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017_The_Economic_DEVELOPMENT_(book4you.org)_165

017_The_Economic_DEVELOPMENT_(book4you.org)_165

Commodity-export-led Growth, c.1870-1929 87

As was shown in Table 1.7, in 1870 the leading export commodity of each of the
Latin American countries accounted, on average, for approximately 50 percent of
total exports. By 1913, following a surge in exports, this figure had dropped to 42
percent, but it climbed back to 54 percent by 1929. The same pattern can be seen if
we look at the three major export commodities, which represented 66 percent of
the total in 1870 and 73 percent in 1929, with the low point being recorded around
1913 (52 percent). These figures clearly illustrate how important commodities
were as an export base for the region, whose competitiveness was heavily depend-
ent on access to a limited number of natural resources. As noted earlier, this has
been a primary, structural trait of most of the Latin American economies and

continues to be so up to the present day.
This situation is what prompted Carlos Diaz-Alejandro to coin the term

"commodity lottery," which has been taken up since then by many other authors.
This concept has a great deal to offer, but it also entails some pitfalls. Its strength is
that it alludes to the fact that export capacity involves an element ofluck, based on
the way that a given natural resource endowment intersects with movements in
international demand for a given type of good at a given point in time. The idea of
the part played by luck in export performance speaks to the fact that what a
country does makes very little difference: its ultimate performance is determined
by its natural resource endowments and outside forces over which it has no
control. From this standpoint, a country may experience a boom that may then,
because of shifts in demand or in international competition or because of the
appearance of substitute products, turn into a bust. Guano in Peru, nitrates in
Chile, rubber in Brazil and Peru, and cinchona bark (quinine) in Colombia are
only some of the examples of products that led to booms that gave way to busts.
This concept must be viewed with caution, however, because it can give the
impression that export capacity and the assignment of roles as winners and losers
are a game of roulette, whereas, in reality, there are a broad range of economic and
social factors that, while not ruling out some degree of luck, give rise to logical
cause-and-effect relationships that can be used to arrive at an understanding of
historical patterns of change. For example, the production of rubber and cinchona
bark declined when these activities were edged out by plantations in the East and
then by synthetic substitutes. The countries of the region simply failed to make the

necessary transition.
An influential school of thought puts the emphasis on the relationship between

production structures and the economic development process and on the fact that
different product categories can be associated with different levels of development.
The richer countries produce "rich-country" goods, while the poorer countries
produce "poor-country" products. W. Arthur Lewis drew upon these ideas in his
Aspects of Tropical Trade (1969) and in Growth and Fluctuations, 1870-1913
(1978), where he explored the paths taken by the different regions on the periph-
ery of the world economy in an effort to respond to the challenges of the global
economy's expansion. Along much the same lines, Bertola and Williamson (2006)
analyzed the workings of Latin American export sectors during the first wave of
globalization. As shown in Table 3.4, it is possible to identify the type of country
that will export the kinds of goods in which the Latin American countries
specialize. There is a dear dividing line between temperate-zone and tropical-
zone agriculture products. In fact, in the case of temperate-zone goods, in which

88 Economic Development of Latin America

Table 3.4. Structure of world production and exports of commodities, 1913

Latin America Competitors Total High income Low income

G3 G1 and G2 High income Low income + G3 + G1 and G2

Temperate-zone agriculture (based on exports)

Simple average 26 0 61 12 100 87 12
87 12
Wool 20 0 67 12 100 81 18
76 24
Meat 30 0 51 18 100 96 4
91 10
Linen 42 0 34 24 100 6
92
Corn 43 0 53 4 100 74
76
Wheat 15 0 76 10 100 59
87
Wheat flour 6 0 86 6 98
35
Tropical agriculture (based on exports) 7
90
Simple average 0 53 20 21 94 20
34 86 10 41
Cocoa 0 42 10 25 98 39 63
5 99 12
Rubber 0 34 39 7
0
Coffee 0 82 12

Minerals (based on production)

Simple average 53 20 48 26 100 65
84
Copper 9 10 7 100 93
59
Tin 20 37 70 100 10
93
Silver 38 3 3 100 59

Gold 17 46 100 37

Lead 5 2 100 93

Nitrates 97 100 100

Notes: Some of the estimations are based on world exports of commodities.
Gl, G2, and G3: Groups of Latin American countries according to Table 1.2.
High-income competitors are Europe, United States, Canada, and Australasia. The low-income competitors are Asia
and Africa.

Source: Authors' calculations based on Bertola and Williamson (2006) using information from Bulmer-Thomas
(2003/1994: table 6.3)

the exports of Group 3 countries were concentrated, high-income countries
(including those of Group 3) had an 87 percent market share, while in the
case of tropical-climate goods, low-income countries (including those in Groups
1 and 2) had a 74 percent market share.

The mining sector is a more ambiguous case. Production in this sector tends to
be, as is well known, highly concentrated in a few areas, mainly because the
number of veins or reserves that can be tapped is limited. The distribution of
these resources between richer or poorer countries is more or less random. These
cases are also more conducive to the emergence of situations in which individual
countries become the virtual monopolist in world markets, as in the case of
nitrates in Chile following its victory in the War of the Pacific.

This comparison of temperate-zone and tropical products sets the stage for an
examination of the decisive influence that these product categories have on the
formation of the corresponding labor markets at the international level. We will
return to this subject later on, when we look at the formation of labor markets in
the different regions more closely. What we can say, for now, is that, while
countries that produced tropical goods competed with other poor countries at
the international level in markets involving very little value added, the producers

Commodity-export-led Growth, c.1870-1929 89

of temperate-zone goods represented an expansion of the European production
frontier and were competing with workers in those regions, who typically earned
much higher wages. When the international prices for temperate-zone products
were set, the marginal producer was the relatively well-paid European rural
worker. These prices yielded a profit level that, in contrast to what Ricardo argued,
did not benefit those that were closer to the consumer market but rather those that
were far away from it and that had been able to become competitive because of the
sharp decrease in transport costs. The expansion of the temperate-zone agricul-
tural frontier in the region was thus able to attract European labor to relatively
high-wage jobs. This has not been the case with the production of tropical goods,
which competed with Asia and Africa, where there was an abundant supply of
labor and living standards were low.

There are, as always, exceptions and cases in which the situation is not so clear.
Coffee production is one of them. The expansion of the coffee industry in the late
nineteenth century into the areas around Sao Paulo, Brazil, was bolstered by the
immigration of European (especially Italian) settlers. These migrants did not
come from high-income regions and their working conditions were, in many
cases, extremely poor, but they were drawn nonetheless by the high prices fetched
by coffee in the late nineteenth century and the virtual monopoly held by Brazil
until well into the twentieth century.

In sum, the higher per capita exports of the countries in Group 3 were
underpinned by two types of factors: the fact that a larger share of the population
was working in internationally competitive industries, and the fact that the
exports that were being produced incorporated a higher value added, a fact that
was determined by the markets that they were competing with.

In addition, as will be discussed in greater detail later on, the mining operations
in countries where this type of activity predominated generally absorbed, in direct
terms at least, a smaller proportion of the labor force than was the case in
countries whose main exports were agricultural goods.

As shown in Table 3.5, the composition of Latin American exports also under-
went a major change. The market share shrank markedly for some of the more
traditional agricultural goods, a number of which were produced almost entirely
by the countries in Group 2 (sugar and rubber), but also some of those in Group 3
(furs and hides). Traditional mining products (precious metals, nitrates, and
guano) shrank as well. The only traditional agricultural product to hold its ground
was coffee, while the market shares of mining products that were in high demand

Table 3.5. Structure of Latin American exports, 1859/61-1927/9

1859/1961 1899/1901 1911/1913 1927/1929

Cereals, wool, and meat 3.9 22.2 24.4 27.7
Coffee 18.2 18.5 18.6 18.0
Sugar, tobacco, hides, and rubber 41.2 28.5 24.5 16.9
Copper, tin, and oil 0.2 1.2 4.7 14.2
Guano, nitrates, and precious metals 18.8 14.2 13.0 6.6
Not classified 17.7 15.4 14.8 16.6
100.0 100.0 100.0 100.0

Source: Bairoch and Etemad (1985: table 5.1)

90 Economic Development of Latin America

Table 3.6. Latin American trade with United States 1913-27 (percentages)

1913 1918 1927

1. South America 16.2 25.9 26.8
a. US shares in total imports 37.8 59.9 60.2
b. US share in total imports from US and UK 16.8 34.8 25.2
c. US shares in total exports
2. Mexico, Central America, and the Caribbean 53.2 75.0 62.9
a. US shares in total imports 82.0 95.0 91.2
b. US share in total imports from US and UK 71.3 73.4 58.4
c. US shares in total exports

Sources: la, lc, 2a, and 2c: Thorp (1986: table l).lb and 2b: data underlying Badla-Mir6 and Carreras-Marin (2012),
kindly provided by the authors.

(copper and tin) and oil burgeoned, as did those of the agricultural products
typically produced by Group 3 (wool, wheat, and beef).

The reliance on European vs US markets became a decisive factor in the
region's export performance from 1914 on. The strength of demand in the US
market was, in fact, one of the reasons why Latin America was able to sidestep the
slowdown that was experienced in Europe following the First World War. The
influence of demand in the US market was much stronger in Central America, the
Caribbean, and Mexico than it was in South America, as shown in Table 3.6. And
if the figures for the countries in South America are broken down, it becomes clear
that the northern countries (Colombia and Venezuela) also relied more heavily on
the US market earlier on. This became even more apparent during the war,
especially in the South American countries. The reliance on this market was at
times a mixed blessing, as in the dramatic case of the United States' deep-seated
protectionism targeting the Cuban sugar industry. This destination-based profile
of export trade goes a long way toward explaining the differences between the
various regions' export growth patterns between 1910-14 and 1925-9.

As stated earlier, the growth of international trade during the second half of the
nineteenth century and up until, at least, the First World War, was largely a result
of sweeping technological changes (including the construction of the Suez and
Panama canals) that resulted in a steep reduction in inter-oceanic and overland
shipping costs.

