knowledge, technology, and social
organization have evolved as people strive to increase their capacity for change
and for generating social well-being by drawing upon the endowments of natural
resources that are available to them. Contemporary theorists have repeatedly
disagreed as to whether the ecosystem places significant restrictions on economic
development or whether humankind's ingeniousness, its capacity for scientific
and technological development, and its social inventiveness will, time and again,
overcome what once seemed to be insurmountable barriers.

As we enter into the second decade of the twenty-first century, the prevailing
view of the relationship between human society and the environment appears to
be a highly critical one. Whereas, until a few decades ago, natural ecosystem
services seemed to have been recycling the by-products of human activity and
maintaining the water, nitrogen, carbon, phosphorus, and other cycles, there have
been growing signs that the expansion of the human ecosystem relative to the
natural one is placing constraints on the development pattern embraced by
human society over the past few centuries. The accumulation of carbon dioxide
and other greenhouse gases in the atmosphere and of nitrogen oxides in the
atmosphere, water, and soil are signs that the ecosystem is becoming unable to
recycle the vast amount of waste being generated by society (Solbrig 2006).

13 It is important to remember that the "relevant world" for Latin America in this exercise is not the
same as it is for the West's per capita GDP as shown in Table 1.1.

Latin America in the World Economy 31

Just as production capacity and the earnings derived from production are
unequally distributed in today's world, so are the different world regions' contri-
butions to this ecological imbalance. The United States, Europe, and Japan
generate a demand for much larger amounts of natural resources (and, in the
case of the last two, of food) than they can provide. Apart from the question of
how much of an impact access to raw materials and foodstuffs from the New
World had on today's developed countries, Latin America has certainly geared its
development pattern toward supplying these goods and has therefore given rise to
quite the opposite pattern. The other side of the coin, however, is that, as a result,
it has not attained the standards of living that it could have achieved given its

natural resource endowments.
In the course of this protracted process of change in the world's natural and

social ecosystems, Latin America has been discovered and rediscovered time and
again. When Europeans discovered America, this apparent natural paradise had
long before been settled by age-old civilizations that had transformed it, wiped out
species of animals, built up agrarian systems, and constructed cities. The changes
wrought by the colonial powers transformed the region's fauna and flora as they
introduced new farming techniques, cleared land for crops, and started up mining
operations. However, these changes were largely confined to coastal areas and, in
the case of mining activities, a few other enclaves. The most influential changes
were in people's lives, with the decimation of the indigenous population, mainly as
a result of the introduction of new diseases, being the most significant of all.

As new sets of circumstances arose in the aftermath of the Industrial Revolution
and as the demand for raw materials grew, the fallacy that Latin America was,
even during the nineteenth century, still a "virgin" continent with untapped
resources persisted. As noted by Orihuela (2010), the Eurocentric historiography
of the nineteenth century, even while it sometimes viewed the indigenous popu-
lations of the Americas sympathetically (although, more often than not, adopting
a racist perspective), portrayed them as savages living in a natural state within a
natural setting. They were thus also seen as a potential obstacle to the appropri-
ation of natural resources and habitats by these civilizations.

During the stage when commodity exports were driving development, the
environment was altered even more markedly by the expansion of export crops,
widespread deforestation, the construction of entire cities, the development of the
railroad and the building of roads, the expansion and diversification of mining
operations and incursions into new and, until then, undeveloped areas that were
less attractive areas for human settlement but were rich in natural resources such

as nitrates, rubber, and guano.
During the period of state-led industrialization and the modernization efforts

that went along with it, the main changes that were coming about were associated
with urbanization, industrialization, the expansion of the electricity grid to power
it, road construction, and the rapid expansion of the agricultural frontier. It was
also during this period that the energy transition (i.e., a shift to an increased and
more widespread use of fossil fuels) that the more developed countries had made
during the preceding period spread to the majority of the countries of the region.

On the whole, the strong increase (although at unequal rates in the different
countries) in the consumption of fossil fuels during the first half of the twentieth
century picked up even more speed in the second half. This long-term upswing

32 Economic Development of Latin America

did, however, undergo marked fluctuations as a result of the behavior of supply
and demand. The impact that these factors had on the different countries was
largely determined by international conditions but also depended on whether they
were energy producers or importers. For energy-importing countries, the world
wars cut deeply into their energy supplies. In both groups, the Great Depression of
the 1930s drove down the levels of economic activity and household consumption,
causing the demand for energy to subside as well.