The index devised by North to track freight costs fell by 41 percent in real terms
between 1870 and 1910, while the British index showed a 70 percent drop during
that same period. This contrasts with the reduction in import tariffs from 40
percent to 7 percent for manufactures being shipped to the OECD countries
between the late 1940s and the late 1970s (Bertola and Williamson 2006).

This shortening of communications and economic distances between different
parts of the world led to significant changes in relative prices and the terms of
trade. The trends seen in the terms of trade during this period raise a number of
interesting issues, First of all, there is a marked increase in volatility (see Figure 1.5
in Chapter 1), as the relatively long real commodity price cycles tended to evolve
into shorter cycles toward the end of this period. The aggregate series for the terms
of trade for eight countries indicates that they rose in the 1870s and then
fluctuated until the 1910s without any clear trend.

Commodity-export-led Growth, c.1870-1929 91

After peaking toward the end of the First World War or during the post-war

boom, the terms oftrade began to slide and fell even more in the 1930s. As noted
by Ocampo and Parra (2003 and 20~0), the t~rning _point in com~odity price
trends came with the worldwide deflatton expenenced m 1920-1. In th1s sense, the

1920s were marked by a short-lived upward cycle of real commodity prices and
terms of trade for the region, which never regained the heights seen prior to the

1920-1 crisis before crashing once again during the Great Depression of the

1930s.
The growing instability and low levels of real commodity prices from the 1920s

on-or even earlier, in some cases, such as the collapse of coffee prices in the late
nineteenth century-was an incentive to regulate these markets. Brazil moved in
this direction on a unilateral basis in the first decade of the twentieth century, and
this practice was extended to include a larger and larger group of commodities
between the start of the First World War and the 1930s as a means of adminis-
tering production surpluses and low price levels. In fact, even during the war,
some of the world powers continued to regulate selected markets. We will return

to this subject in the following chapter.
As is also true of the other relevant variables, the trends in the terms of trade

differed considerably from one country to another. The figures shown in Table 3.3
are given at constant prices, but price variations had a strong impact on purchas-
ing power. The countries in Groups 1 and 2 experienced a sharp irnprovem~nt in
their terms of trade up to the 1880s, in the first case, and up to the 1890s, m the
second. The prices of their exports then dropped below their initial levels,
although they then improved somewhat in the 1910s. Here again, the countries
in Group 3 fared better and far outperformed the other two groups, as is
illustrated in Figure 3.1. The upturn of the 1870s was not as noticeable for this
group. But, in contrast to what occurred in the other two groups, Group 3 saw a
radical improvement in the early years of the twentieth century that continued up
until the outbreak of the First World War. These differing trends were a reflection
of the uneven prices movements for the different categories of commodities and,
in the latter case, of the delayed upswing in the real prices of temperate-zone
agricultural goods relative to tropical products and metals (see Figure 1.5). From
the 1920s on, prices-except for the prices of the products of Group 1-plunged.

The results in terms of the increase in purchasing power of export earnings (i.e.,
the combined effect of the increase in the volume of exports and of the terms of
trade) are shown in Table 3.7. Using 1870-4 as base years, it can be seen that by
1910-14, Group 3 had five times as much purchasing power as the other two
groups did, thanks to the strong improvement in its terms of tr~de. ~his ~dv~ntage
was reduced somewhat by faster population growth but was still qmt\'! stgmficant.
Between 1910-14 and 1925-9, a number of major changes occurred. During this
period, Group 1 was far ahead of the others because it did not experience the
deterioration in its terms of trade that the other two groups did. In addition, its
rate of population growth was slower than that of the others. The end result of
these trends was that Group 1 turned in a much more impressive performance,

followed-at some distance-by Group 3. .

Coastal areas benefited greatly from the reduction in maritime shipping costs.

In the case of overland transport, the advantages afforded by the development of

the railroads varied a great deal depending on what geographical obstacles had to

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,t •

Table 3.7. Terms of trade and purchasing power of exports (1870-4 = 100)

Export volwne Terms of trade Purchasing power Per capita purchasing power
1870-74 1910-14 1925-29 1870-74 1910-14 1925-29
1870-74 1910-14 1925-29 1870-74 1910-14 1925-29

Group 1 100 809 2,967 100 127 125 100 1,023 3,695 100 471 1,130
Colombia 100
Mexico 100 460 981 100 70 75 100 321 735 100 198 401
Peru 100
Subtotal 211 1,227 100 77 72 100 163 885 100 99 427

421 1,202 100 84 88 100 354 1,060 100 206 501

Group 2 100 146 447 100 108 103 100 158 462 100 65 138
Brazil 100 100 779 1,166 100 427 415
Cuba 100 928 1,847 100 84 63 100 302 638 100 129 194
Subtotal
320 760 100 94 84

Group 3

Argentina 100 1,141 1,639 100 129 115 100 1,476 1,883 100 346 292
100 428 730
Chile 100 416 712 100 181 222 100 754 1,578 100 170 152
100 358 371
Uruguay 100 287 437 100 203 171 100 582 746
100 266 352
Subtotal 100 688 1,043 100 156 152 100 1,074 1,589

Total 100 494 953 100 ll5 106 100 568 1,006

Source: Table3.3 for exports; Williamson (201!) for terms of trade.

94 Economic Development of Latin America

major stride forward for some mountainous regions, as in Mexico, and were taken
advantage of by mining operations as well.

Any oversimplified interpretation that attempts to cast geographic determinism
as a decisive variable will lose a great deal of its explanatory value, however. It
suffices to look at the backwardness of the Caribbean coast of Colombia, the
history of north-eastern Brazil, the underdevelopment of many Caribbean islands,
and even the development path of Mexico to conclude that measuring the
distances from markets will not help us to find the keys to success. An informative
example ofjust the opposite sort is provided by the countries of Australasia, which
were the farthest away from major world markets and developed into some of the
richest countries on the planet.

Table 3.8 illustrates the speed at which railroads expanded in Latin America
and at the global level. In the preceding chapter, it was noted that railroads were
later in coming to Latin America than to Europe and the United States. Their
expansion then picked up speed, however, with Latin America going from having
5.5 percent of the world's railroad track in 1870 to 22.5 percent in 1913. Latin
America now has five times as much track as the world average, which indicates
that it has a huge advantage over the poorer and more densely populated world
regions.

The first railways were laid in Cuba and then in Mexico, followed by the
railroad in Panama which linked the two coasts in the mid-nineteenth century.
In the 1870s, the railroads grew at a headlong pace in the larger countries, such as
Argentina, Brazil, and Mexico. But they also had an enormous impact in smaller
countries. After 1913, the railroads grew much more slowly except in a handful of
countries (Colombia, Ecuador, and some Central American nations).

It should come as no surprise that the amount of railroad track that was laid,
relative to the size of the population, was much greater in the countries of Group
3, which had three times as many miles of track in 1913 as the other two groups of
countries did.

The following example may help to show how much of an impact the expansion
of the railways had. In Uruguay, a small country without any major natural
obstacles, the advantages that the railroad brought in 1870-1913 are clear to
see: transoceanic freight costs fell by 0.7 percent per year, while the cost of train
tickets dropped by 3.1 percent per year in real terms (Bertola 2000: 102, table 4.1).

GDP and per capita GDP

As in the case of population growth and exports, the different countries' perform-
ance in terms of GDP and per capita GDP also varied a great deal, in line with the
trends experienced during the preceding period. Unfortunately, relatively reliable
information is available only for nine countries; fortunately, however, these nine
are fairly representative of the populations of the different groups and came to
account for an increasing percentage of the region's total population as the years
passed. For this period as a whole, on average, they were home to 87 percent of
that total.

As shown in Table 3.9, between 1870 and 1929 the annual rate of GDP growth
was 3.3 percent. The rate was highly variable, however, peaking at nearly 5 percent

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96 Economic Development of Latin America

per annum in the decades leading up to the First World War and the Great
Depression of the 1930s (see Figure 4.5 in the next chapter) and, more specifically,
in 1902-12 and 1922-9. It also slumped sharply during the decade following the
Baring crisis of 1890 (which, as we will see later on, hit Argentina very hard) and
slipped back during the First World War as well. As in the preceding period,
Group 3 outdistanced Groups 1 and 2-and by a considerable margin, in this case,
owing primarily to the spectacular growth of the Argentine economy. In fact, the
distance separating Group 3 from the other two was so great that, even though its
population was growing faster, its per capita GDP rose much more. As a result,
whereas, around 1870, Group 3's per capita GDP was twice as high as that of the
other two groups, by 1913 it was 2.5 times as high as Group 1's and was four times
greater than that of Group 2 (most of whose members were the former slave-based
economies).

However, unlike the situation in the preceding period, given the fact that
Group 2's population was growing faster than Group 1's was, the latter saw a
significantly higher increase in per capita GDP than Group 2. Two of the main
factors behind this trend were the satisfactory rate of growth achieved by Mexico
under Porfirio Diaz (which marked a sharp contrast with its disappointing
performance in the third quarter of the nineteenth century) and the mediocre
showing of the Brazilian economy.

In the years surrounding the crisis of 1913 and the First World War, changes
occurred that slowed the growth of GDP and per capita GDP. Groups 1 and 3,
which had the faster growth rates for per capita GDP for the period as a whole,
were the ones whose growth rates faltered in 1913-29. In the case of Group 1, it
was actually Mexico that pulled down the average as a consequence of the
disruption caused by the Mexican Revolution, while Colombia experienced a
boom on the back of the vigorous upturn in its coffee production. By contrast,
the countries of Group 2, which had borne the impact of the decadence of the
slave-based economy in 1870-1913, seemed to have found a workable growth
path-although it took them until the early twentieth century to do so. The
patterns did differ a great deal, however. The expansion of Venezuela's economy
came with the start of its oil boom, while Brazil's first bout of rapid growth was
underpinned by its domestic market (see below). The exception to the rule in
Group 2 was Cuba, which, after experiencing a boom immediately following its
independence in 1902, entered into a period of increasingly volatile growth.