One peculiar feature of the energy transition in Latin America was that the
substitution of oil for coal happened very early on (both in terms of timing and in
relation to the levels of GDP that had been reached). This process displayed
major fluctuations, however, both in comparison to how it had occurred in
industrialized countries and in terms of the speed with which it took place in
the different countries of the region (Folchi and Rubio 2006).

Mining activity has climbed steeply in recent decades. The region's continuous
urbanization has begun to be reflected in ever-greater degrees of urban sprawl and
environmental pollution. Meanwhile, the unrelenting expansion of commercial
agriculture has led to an increasing use of fertilizers and a significant reduction in
forested areas, owing in part to what is not always well-regulated logging. In fact, the
region's cities cover no more than 3 percent of its territory, and it is the changes that
have taken place in agriculture, forestry, and the like that have had the biggest
environmental impact. It is estimated that no more than somewhere between 55
percent and 70 percent of the region's original forests are still here today. Deforest-
ation has been rapid and, even though Brazil is the country in which the largest
areas have been deforested, the actual rate of deforestation has been highest in
Central America and the Caribbean. Nevertheless, and even from a strictly agrarian
standpoint, the strength of environmental impacts in Latin America is below the
world average and deforestation rates have been declining (Solbrig 2006).

Be this as it may, as long as existing patterns of development around the world
and Latin America's particular type of production-sector specialization remain as
they are, the Latin American region's natural resources will come under increasing
pressure even as the region's potential for extensive growth nears its limits.
However, the entire ecosystem is showing signs of distress, and this will necessar-
ily prompt determined scientific, economic, and social efforts to alter these
development patterns. This, in turn, will lead to what will no doubt be largely
unpredictable changes in the demand for natural resources and in the ways that
those resources are tapped, used in production processes, and conserved. This will
be a valuable opportunity for overhauling Latin America's development patterns
and production structures and for exploring new development paths that will
enable the region to combine the use of its natural resource base with the
incorporation of knowledge into all aspects of its economic activity.

FROM ECONOMIC DEVELOPMENT TO HUMAN
DEVELOPMENT

Economists have been becoming increasingly dissatisfied with the use of per
capita GDP as a measurement of development and living standards. Per capita

Latin America in the World Economy 33

GDP may be an acceptable measurement of the resources that people can access in
order to secure certain living conditions, but it is not a good yardstick for
measuring peoples' capabilities to achieve those living standards (Sen 1993).

This is why there has been increasing reliance on the Human Development
Index in recent decades. The most widely publicized, and simplest, version of this
index, regularly published over the past two decades by the United Nations
Development Programme (UNDP), is composed of equally weighted measure-
ments of per capita GDP, life expectancy at birth, and level of education (illiteracy

and educational coverage).
In the following paragraphs, we will examine a few different options for

constructing a historical human development index. 14 The estimate that we will
use here, which is based on the work of Bertola, Hernandez, and Siniscalchi
(2011), provides updates of earlier estimates of per capita GDP and life expectancy
at birth, but the most important innovation is that we include a series of average
years of schooling for the population in the different countries of Latin America
(Morrisson and Murtin 2008). This allows us to overcome the difficulties involved
in combining illiteracy rates with educational coverage15 (in fact, for this reason,
in 2010 the UNDP started using this measure of educational achievement in its
estimations of the Human Development Index). The country indices are pre-

sented in Table A.4.

Education and human capital

A distinction should be drawn between the concept of education as a dimension of
human development, on the one hand, and the concept of human capital as a
factor of production and a determinant of an economy's level of competitiveness,
on the other. In the first case, a more highly educated population is an end in and
of itself, since education increases an individual's capabilities, in the broad sense of
the term, and enhances a person's participation in social life. In the second case,
however, we are talking about a means to an end, and a different one at that.

The situation in Latin America with respect to education is a contradictory one.
On the one hand, determined efforts have been made to bring about substantive
improvements in the population's level of education. On the other, when viewed
from a comparative vantage point, those efforts seem to have come too little and
too late, and Latin America has been at a clear disadvantage relative to other
regions.

Around 2000, Latin America's population had completed an average of 7.1
years of schooling, whereas the populations of the four countries that have
dominated the world scene over the last two centuries (France, Germany, the
United Kingdom, and the United States) had completed an average of 12.5. This

14 The first attempt to build a historical human development index for Latin America was made by
Astorga and FitzGerald. This work was published as an appendix in Thorp (1998a) and later was
revised by Astorga, Berges, and FitzGerald (2005). Later, Prados de Ia Escosura (2007) presented a
different version of this index, and Bertola, Camou, Maubrigades, and Melgar (2010) then introduced
further changes for the Southern Cone countries and estimated distributional inequality in two cases.