As shown in Table 3.9, whereas the degree of inequality between the Latin
American countries (measured by the coefficient of variation in per capita GDP)
increased in 1870-1913, this trend was reversed in 1913-29. And much the same
situation-although even more markedly-was reflected in other indicators of
modernization, particularly per capita energy consumption (Rubio et al. 2010)
and investment in machinery and equipment (Tafunell2009b). In this respect, the
countries of Group 3 and Cuba were at a distinct advantage up until the early
twentieth century, although later on this advantage began to erode as a result of
the dynamic (but, in any event, still unequal) development of other countries.

A point should be made here about the extent to which the countries for which
we have information can be viewed as representing the region as a whole. Earlier,
we said that they accounted for approximately 87 percent of the population. The
extent to which these countries are representative is not the same for all three

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98 Economic Development of Latin America

groups, however. The degree of representation is 100 percent for Group 3 and 95
percent for Group 2, but, in the case of Group 1, for which we have less infor-
mation, Colombia, Peru, and Mexico represent, on average, only 75 percent of the
total group. Nonetheless, even though Colombia and Mexico have very different
histories and the conflicts that took such heavy tolls on their populations had
different types of impacts during the two periods in question, when we look at
these three countries' population growth rates, we see that they are very similar to
the rates for Group 1 as a whole (see Table 3.1). Thus, if we take the population as
an indicator, then these three countries, taken together, can be said to be repre-
sentative of the entire group. We have also seen, however, that the trends in export
performance are somewhat different. Nonetheless, the exports of this group did
expand between 1913 and 1929, which is in keeping with the development path
discussed here. We will return to this point in the following section when we take
a look at the domestic market.

In short: Latin America grew at a brisk rate between 1870 and 1913, but at the
same time the differences between the various groups of countries widened as
Group 3 outpaced the other two. The economies that had been based on slave
labor, which were quite sluggish in the late nineteenth century, made a recovery in
the early twentieth century (when they were, obviously, no longer based on the use
of slaves), as did countries such as Colombia in Group 1. In 1913-29, then, there
was a slowdown for equally diverse reasons. The countries that had begun to grow
early on saw their growth rates slide, as did Mexico. The net result was a reduction
in regional disparity.

The domestic market

Most of the periods of economic expansion in Latin America up to the 1920s were
driven by exports, which grew more rapidly than GDP and had a decisive influ-
ence on the growth cycle. But the fact that exports played an influential role does
not mean that export sectors absorbed a majority of the workforce or even
represented a large proportion of GDP.

In most of these exporting countries, in fact, large numbers of workers
remained subject to traditional rural structures. To quote Braude! (1986: 11-12):
"The preindustrial economy is thus the result of the coexistence of the rigidities,
inertias and clumsiness of a still elementary economy with the live and strong
features of modern economic growth [ ... ]. Thus we have two universes, two ways
of life foreign to each other yet whose wholes explain one another." The first of
these was the universe of exchange and local affairs; the second was that of trade
on a greater scale that led to capital formation. These economies were driven
by exports in the sense that exports were at the center of the pattern of market
activity on a broad scale and underpinned capital formation, but not in the
sense of encompassing a large portion of the population, which, in many Latin
American countries, particularly the most heavily populated ones, remained
within the arena of the local "elementary economy" for much longer. In many
cases, the shrinkage of the networks that had developed during colonial times
around the supply lines for mining operations or slave-based economies actually
had the effect of reinforcing these local economies.

Commodity-export-led Growth, c.1870-1929 99

Using the information on the nine countries for which we have GDP data for
this period, we can try to gauge how the economic growth figures break down
into their export and domestic-market components, as we did in the preceding

chapter.
Table 3.10 shows the results. The first conclusion to be drawn is that export

growth did indeed lead to a lasting increase in the export coefficient up to 1925-9.
It is significant, however, that, on average, over 80 percent of Latin America's
output was directed to the domestic market even in the final stages of the export
boom. This is an extremely important fact to bear in mind, since, because of the
scarcity of information on this period in history, there has been a tendency to
assimilate the whole of the Latin American economy to its export sector, on which

· there are generally more complete records.
The differences between the three groups are again evident, and reflect various

patterns observed in the preceding period. Group 1 exhibits a much lower
coefficient of economic openness than the other two groups. Cuba, Chile, and
Uruguay have the highest coefficients, which makes sense, given the relatively

small size of these economies.
In both Group 1 and Group 3, the growth of per capita GDP associated with the

domestic market slowed after 1910-14. Group 2 was the one that departed from
this trend, despite the downturn in Cuba. It is likely that the improvement in the
living standards of former slaves may have played a part in the expansion of the

domestic market.
We have noted that, overall, the region's export coefficients were on the rise

until 1925-9. This was not true of either Group 2 or Group 3, however, as, after
1910-14, export growth slowed to rates below those registered for the domestic
market, with the result that the export coefficient fell. This was not the case in
Group 1, in which this trend was driven primarily by Colombia, as Mexico's
domestic market underwent a sharp contraction in the aftermath of the

revolution.
Table 3.11 shows the results of an analysis of this information based on the

same methodology used to prepare Table 1.8 in Chapter 1. The idea is to look at
the relationship between the growth rates for a given economy and for the
countries with which it trades on the basis of the nexus between the income
elasticity of export and import demands. The intuition is that, no matter how
much exports may grow, if imports expand more quickly, the resulting deterior-

ation in the trade balance may constrain growth.
At this point, we need to divide the period 1870-1929 into two subperiods:

1870-1913 and 1913-29. The estimated and real growth rates for 1870-1929 are
quite similar, which means that growth rates can be estimated on the basis of the
propensity to export and import and the growth of external demand. The fit is also
good for 1870-1913. And it is highly instructive to see how two of the three
variables at stake changed in 1913-29, which was a harbinger of the deep crisis
that was about to erupt. In most ofthe countries (including all of those in Group 3),
a sharp reduction was evident in the income elasticity of demand for their exports
in world markets, as well as in the income elasticity of the countries' own demand
for imports. The decrease in the first of these elasticities of export demand is
especially critical, since it suggests that world demand was becoming a less and
less powerful driver for Latin America's development. Only Venezuela (thanks to

Table 3.10. Growth of GDP and dynamics of exports and the domestic market, 1820-70

GDP growth Real export growth Growth of the domestic Per capita growth of the Exports/GOP (%)
market domestic market

1870- 1913- 1870- 1870- 1913- 1870- 1870- 1913- 1870- 1870- 1913- 1870- 1870- 1910- 1925-
1913 1929 1929 1913 1929 1929 1913 1929 1929 1913 1929 1929 1874 (a) 1914 (a) 1929

Group 1 2.9 2.5 2.8 3.7 6.0 4.6 2.9 2.5 2.8 1.6 1.2 1.5 5.0% 8.0% 13.1%
2.7% 8.9% 13.5%
Colombia 2.3 6.1 3.3 5.4 9.1 6.4 2.1 5.8 3.1 0.3 3.2 1.1 5.7% 6.9% 13.0%
4.2% 4.7% 12.5%
Mexico 3.4 0.8 2.7 3.9 5.2 4.2 3.3 0.5 2.6 2.2 -0.3 1.5

Peru 1.6 5.4 2.6 1.9 12.4 4.7 1.6 4.9 2.5 0.4 3.5 1.2

Group 2 2.4 4.2 2.9 2.9 2.6 4.0 2.4 4.3 2.9 0.5 2.3 1.0 12.0% 26.8% 21.2%

Brazil 2.3 4.2 2.8 0.9 7.8 2.8 1.8 2.7 2.1 -0.2 0.7 0.0 15.3% 9.1% 15.0%

Cuba 3.1 1.2 2.6 5.7 4.7 5.4 3.1 0.0 2.3 1.7 -2.8 0.5 9.4% 26.0% 43.5%

Venezuela 2.6 7.5 3.9 2.2 13.7 5.2 2.6 7.5 3.9 1.3 6.7 2.8 15.1% 12.8% 29.8%

Group 3 4.8 3.2 4.4 4.9 2.8 4.4 4.7 2.5 4.1 2.1 0.2 1.6 24.0% 25.2% 23.8%

Argentina 5.8 3.5 5.2 6.3 2.4 5.2 6.8 3.7 6.0 3.4 1.1 2.7 20.4% 23.9% 20,4%

Chile 3.3 2.2 3.0 3.6 3.6 3.6 3.3 2.2 3.0 2.0 0.9 1.7 31.0% 34.8% 43.0%

Uruguay 3.9 3.2 3.7 2.7 2.9 2.7 3.8 3.0 3.6 0.9 0.8 0.9 61.2% 37.8% 35.7%

Total 3.3 3.7 3.4 4.0 4.9 4.2 3.3 3.2 3.3 1.6 15 1.6 12.6% 16.4% 19.4%

Note; GDP is measured as the value added of exports and production for the domestic markel The growth rates are calculated using constant 1990 dollars.
Sources and methodology:

Tables 3.3 and 3.9 for GDP and exports
The calculations of the export/GOP coefficient 1925-9 at domestic prices are based on export data from Tena-)ungulto and Federico (20ll) converted lnto local currencies uslng exchange rates
according to OXLAD.
The data for GDP ln local currency comes from OXLAD for Argentina, Brazil, Peru, and Venezuela; Rodriguez Weber (2009) for Chile; ECLAC ln constant dollars for Colombia converted to
current prices uslng the US CPI; INEGI for Mexico; Bertino and Tajam for Uruguay (1999: table 15). The export coefficients for 1870-4 and 1910-14 are then estimated on the basis ofthe evolution of
exports and GDP at constant prices. So, they may be understood as export coefficients at 1925-9 relative prices.

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102 Economic Development of Latin America

the start-up of its oil exports) and Colombia (thanks to the coffee boom and, later
on, the oil boom) were exempt from this general trend in 1913-29.

THE SOCIAL, POLITICAL, AND INSTITUTIONAL
ENVIRONMENT

Strengthening the state

There is a broad consensus that, during this period, although international and
civil conflicts continued to be in evidence (as did poor governance in numerous
cases, along with many other traits of the young Latin American republics), an
increasing degree of political stability was taking hold in many of the region's
countries which, more often than not, was coupled with the assumption of power
by authoritarian governments.