15 See Bertola, Hernandez, and Siniscalchi (2011).

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Latin America in the World Economy 35

means that the region's level of education as of the year 2000 was 59 percent of
what those developed countries' level was (see Table 1.9). This shows just how far
behind Latin America is in absolute terms. If, however, we look at the region's
performance during the twentieth century, it becomes clear that it has made a
great deal of progress. In fact, perhaps the most impressive figure is the one that
measures the level of education at the start of the twentieth century, when the
region's population had completed, on average, just 1.5 years of schooling, which
was only one fourth as much as the population of the developed countries.

The construction of indices to measure relative performance levels has been the
subject of a great deal of debate. As will be discussed in greater detail later on, it
has been argued that the function that best represents progress in terms of life
expectancy is a convex one, since it becomes increasingly difficult to achieve one
additional year in the population's life expectancy as that variable increases and
approaches physiological limits. A similar argument can be advanced in regard to
education (i.e., that it should be a convex function, with each additional average
year of education representing a greater achievement at the margin) especially
since, among other factors, once they have reached adulthood, people need to
work and to earn a living so that others can study rather than work. If this is the
case, then, the relative performance of Latin America vis-a-vis developed countries
is even worse. As shown in Table 1.9, the region's level of educational achievement
would then be equivalent to only 40 percent of that of developed countries.

Even the best-performing Latin American countries in terms of education had
very low average levels of schooling at the start of the century: 1.8 years for
Argentina and 2.4 for Uruguay in 1900, while the average for the developed
countries was 6.4. Other newly settled regions, such as Australia and
New Zealand, had levels similar to those of the other developed countries men-
tioned earlier. The available data indicate that this educational lag relative to
developed countries arose during the closing decades of the nineteenth century,
but it is likely that it was taking shape throughout that entire century.

Data for the broader sample of the sixteen Latin American countries for which
information is available show that the point in time at which Latin America
narrowed the gap with the developed countries the most was during the middle
decades of the twentieth century (see also Astorga, Berges, and FitzGerald 2005;
Prados de la Escosura 2007). This effort continued, however, during the last two
decades of the twentieth century and the first of the twenty-first.

These levels are obviously an average of differing levels from one country to
another, and they tell us nothing about differences in quality or the distributional
inequality of educational opportunities within individual countries. Inequalities
across countries increased up to 1940 and then began to decline. Meanwhile,
Frankema (2009) has shown how the universalization of education may not be
coupled with any substantial improvement in its quality; in fact, there may even be
a trade-off between coverage and quality. The data that he compiled do, in fact,
indicate that Latin America's performance would be seen to be less satisfactory
if measurements of quality (such as the rate of school failure) were to be included
in the analysis. The large lag that he identified in this respect in the early 1960s
has, however, tended to narrow since then. Nevertheless, reading, mathematics,
and science tests administered recently under the OECD's Programme for
International Student Assessment (PISA) point to similar trends, as the Latin

36 Economic Development of Latin America

American countries' scores are far below those of developed countries (Hanushek
and Woessmann 2009).

Part of the explanation for this lies in the clear relationship between education
and development. In fact, educational levels can be regarded as a dependent
variable of the level of development, as educational levels change as an economy
advances. The direction of causality would therefore be from economic growth to
a rise in the level of education. Viewed from this perspective, the levels of
education existing in Latin America would appear to be in line with its per capita
income levels.

This is inarguably part of the explanation. It is very rare to find a country with a
relatively low per capita GDP and a very high level of education. Cuba is a
conspicuous exception to this rule which also clearly illustrates the difference
between the role of education in developing human capabilities and in promoting
an increase in human capital. The fact that the provision of services to meet
educational and other social needs is dependent on the level of development
attained by a given country is the backdrop for a well-known paradox: those
countries in which the need for education, health care, and other social benefits is
the greatest are those that have the least available resources to draw upon in order
to meet those needs, while the richer countries can devote a larger share of their
income to building welfare states. This also backs up the idea that, far from what
many theorists contend, increased public social spending does not erode growth
but rather boosts it (Lindert 2004).

Figure 1.5 shows that, while this is true, it is also true that Latin America stands
out from the rest of the world in the sense that, for any given level of per capita
income, its level of education is lower than that of other regions. In other words,
Latin America has performed less well in terms of education but, at the same time,

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1,000 2,000 3,000 4,000 5,000 6,000

Latin America • West --Log. (Latin America) --Log. (West)

Figure 1.5. Latin America and the West 1870-1930: Per capita GDP in 1990 PPP US$
(x-axis) and average years of education of population 15 and above (y-axis)

Based on Bertola, Hernandez, and Siniscalchi (2011)


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