This growing political stability can be related to an observation made by Glade
(1986): during the decades following independence, a gradual, progressive, cumu-
lative and, at times, barely noticeable process was taking hold that opened the way
for social and economic relations of a type that were more in keeping with the rise
of capitalism. Although this incremental, evolutionary process of change did not
bring about a radical organizational overhaul of the economy, it did lay the
groundwork for the adoption of new institutional arrangements, such as those
that were introduced in 1870-1914.

The consolidation of the centralized power of the region's nation states was, for
the most part, grounded in the establishment of oligarchic governments. This
strengthened a coalition whose power was drawn from the intersecting interests of
landholders, mining owners (where they were relevant), local traders and money-
lenders (some of them transformed into bankers), and foreign capitalists, on the
one hand, and of the political agents, political parties, and caudillos that remained
in power, on the other. The latter group had a great deal of discretionary authority
but ultimately defended the interests of those influential stakeholders. These
economically powerful sectors were extremely successful in co-opting the groups
that held political power (when they were not one and the same group) while at
the same time forgoing formal mechanisms for the control of governments and
even for the control of the power held by other segments of the elites, in order to
ensure that the power base vis-a-vis the subordinated sectors of the working class
remained intact. According to Halperin (2008/1969), during this stage the trad-
itional landowners, which had risen to ascendency during the decades following
independence, began to lose ground to the new commercial and financial elites
that had close ties to foreign capital and that ultimately entered into what has been
called the new "colonial covenant."

Brazil's experience is a case apart, as it is in many other ways. Its path to
independence was quite different, in that it led to the establishment of an
enlightened monarchy that then rather smoothly transitioned into a republic in
1889; much the same thing occurred with the abolition of slavery. The situation
does not lend itself to simplistic interpretations, however, since, as we have seen,

Commodity-export-led Growth, c.1870-1929 103

political stability in Brazil was not a strong enough force to enable this country to
embark on a sustained process of economic growth. As we have seen, Brazil
appears to have found its way on to a more promising growth path in the early
twentieth century, whereas during the nineteenth century, it witnessed differing
and contradictory development processes in the various regions of the country
whose net result was quite disappointing in terms of both growth and income
levels. Toward the end of the nineteenth century, however, the rapid expansion of
the coffee-producing sector into the state of Sao Paulo, which was later to become
the nucleus of a powerful industrialization drive, took hold. In the meantime, the
north-eastern part of the country, which had been the hub for the expansion of the
sugar industry when it served as the center of the colonial economy, and the Rio
de Janeiro region, both of which had enjoyed their heyday when slave labor was
the basis for economic activity, slipped into an unmistakable downturn-though
somewhat later in the case of Rio.

As noted at the end of the preceding chapter, Chile was more or less of a stand-
out in Spanish America. In relative terms at least, it boasted a sturdy base of
institutional stability and a fairly strong state and bureaucracy which, under the
guiding hand of Balmaceda and his interventionist and nationalist vision, were
wedded with powerful economic interests. Faced with the crisis of the 1870s,
which, early on, placed constraints on Chile's rather opportunistic forays into
international markets in the form of wheat exports to California and Australia
when these regions' gold rushes were at their height, this fairly powerful state, in
regional terms, did not hang back but instead threw itself into a war of expansion
to defend the interests of companies in which its cabinet ministers held a financial
interest. The War of the Pacific ended in the annexation oflarge tracts of resource-
rich (in nitrates) land.

Another paradigmatic case for this period is that of Mexico. As we saw in the
preceding chapter, while Mexico may very well have witnessed a fairly successful
economic development process in the first few decades following independence,
this process first fell prey to very serious international conflicts and then to major
domestic disputes that opened the way for a period of extreme instability and very
poor economic results. The situation changed radically, however, during the
protracted period (1876-1910) in which Porfirio Diaz governed the country
with an iron fist.

Other dictators who remained in power for extended periods of time included
Antonio Guzman Blanco (1870-87) and Juan Vicente Gomez (1908-35) in
Venezuela and Justo Rufino Barrios (1871-85) and Manuel Estrada Cabrera
(1898-1920) in Guatemala. In the River Plate countries, General Roca played a
decisive role in the expansion of the agricultural frontier by using his power to put
an end to the remaining conflicts surrounding the takeover of land from the
indigenous inhabitants. In Uruguay, this period of military rule (during which
power was held by three members of the armed forces in succession) succeeded in
bringing the entire territory under government control while increasing the
economy's level of technical sophistication and boosting its efficiency as part of
the move to "impose discipline" in rural areas.

Even in countries that did not have these types of strong, authoritarian govern-
ments, the general atmosphere was one of greater respect for property rights. In

104 Economic Development of Latin America

other words, to use a term that gained currency in the late twentieth century, the
"business climate" had improved.

The reinforcement of central state structures during this period, and the greater
guarantees that this afforded for capital formation, is acknowledged even by Dye,
who has generally argued for a structural interpretation of Latin America's insti-
tutional instability up to the present day. He maintains that the half of the Latin
American countries that achieved some measure of institutional stability
following their independence did so during this period of export-led growth,
only to see that stability vanish when this economic model collapsed in the
1930s (Dye 2006: 183).

This general trend should not, however, cause us to lose sight of the marked
political instability that existed in a number of countries. The Thousand Days War
(1899-1902) in Colombia-the worst of the civil wars of the nineteenth century in
that country~is one example; and it was not until Colombia succeeded in
establishing some degree of stability after that war that it was able to embark on
a period of dynamic economic growth. The most conspicuous example, however,
is unquestionably the Mexican Revolution, which, in economic terms, brought the
period of rapid growth seen under Porfirio Dfaz to a screeching halt and led to a
phase of sluggish growth that continued until the political organization engen-
dered by the revolution achieved stability and laid the groundwork for renewed
economic growth. 1

The matter of what caused what remains an open question. Was it the insti-
tutional advances that eventually triggered the wave of growth? Or, on the
contrary, were the opportunities that Were opened up by the ·expansion of
international demand for commodities and declining transport costs the factors
that ultimately calmed the political waters? For the time being, let us simply say
that the two factors were closely related and that, although there may be other
situations in which this was not the case, the general tendency would seem to be
that growth and institutional stability go hand in hand.

Land markets

Land, whether used for farming or for mining, continued to figure as the main
factor of production underlying Latin America's entry into the world economy.

The expansion of Latin American production and exports, as described earlier,
was based on a rapid expansion of the land area that was brought into the
commercial circuit. This increase in land area was brought about in three main
ways: (a) the purchase or appropriation of public lands by private individuals; (b)
the more efficient use ofland held by the owners of traditional farms and ranches;
and (c) the expropriation ofland owned by religious and other organizations, and
the dissolution of the Indian reservations, where this was done (Glade 1986).

1 Moreno-Brid and Ros (2009) make what is perhaps the best attempt to trace the links between the
major phases of Mexican history and the existing institutional arrangements and, in their view, the
implicit social covenants concerning the economic development process that marked the two major
waves of growth in Mexico's economy after independence.

Commodity-export-led Growth, c.1870-1929 105

The main areas in which the frontier was extended were in northern Mexico
and the southern portions of South America. In addition, however, in all the
central regions of Mexico, Central America, and the Andean areas of South
America, the frontier was also pushed back toward tropical zones and the plains
where the land had not been farmed before. Glade draws a distinction between
two different ways in which this was done. One involved the production of new
export crops in frontier areas (e.g., coffee in Brazil, wool in Patagonia, saltpeter in
northern Chile). The other consisted of shifting traditional crops into marginal
zones so that the more central areas could be used for export crops.

The institutional approaches used to bring this about varied a great deal and
were, in some cases, blatantly fraudulent. In the mining sector, concessions were
the main means. Land was also leased to railroad companies so that they could lay
new tracks. Another common procedure was to grant land to companies as a way
of promoting the settlement of migrants in new areas; in some cases this worked
very well, but in many others it paved the way for large-scale land grabs and led to
the appropriation of vast tracts of land by a few landowners, as happened in
southern Chile. Public land was also sold to private individuals at very low prices.
In a few cases, new small parcels were created (e.g., in the coffee-growing areas of
Colombia and Costa Rica), but most of the time they were large estates? Finally, in
a large part of the territory, people simply moved onto the land and then claimed
it, with those who already had fortunes and power being the most successful in
using this strategy. In many of these cases, the land that was claimed, bought, or
granted already had people living on it and these people remained on the land, as
if they were part of it, giving rise to a complex mosaic of labor and social
relationships between them and the new owners.

This transformation of farms and ranches appears to have been the result of
new commercial opportunities at both the regional and international levels,
combined, in most cases, with improved access to shipping or overland routes
that were being opened up primarily by the railroads. As was true of the expansion
of the frontier, the expansion of the haciendas into inland areas sometimes
entailed the use of what had previously been idle resources, but it could also
involve a reorganization of production activities that were already being carried
out by the inhabitants of these haciendas. In such cases, this often sparked
conflicts as the campesinos were pushed onto marginal lands and commercial
activities were set up in the more central areas. These activities often involved
typical export products, goods for local markets, or mining. Most of these types of
shifts occurred in areas that had been among the first to be settled in colonial
times. The outcome was an increasing development of land markets and a
contradictory mix of the concentration and division oflandholdings. This process
paved the way for landholders to gain entry into other elite groups made up of
persons who had amassed their wealth through trade or mining and even of high-
ranking members of the military and political chieftains, as well as foreign

investors.

2 In Colombia, small and medium-sized plots ofland were granted in what were to become coffee-
growing areas only after the people on those lands, which had previously been granted to large
landowners, put up a fight.

106 Economic Development of Latin America

The joint holdings of churches and other organizations came under an increas-
ing threat as liberal reforms took hold. This threat began to be felt in Mexico in the
1850s, Colombia in the 1860s, and Venezuela and Ecuador later on. Actually, the
holdings of the Catholic Church had first come under pressure a century earlier,
when the Jesuits were expelled in the 1760s. Now, however, these holdings were
acquired through purchase, leasing, or direct expropriation. Eliminating the large
landholders' arrears in tithes owed to the Church was also a common practice.
Bauer (1986: 178) states that in Chile, the state took in US$3.5 million between
1865 and 1900 in the form of redemptions on the equivalent of US$17 million in
arrears of tithes owed to the Church. In Mexico, much the same thlng happened,
with the state receiving 15 percent of the debts owed to foundations for the
celebration of masses and charitable works.

And then: " ... in the mid-nineteenth century, offensives targeting Indian lands
were mounted almost everywhere (combined with, in some places, assaults on
Church-held properties) ... " (Halperin 2008 [1969]: 213). This eloquent phrase
illustrates another important facet of the processes taking place during almost
the whole of the period covered in this chapter, as well as in the decades leading
up to it.

Although some of the lands taken from the Church and other organizations
ended up as small- and medium-sized holdings in the hands of campesinos, more
often than not they were appropriated by large landholders and capitalist firms. In
many cases, the recipients were local people who did not belong to the elite as
such-members of the provincial aristocracy, traders in the smaller cities, "rich
Indians" from the local community or elsewhere. These lands were sometimes
used for the production of export crops, but sometimes not. As the region became
more a part of the world economy, however, the role played in this process by the
elites increased, and more and more of this land began to be used to produce
goods for the international market.

In short, and as noted by Glade (Glade 1986: 30): "The spread of capitalist
relations of production through Latin America did not eliminate all pre-capitalist
corporate and communal holdings, peasant cultivators and customary usufructu-
ary claims on latifundian land, but the position of all such cultural survivals
was given a largely different meaning in the new social and economic matrix
of the day."

It is difficult to arrive at an estimate of trends in land prices for Latin America.
Although, as discussed earlier, the tendency was toward the formation of land
markets, the operational mechanisms for these markets were made up of a
seemingly endless jumble of political modalities, coercive provisions, and local
customs and traditions. The latter had governed the operation of local land
markets, in which transactions were based on personal relationships of trust
within the framework of tight-knit communities many of whose members had
kinship ties. Hence the difficulty of estimating land prices, since such large tracts
of land were either handed over under concession contracts or taken outright. In
addition, it is particularly difficult to determine how representative prices were
during the times when the agricultural frontier was rapidly expanding, since that
very expansion gave rise to a sharp price differentiation between marginal lands
and the land in central zones, whose prices soared during this period.

Commodity-export-led Growth, c.1870-1929 107

Table 3.12. Land prices in Argentina and Uruguay, 1870-1929 (indices 1913 = 100)

Argentina Uruguay Argentina (pesos/ha) (c) Uruguay (pesos/ha) (d)
(a) (b)
Coefficient of Average Coefficient of
Average variation variation

1871-1875 8.2

1876-1880 9.0

1881-1885 5.5 11.4

1886-1890 12.8 21.8 1.14 0.61

1891-1895 15.2 22.4 1.06 0.68

1896-1900 20.6 22.8 1.05 0.47

1901-1905 24.2 30.2 1.76 0.34

1906-1910 57.2 52.8 43.3 0.61 2.16 0.23

1911-1913 100.0 88.4 77.5 0.55 2.78 0.24

1914-1919 167.2 73.8 88.7 0.54 2.98 0.12

1920-1924 265.8 99.4 125.9 0.59 4.10 0.10

1925-1929 297.4 104.8

Sources:
a. Williamson (1998)

b. Bertola, Camou, and Porcile (1998) Buenos Aires, Santa Fe, _c6rdoba, Ent~e . a~d La Pampa. ,.
c. Argentina: average land prices in Rios Repubhca

Argentina, Ministerio de Agricultura (1926): Anuarw de Estadlstrca Agropecuarra 1925-6. ch. N .

d. Uruguay: average land prices in canelones, San Jose, Paysandu, Tacuaremb6, Cerro Largo, Lavalleja, Durazno,

and Florida extracted from Balbis (2005: table 12)

Despite all these problems, however, it does appear to be the case that land
prices rose very sharply, particularly in areas with good farmland an~/or that were
close to railways or to inland or maritime shipping routes. As shown m Table 3.12,
in the Plate River countries, land prices soared more than tenfold between 1~70
and 1913. In addition, starting in the 1880s in Uruguay and the early twentl~th
century in Argentina, land prices across the different areas of these ~ountnes
tended to converge, which suggests that these land markets were becommg much
more integrated, partly as a result of the expansion of the. transport network. The
price differences across the various regions of. Arge~tma were, as was to be
expected, greater than those seen in Urugua~, s1~ce, m te~ms of land area and
population, all of Uruguay equates to one reg1on m Argentma.

Labor markets

The process which Cardoso and Perez Brignoli have called a transition to perip~­
eral capitalism reached a critical point in terms of the changes that occurred m
labor relations. These changes were to have an impact on the wide range of types
of labor institutions that involved coerced subordination, including slavery but
also many other types of ways in which workers were tied to the land or mines and
in which their mobility was limited. At the same time, however, attempts were
being made to "free up" the workforce represented by c~mpesi~o and indigen~us
communities whose members held on tenaciously to thetr subststence economtes.

108 Economic Development of Latin America

Wage labor and a mobile workforce, more generally, were very scarce, as was
noted by many writers from the time.3 This was not because labor was scarce as
such, but simply because, on the whole, its mobility was restricted by the social
relations prevailing at that time. This attests to the restrictions placed on labor
mobility by pre-capitalist economic structures and points up the fact that the most
important "institution" of modern capitalism, the wage-labor market, took root
only gradually in Latin America. It was not until the twentieth century and after
these changes had taken place, along with rapid population growth and uneven
job creation rates, that Latin America came to have what W. Arthur Lewis (1954)
called an "unlimited supply oflabor." But this was something that was a long time
in coming.

Different regions of Latin America were to follow very different paths, and the
paths they chose were obviously determined in part by the nature of pre-existing
social relations and the ways in which the opportunities that opened up during
this period presented themselves.

Because of restrictions on labor mobility, access to the world's most developed
wage-labor market of the time-the European labor market-was a decisive factor
in enabling countries to seize the opportunities offered by the world economy.
This pattern was observed in the newly settled economies of the Southern Cone, as
has been seen earlier in this chapter. This set the stage for rapid economic growth
based on large-scale immigration, a wage-labor market, and a better standard of
living than in the rest of the region. Immigration was also a good vehicle for the
international transfer of technology in the form of the wealth of tacit knowledge
that the immigrants brought with them. This knowledge also related to forms of
social organization and different ways of perceiving conflict, and immigration
therefore also contributed to the early emergence of conflicts associated with
modern labor movements. The mobility of this labor force reached its maximum
expression in the golondrina ("swallows" or "birds of passage") workers, who
crossed the Atlantic every year to work in the agricultural sector.

The use of other internationally mobile workers was more limited. The aboli-
tion of slavery in the Caribbean provided a supply of labor for the banana
plantations of Central America, the sugar plantations in Cuba, and the construc-
tion of the Panama Canal, while Chinese indentured laborers (the so-called
"coolies") worked in Cuba and Peru. In some parts of Latin America, however,
the abolition of slavery turned out to have very different effects because the freed
slaves sought an independent life in frontier zones where they would not be
obliged to work as subordinates. This sort of "permanent strike" did very little,
for a time, to contribute to the formation of a modern labor market.

Those areas where working conditions and wage levels were not attractive
to European immigrants had to rely entirely on their internal development
process to create a mobile labor force. This mobilization of the workforce
depended on many different elements, including how strong traditional insti-
tutions were, what types of export products predominated, how they tied in with

3 For an analysis of the views on this subject of contemporary scholars, see Bulmer-Thomas (2003/
1994: ch. 4). This author does not, however, place as much as emphasis as we would like on the link
between the "scarcity" discussed by writers of the time and restrictions placed on workers' mobility by
the traditional social relations that remained in place.

Commodity-export-led Growth, c.1870-1929 109

resource endowments, and the dynamics of their linkages with local production
activities, with population growth, and with the ways in which the economy was

changing and growing.
Small-scale rural landowners were another possible source oflabor. As we will

see in the following section, small holdings predominated in a number of regions,
and their production activity played an important role in the development of
export sectors in certain countries (coffee in Colombia and Costa Rica, tobacco in
Cuba) and in providing food supplies for the cities and export centers. Given the
predominance oflarge landholdings, however, this source of supply was limited in

scope.
In a number of countries, excess campesino labor began to accumulate and,

more generally, demographic pressures in rural zones were building up even
before the time when the development process began to be led by commodity
exports. And all of this was heightened by the effect of the liberal reforms
introduced in the nineteenth century. These "free" laborers worked for daily
wages on a temporary or permanent basis or, more often, as sharecroppers or
under other arrangements that combined labor obligations with the right to use
the land for subsistence farming. For the most part, there were differing economic
and non-economic restrictions on labor mobility, such as those associated with
debt bondage, the "company store" trap, and other similar coercive modalities,
including the expedient of turning to local authorities for help in imposing these
various types of economic subordination. In areas where a mobile workforce was
not developed, manpower was, in many cases, mobilized by force, as it had been
during the colonial period, with the main difference being that now it was
combined with monetary incentives. This was the general rule in areas where
there was still a large indigenous population. In addition, mechanisms of forced
labor were still used here and there on the haciendas and in public works,

especially in Peru, Bolivia, and Guatemala.
Thus, the formation of the labor market was a mosaic of widely differing

processes, most of which moved forward at a quite slow pace, thus giving rise to
the aforementioned scarcity of mobile labor. According to Glade (1986: 33) only
three generalizations can be made: with its abolition in the two hold-outs, Brazil and
Cuba, slavery finally disappeared from the region; as demonstrated by the hetero-
geneity of the region's labor markets, there was nothing even close to a modern
labor market that would have interconnected different areas and production pro-
cesses; and urban labor markets operated much more freely than rural ones did.

Yet, although various forms of labor (some coerced) remained in place, the
long-term trend was toward wage labor, and the growing demand for labor tended
to drive up real wage levels to some extent.

Information is not available on many of the countries, but the little information
that we do have indicates that real wages rose substantially in some areas and that
there were sharp differences between wage levels from one area to the next, as
shown in Table 3.13. Real wages improved in all the countries, at least until the
1910s, except in Mexico, where they appear to have remained at about the same
level until the revolution, after which they plunged. In Colombia, the rise in wages
did not come about until economic activity began to boom somewhat later on.

The differences across regions, as well as the low living standards prevalent in
some of them, are also evident in Table 3.13 and, in particular, Figure 3.2, which

llO Economic Development of Latin America

Table 3.13. Purchasing power wages in Latin America (United Kingdom 1905 = 100)

1870-74 Colombia Mexico Brazil Cuba Argentina Chile Uruguay
1875-79
1880-84 23 67 20 76 so 42 91
1885-89 16 58 25 75 51 76
1890-94 19 56 28 84 44 74
1895-99 24 56 32 84 57 64 86
1900-04 25 58 27 95 68 105
1905-09 62 28 75 45 85
1910-14 29 61 36 80 56 78
1915-19 25 30 39 91 53 85
1920-24 37 29 39 81 55 89
1925-29 35 37 29 83 63
45 26 63 94
31 91 109
113

Sources:
Bertola, Camou, and Porcile (1999) for Argentina, Brazil, and Uruguay
Authors' estimations based on MahiS (2009) for Chile
Williamson (2002) for the rest of the countries

compares wage levels for different groups of countries. Williamson (1998) has
propounded the theory that, during the first wave of globalization, goods and
factor prices converged. Figure 3.2 appears to refute this hypothesis, however, as it
points to the continued existence of sharp differences in wage levels across
regions. These differences can be associated with the different types of labor
markets, the regulations and restrictions on labor mobility (including the segmen-
tation of international migration, as European immigrants headed toward the
recently settled countries and immigrants from China and India going to the
tropics), and especially the differing levels of productivity in these economies and
how their forms ofsocial organization and market power determined the extent to
which productivity gains and rents from the development of natural resources
could be appropriated (Allen 1994; Bertola 2000: ch. 4; Greasley, Madsen, and
Oxley 2000).

The gaps were not only significant vis-a-vis the United States but also between
the Latin American countries of Group 3, such as Argentina and Uruguay, on the
one hand, and the rest ofthe Latin American countries, on the other. Nor were they
confined to wage levels; they were also replicated in other social indicators, as can
be seen in Table 3.14. Life expectancy at birth, literacy rates, average years of
schooling, numeracy rates, and even the figures for newspaper circulation and
readership all reflect the same patterns of wealth, productivity, per capita exports,
and wage levels. In fact, all of these figures simply reaffirm the validity of the
overall picture that we have been piecing together here. Simply put: the average
levels of human capital and development in the countries of Latin America were
very low in international terms, with the exception of the countries in Group 3, but
even those countries lagged far behind nations such as Australia, New Zealand, or
Canada.

These population traits were, in turn, a reflection of these economies' competi-
tiveness. When trends in the world economy changed and Latin America's efforts
to position itself in that economy as a natural-resource exporter reached a critical

Commodity-export-led Growth, c.1870-1929 ll1

300~----------------~----------------~-.~--------

250

150~------------------~----------------

0 0> 0> '<t 0> '<t 0>
0>
"'" "'"0>~ c0o> ~~
~ rr 6 6 ~ 9 J; J,J, J, o;1co'-0>
NN
1.0 co ccoo c0o> c0o> 0 1.0 ~ 0> 0>
co 0> 0
c1o'- 0> 0> Spain-Italy

. · + · · Colombia-Mexico ~ Brazil -II Argentina-Uruguay
--1- Germany-France-United Kingdom --+-- United States

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

Note: Europe 3: Germany, France, and England
Source: Table 3.13 and Williamson (1998)

junction, the Latin American countries were forced to try out o.ther. developme~t
strategies. As they did so, however, they were hel~ back (~o d1ffenng extent.s m
different areas) by a large shortfall in human cap1tal, wh1ch acted as ~ sen~us

constraint on their development potential. As we will soon see, the way m which

economic resources were distributed had a strong impact on the overall averages.

The different faces of rural life

The varying ways in which the processes involved in shapi~g the stru~ture of land
ownership and labor relations all came together gave nse to a WJde array of
different types of rural lifestyles and transitions to agrarian capitalism.

As outlined by Bauer (1986), the central zones of the Spanish colonial world,
with their large indigenous populations, can be divided into three main ~~tegories:
one in which the haciendas and campesino communities were the prevailmg force;
one in which small and medium-scale producers predominated; and a third in
which large landowners held sway. This last category encom.passes, in its tu~n, a
wide range of situations, from ones in which large landholdmgs were com~med
with a dependent and largely compliant campesino workforce that was not. highly

':asorganized, to others in which the workforce ess~ntially ~ree. All these different

forms of rural organization were also intertwmed with the different paths taken by

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E-<

Commodity-export-led Growth, c.1870-1929 113

the transition of the labor force, as discussed in the preceding section. In a)l three
of these categories, however, all of the different groups and forces mentioned
above were present in differing proportions and forms .

The most typical situation-and the one which has given rise to the most
generalizations and stylized images of rural Spanish America-was the one in
which close ties existed between the haciendas founded during colonial times and
rural indigenous communities. In geographic terms, we are talking about central
Mexico, the highlands of Guatemala, and most of the Andean region. Our image
of these haciendas has been changing with time, transitioning from the idea of a
feudal, autarchic society to one of production units that were more integrated into
the local and even international market, although they nevertheless sought to
attain a high degree of self-reliance in terms of their supply of goods and labor

(including skilled labor).
The more commercial characteristics of the haciendas were probably developed

and certainly strengthened during this period, but they were still a far cry from
being a modern business venture that drew its workforce from a free labor market.
On the contrary, the campesinos who formed this workforce continued to cling to
the land, including the particular plot that they were given to farm within the
hacienda. Meanwhile, the indigenous communities in these areas were no longer
like what they had been in pre-Columbian times but were instead hybrid organ-
izations that had been profoundly changed by their contact with the Spanish
conquerors and by the republican society later on: their members spoke Spanish
and were Christian, they functioned on the basis of the system of compradrazgo
("ritual kinship") and used Spanish forms of government (Bauer 1986: 158-9).
Eric Wolf defined the resulting type of community as being "supported in its
autonomy by a grant ofland, charged with the autonomous enforcement of social
control, constituted a small, closely defended island securing the social and
cultural homogeneity of its members within, struggling to maintain its integrity
in the face of attacks from without" (Wolf, quoted by Bauer 1986: 159). During
these years, and although the situation differed greatly from place to place, the
campesino communities were faced with attempts to rob them of their lands and
force their members to become wage laborers. The pace at which these efforts
progressed was quite uneven and generally slow, however.

The institution of the hacienda also underwent considerable changes, although
it would survive as a production unit until well into the twentieth century, when it
became a more systematic target of agrarian reform movements. In some cases, a
rapid transition was made to more modern, capitalist forms of production, as in
Mexico, while in some areas of Peru, indigenous communities actually managed
to manipulate the labor supply to some extent. In contrast, the typical Bolivian
haciendas located in the vicinity of Lake Titicaca exploited and subjugated the
indigenous population within the context of a stagnant economy until the mid-
twentieth century (Duncan and Rutledge 1977: 484). In Guatemala, forced indi-
genous labor on the coffee plantations and in public works programs remained a
reality until well into the twentieth century. The closing years of the nineteenth
century were rife with indigenous revolts, which had as much to do with the
loss of indigenous communities' land as it did with the flip-flops of the tax
system, which mirrored the succession of booms in silver and tin exports (Morner

1977: 471).

114 Economic Development of Latin America

The .second category is, as defined above, made up of the areas in which small
and medium-scale landholdings predominated. Bauer notes that this type of
ownership structure was common in the Sierra Alta de Hidalgo, in Bajio in
Mexico, in central Costa Rica, some parts of Antioquia and the coffee-growing
area of Caldas in Colombia, in Huancayo in areas near Arequipa in Peru, in Loja
and Carchi in Ecuador, and in the Department of San Felipe in Chile. It was also
found in the tobacco-growing regions of Cuba and many other places. We do not
have a clear picture of how these sectors evolved during this period, other than, as
noted by Bauer, that they tended to be located closer to urban areas and interacted
freely with the expanding capitalist economy, mainly, as we have said, by supply-
ing food to the cities and, in a few cases, producing export goods. We do not,
however, have figures on the volumes involved that would allow us to quantify
their economic importance. It does appear, however, that they represented a fairly
small fraction of the agrarian relations existing in the region at this time, as is also
indicated by the fact that land ownership was so highly concentrated (Frankema
2009: ch. 3).

The haciendas of northern Mexico and of the central valley in Chile are
examples of the third type of situation, in which relationships of economic
dependency were established because neither the smallholders nor the indigenous
communities could withstand the power of the hacienda owners. The latter had a
virtual monopoly on the land and forced the campesinos to live and work on their
estates in a dependent relationship that took various forms, such as that of the
inquilinato (tenant farmers) in Chile.

Be this as it may, the overall trend during this period appears to have been
toward the monetization of contracts and payments and, to some extent, a
changeover from tenant farmers to wage laborers, which afforded greater flexibil-
ity in land use. As workers were drawn to wage-labor opportunities in the cities,
mining areas (such as the nitrate mines in northern Chile), and railroad works, the
hacienda owners were forced to either offer higher wages or make use of various
stratagems to hold on to their workers, such as indebtedness or the provision of
land for pasturage or household farming. The settlement of southern Chile, which
had originally been led by small and medium-scale immigrant landholders,
changed radically in the late nineteenth century, when the ownership structure
based on large haciendas seen in the central valley was transplanted onto this
portion of the country. Although the Chilean haciendas were not as large as those
of Mexico (according to Bauer, in Zacatecas there were at least eight haciendas of
more than 100,000 hectares in size), they nonetheless represented a very highly
concentrated structure of land ownership.

The situation was very different in the economies in coastal and tropical zones
where lowland plantations predominated. In broad terms, three types of transi-
tions were taking place here: the conversion of former slaves into wage laborers
(which did not always occur, as noted earlier); internal migration, mainly by
members of indigenous groups and mestizos, from the Andean highlands to the
low-lying plantations; and the use of migrant workers, such as Italian settlers, in
Sao Paulo in Brazil, and the "coolies" in other countries, among others.

North-eastern Brazil is one of the greatest success stories for the incorporation
of former slaves into the plantation system. Here, the monopoly held on the land
was combined with the environmental difficulties encountered in the agricultural

Commodity-export-led Growth, c.1870-1929 115

frontier areas of the already overpopulated sertiio.4 The crisis in the sugar industry
blocked any economic or technological advances, but the owners of Brazil's sugar
plantations retained their power by keeping wages very low and working condi-
tions very bad. The situation was somewhat different in the Cauca Valley of
Colombia, where the possibility of taking refuge in the highlands was another
option for former slaves, although, accord!ng to Taussig (1977), this potential
workforce was reassimilated into the plantation system later on, although not
without conflict and resistance.

Campesinos from the highlands were recruited in various ways. Coercive
methods were used in northern Argentina, primarily because of the local oligar-
chy's monopoly over the land, while at the other end of the spectrum, there were
haciendas that were worked by people who migrated of their own free choice, as in
the coffee-growing regions of Cundinamarca in Colombia (Duncan and Rutledge
1977: 203-98). The case of northern Argentina involved an early process of
agricultural industrialization geared to the domestic market in combination
with a high level of protectionism. In the coffee-growing plantations of eastern
Colombia, although land-lease arrangements were developed, the trend in the
early twentieth century was toward a gradual increase in leaseholders' autonomy,
with many of them ultimately becoming the owners of their land as a result of the
first agrarian reform of the 1930s (Palacios 1983). A third type of case is repre-
sented by the sugar plantations of Peru, which, as demand and international prices
soared, concentrated ownership and modernized production. This allowed the
sugar mills to pay relatively high wages in order to attract workers, who, in
addition, were coming from the highlands where the population was growing

swiftly.
The attraction of foreign immigrants was the main approach used in the Sao

Paulo region and in Cuba after independence. In the latter case, during the sugar
boom of 1900-25 the industry was relocated to less populated areas, in part
because of the available local labor force's reluctance to put up with the appalling
living and working conditions that prevailed on the old plantations. The restruc-
turing of this industry led to a de-linkage, to some extent, between its agrarian and
industrial components and paved the way for hefty investments in the latter. This
generated a strong demand for workers to build new factories, with Spaniards
making up the bulk of this workforce. The work in the fields, however, remained
as hard and technologically backward as it had been in the old sugar mills, and in
order to meet this portioh of labor demand, the doors were opened (after some
skirmishing) to immigrants from the West Indies (Moreno Fraginals 1991).

Sao Paulo was a truly special case because it is the only one that combined
European immigration with tropical agriculture. The extension of the agricultural
frontier, soaring demand and prices in the coffee industry and the duficulty of
convincing former slaves to come to work on the plantations prompted this
industry to turn to immigrants, mainly Italians, who came in droves. The resulting
social structure was very different from the pattern seen on the plantations and
ended up being somewhere in between those of the plantation-based economy

4 The term sertiio refers to the backlands away from the Atlantic coastal regions of North-East
Brazil.

116 Economic Development of Latin America

and the newly settled economies of the River Plate area. In the early stages of this

wave of immigration, sharecropping was the most common system, but it grad-

ually gave way to complex types of wage contracts that included a basic wage, a

piece-work wage, payments in kind, and authorization to use land that could not

be used to grow coffee for, primarily, own-consumption subsistence crops. This

last component of the arrangement was especially attractive for campesino immi-

grants (Holloway 1977). ·

The extension of the agricultural frontier in temperate zones was, as we have

seen, associated with the highest rates of population and economic growth. The

key factors that distinguished the processes occurring in these regions from one

another were the ways in which access to the land was obtained and the degree of

concentration of land ownership. These factors ended up determining the nature

of the social structure in these areas, which involved a greater or lesser predomin-

ance of vast landholdings that employed large numbers of free wage laborers,

together with a middle class oflandowners who made greater use of family workers,

although they also employed many wage laborers, especially during the harvest.

All in all, then, recent research has provided us with a more nuanced view of

what had previously been an overly stylized depiction of an absolute predomin-

ance of large landholdings (the latifundios) in Latin America as contrasted with,

for example, the more equitable distribution of land ownership in the British

colonies of North America. These findings have shown up the presence of many

more small and medium-scale farms and even ranches than were previously

thought to exist. As we will see in the following discussion, this is a highly

controversial subject area in which a great deal of research is now being done.

INCOME AND WEALTH DISTRIBUTION

As mentioned in Chapter 1, the distribution of income and wealth has been an
issue that has been hotly debated during the past two decades. We know that,
today, Latin America is one of the most unequal regions on the planet, but there is
not a great deal of consensus as to the root cause of that inequality or about exactly
what impact it has had on the region's long-term performance.

The idea that Latin America has been very unequal ever since colonial times
was a recurring theme in most of the historical, sociological, and economic
literature on Latin America of the 1960s, 1970s, and 1980s and has been taken
up by the neo-institutionalist school of thought, which sees it as a decisive, long-
term feature of Latin America. Other authors, however, have argued that inequal-
ity did not become a distinguishing feature of Latin America until the period that
we are considering here, after which it remained in evidence throughout the
twentieth century.

We have been discussing two dimensions of inequality. The first is that of the
relative levels of inequality in Latin America and the more developed countries.
This is a dimension that is often overlooked in studies focusing entirely on
inequalities existing within each country. We have seen that the years between
1870 and 1913 were a period of growing inequality worldwide, as the differentials
in the rates of inequality exhibited by different world regions rose considerably. In

Commodity-export-led Growth, c.1870-1929 117

the course of this process, however, Latin America as a whole came out rather
well, while Africa and Asia were the continents that moved down in the inter-
national rankings.

As we know, a widening gap of this sort can provide opportunities for growth
through technology transfer and the adoption of more advanced forms of organ-
ization that have been developed by leading countries. It is also true, however, that
the differences reflected in per capita income levels are an accurate reflection of
each economy's ability to compete and that, consequently, that gap can function
as a mechanism for the perpetuation of those inequalities: hence, inequality can
lead to greater inequality. Within this context and during this time period, Latin
America's position as a region that was developing its natural resources, mobiliz-
ing its labor force in various ways, and attracting capital flows enabled it to take
advantage of international trends in demand and prices to shorten the distance
separating it from the world's leading economies, although not by all that much.
The gap was still wide: in 1929, Latin America's per capita GDP was just 40
percent of what the West's was (see Table 1.1). This state of affairs did clearly open
up opportunities, but it also placed the region at a distinct disadvantage as it strove
to compete on the international market, especially in high-technology sectors.
From the standpoint of income distribution, the issue of determining how much
of these revenues were appropriated by foreign actors has been difficult to resolve.
While some of the views in this regard used to underpin dependency-based
interpretations, it is a question that has not figured on recent research agendas
because some degree of consensus has been reached that, although these outflows
may have been substantial, they do not, in themselves, account for Latin America's
performance, for better or for worse.

The other dimension that we have been looking at is the inequality existing
across countries within Latin America. We have seen that the greater inequality in
evidence during this period at the world level was reproduced within Latin
America, at least until1913, with the countries in Group 3 growing much faster
than the others. This gap narrowed somewhat between 1913 and 1929, however,
when the economic slowdown in Europe had an especially strong impact on the
most southern countries of South America while the continued expansion of the
United States spurred the growth of some of the other nations of the region.

We will now take a look at the inequalities existing within countries and at their
possible impact in terms of overall inequality in Latin America.

In order to make up for the general lack of data, researchers have gone back and
studied relative prices and income levels as a means of gauging the degree of
inequality existing at that time. They have used both the ratio between wages and
land prices and the ratio between wages and per capita GDP for this purpose. And
all of these exercises have revealed a trend toward increasing inequality in Latin
America during this period in all the countries for which this information could
be compiled (Williamson 2002; Prados de la Escosura 2007; Bertola et al. 1998).

There are a number of problems in this respect, however. First of all, these
indicators, which are based on average land prices and the wage levels of unskilled
workers, do not show us absolute levels of inequality, nor do they allow us to
compare inequalities in different countries. And as far as the ratio between wages
and per capita GDP is concerned, the estimates do not take the share of GDP
represented by the wage bill into account.

118 Economic Development of Latin America

Some efforts have recently been made to construct more complete databases
that would pave the way for more informative comparisons, but they are still in
their early stages. Before looking at what they have managed to yield thus far, it
may be helpful to consider the different settings involved, starting with the sets of
conditions in rural areas discussed earlier.

In the agrarian zones of the countries in Group 1, the degree of structural
inequality may have been fairly low if indigenous communities maintained their
control over large tracts of the available land. According to Bauer, the campesino
communities in Bolivia owned at least 50 percent of the land as of 1860 (1991:
138). It all depends, however, on how autonomous these communities were and
whether or not they were pressed into working elsewhere (on the haciendas or in
public works) and paying taxes on those wages. However, there was high concen-
tration of non-Indian land and in several of these societies there was also a mining
sector that, more often than not, generated striking inequalities. However, the fact
that these economies had very low per capita export levels suggests that the impact
of mining exports on overall levels of inequality may not have been that large. In
these areas, the pattern that we expect to see is one of incre.ased inequality as the
value of natural resources rose and, in particular, as land was redistributed to large
landholders while wages remained very low. It is difficult to estimate just how high
the resulting levels of inequality were, however, since this would depend mainly
on the redistribution of assets rather than on income levels as such. In general, the
countries of Group 1 witnessed heated conflicts between hacienda owners and
campesino communities as the hacienda-based system evolved. In the few areas
where small and medium-sized holdings were the predominant form of land
ownership, the levels of inequality were probably not very high and did not
increase dramatically during this period.

One of the types of transitions to a capitalist hacienda system that has been
studied is one in which neither small-scale producers nor campesino communities
were able to curb the power of the hacienda owners. This is the type of transition
that occurred in Chile, which we have placed in Group 3. The hacienda owners'
monopoly on the land and the powerlessness of the campesinos led to a situation
of severe structural inequality. The trends that we can expect to see during this
period will depend on how much of an opportunity there was to use the land for
commercial ventures, as well as on land values, movements in the labor supply,
and the availability of an open frontier that could be pushed further back. We will
discuss this case in greater detail in a moment.

The economies of Group 2 may also have had a relatively high degree of
structural inequality. In these countries, the coastal lands that were suitable for
tropical crops and clo~e to shipping routes were monopolized by an elite group
that, in most cases, was made up of former slave owners or their descendants.
Although not all of the black population had been slaves and there had been,
moreover, differences between different groups of slaves, the levels of inequality in
these regions were probably quite high, with most of the people having very low
standards of living while export earnings were heavily concentrated in the hands
of the elite. It should be remembered that these countries had much higher per
capita levels of exports than those of Group 1, which suggests that the rest of the
local economy was very small, and the inequalities in the export sector would
therefore have a greater impact on the overall situation. Even though the abolition

Commodity-export-led Growth, c.l870-1929 119

of slavery seriously disrupted these economies and brought about significant
institutional changes, the labor market was such that the new wage-earners had
very poor living standards, while the steep rise in the value of export crops in the
late nineteenth and early twentieth centuries made the elite even richer. Landmark
events or stages in terms of the concentration of land ownership varied a great
deal from place to place, ranging from those triggered by the liberal reform
process to those that took place, for example, in the sugar-producing areas of
Peru after the First World War against a backdrop of increasing technical
sophistication and investment (Klan~n 1977: 233).

Finally we have the cases of economies that attracted large flows of immigrants.
The levels of inequality in these economies were the result of two different trends.
On the one hand, the predominance of European wage laborers kept pay levels
high, which should have translated into fairly low levels of inequality. On the
other hand, there were areas where land ownership was highly concentrated,
which can be expected to have led to a high level of structural inequality. The
effect of this concentration will also have depended on whether or not there was
an open frontier, on the differences in land prices between the central and frontier
zones, and on the way in which the land in the latter could be acquired.

It is difficult to ascertain what or how much influence foreign investment had
ori patterns of inequality, since much of the surplus appropriated by these invest-
ors was taken out of the region and since it is hard to identify them individually.
Large capital flows were seen in activities involving large volumes of fixed capital
and economies of scale, such as mining, oil drilling, and the sugar and banana
plantations. Foreign capital played a dominant role in all of these sectors. In
other cases, foreign capital controlled the marketing and processing, but not the
production, of commodities. The extent of concentration in production sectors
was not determined solely by technological imperatives, however. The contrast
between the large coffee plantations that were developed in most of these coun-
tries, despite the lack of economies of scale, and the small and medium-scale
holdings typical of a few of them, is a striking example. This indicates that the
determinants of the industrial structure in a broad sense were institutional in
nature in these cases-i.e., they were associated with the need to concentrate land
ownership in order to control the labor force, rather than with the nature of the
goods that were being produced. The practices of local and foreign investors in
these cases were, for the most part, quite similar.

A recent study on the Southern Cone (Bertola et al. 2010), which is based on
direct estimates for Brazil, Chile, and Uruguay and on informed assumptions for
Argentina, discusses three of the four main examples that we have been referring
to. The findings of this study, which deals with inequality in these countries as if
they were a single unit, are presented in Table 3.15 and indicate the following:

• Inequality increased significantly between 1870 and 1920 in the Southern
Cone and Brazil, taken as a whole.

• The extent of inequality increased in all the countries and among countries
as well.

• At the start of this period, although a great deal of inequality did exist
between countries, it nonetheless accounted for less than 10 percent of

120 Economic Development of Latin America

Table 3.15. Inequality in the Southern Cone, 1870 and 1920

Total and by country Within countries Between countries

GE(O) GE(1) Gini GE(O) GE(l) GE(O) GE(1)

1870 0.639 0.594 0.575 0.587 0.537 0.052 0.057
Total 0.513 0.477 0.522 0.721 0.640
Argentina 0.581 0.534 0.548 0.176 0.180
Brazil 0.715 0.643 0.594
Chile 0.421 0,397 0.481
Uruguay
0.897 0.821 0.653
1920 0.654 0.595 0.574
Total 0.725 0.651 0.597
Argentina 0.886 0.776 0.641
Brazil 0.618 0.565 0.562
Chile p90/p10 p90/p50 p50/pl0
Uruguay 24.63 6.83 3.61
36.52 6.32 5.78
1870
1920

Note:
GE(O) and GE(l) correspond to the generalized entropy indices
p stands for percentiles

Source: Bertola et al. (2010: tables 3 and 4)

total inequality. The other 90 percent consisted of inequalities within coun-
tries. By the end of the period, however, inter-country inequality accounted
for about 20 percent of the total, even though inequality at the national level
had also risen. This change was the result of strong economic growth in the
three countries in Group 3 and a very poor performance by Brazil in the late
nineteenth century.
• Brazil's and Chile's high and rising levels of inequality appear to have been
greater than those of Argentina and Uruguay, although it must be remem-
bered that the results for Argentina are based on assumptions.

Looking specifically at the case of Brazil (Bertola et al. 2010: table 5), we see that
there was an overall increase in inequality. The sharp differences existing between
Brazil's five regions notwithstanding, it was the inequalities within each of those
regions or within its twenty-one provinces or states that account for most of the
inequality, whereas the differences between regions or states/provinces repre-
sented very little of total inequality and played no more than a very small part
in the increase in inequality registered between 1870 and 1920. The reason why
inter-regional inequality did not increase in Brazil during these years was that the
upswing in growth in the state of Sao Paulo was counterbalanced by the decline
experienced in the until-then richer state of Rio de Janeiro.

How did this increase in inequality come about?
One of the mechanisms that has been emphasized in numerous studies is the
trend in relative prices predicted by the Heckscher-Ohlin model of international
trade and, in particular, the Stolper-Samuelson theorem concerning the distribu-
tional effects of trade specialization patterns, which predicts that greater market

Commodity-export-led Growth, c.1870-1929 121

integration will generate a relative increase in the returns to the more abundant
factor of production. In Latin America's case, the outcome would be rising land
prices and declining returns to labor. It should be noted, however, that this
analysis assumes that the returns to the scarce factor (in this case, labor) were
fairly high prior to specialization, that there was full employment, and that factors
of production were not internationally mobile. All of these assumptions are of
questionable validity for an interpretation of Latin American history, and the
capacity of this type of analysis to explain the deterioration in income distribution

experienced during this period.
The first of these assumptions is particularly surprising to any knowledgeable

observer of social relations in the rural areas of Latin America during that time.
The second is equally surprising when account is taken of the marked under-
utilization of resources at the start of this period. And the third overlooks the fact
that factor mobility was quite high in the more dynamic regions, which were
attracting both capital and labor. In this case, wages were influenced by the pay
levels existing in the migrants' home countries, which may have been, in fact, the
most important determinant of income distribution. In any case, the increased
supply oflabor could have driven down the ratio between wages and land rents in
a way similar to that predicted by the Heckscher-Ohlin model, especially in areas
where the agrarian frontier could not be expanded.

Even in these situations, however, it has been shown that the frontier could
sometimes be pushed back, as occurred in Chile with the War of the Pacific and
the conquest of the south. During this stage, the level of inequality in Chile fell.
The appropriation of frontier land often took place in ways that did not involve
traditional market mechanisms, as we have seen, and it is probable that large
amounts ofland were acquired at very low prices. Usually, these types of processes
are not captured by land price indices. However, once these frontier zones had
become consolidated, ownership over them had been institutionalized, and com-
mercial ventures were underway, the increase in the price of the land appears to
have been inexorable.

Relative price movements can also, however, be generated by institutional
factors. Whether because labor mobility was constricted or because large numbers
of workers were brought in by coercive means, the level of inequality was not
purely attributable to market forces. In addition, this was, as we have seen, a time
of sweeping changes in power structures, social relations, and land ownership.
And all of these processes left a deep mark on income and wealth distribution and,
in most cases, heightened the elitist, exclusive nature of Latin American develop-
ment. As we have seen, this did not necessarily keep real wages at subsistence
levels. In most cases for which the necessary information is available, real wages
rose, although these figures are based on urban wages that were probably subject
to special conditions, rather than on the wages of the much larger campesino

population.
We can therefore conclude (although exercising caution, given the scarcity and

doubtful reliability of the available information) that, while the situation varied
considerably from place to place, there was a high degree of structural inequality
in Latin America even before the first wave of globalization. And after that, the
level of inequality rose sharply, with the original patterns of inequality being
perpetuated and new ones being created, especially in the areas where indigenous

122 Economic Development of Latin America

populations had their lands taken away from them and were coerced into becom-
ing tenants or wage laborers. A sizeable portion of the increase in inequality was
due to the revaluation of natural resources that came about as a result of the
region's increasing participation in the international economy, which would
ultimately lead to a reduction in inequality when international price trends were
reversed and, particularly, when the first wave of globalization collapsed. This did
not mean, however, that the living conditions of underprivileged sectors neces-
sarily improved.

The distribution of land ownership is a widely used indicator for measuring
wealth inequality. Table 3.16 summarizes some of the available data for the
first few decades of the twentieth century. It comes as no surprise that the Latin
American countries have the highest levels of inequality of all. At the opposite
end of the spectrum, we find Canada, the United States, the Asian countries
(which have been rapidly gaining on the West in the last few decades), and the
Scandinavian and Baltic countries. The Scandinavian countries are among
the ones that were the quickest to join the ranks of the rich countries during the
twentieth century.

The cases of Australia and New Zealand are interesting in that the concentration
of land ownership was relatively high. They differ from the Latin American
countries, however, in that the percentage of the adult male population in rural
areas who were landowners was very high, whereas, in Argentina and Uruguay, the
percentage was no higher than 20 percent. Thus, the different processes involved in
the appropriation and distribution of land ownership gave rise to very different
functional income distribution structures: in Australia and New Zealand, the
proportion of income derived from profits and wages was far higher than the
proportion provided by land rents, whereas the latter was the predominant factor
in Argentina and Uruguay (Alvarez 2007).

Finally, it seems worthwhile to make a more general point about these inequal-
ities. In a situation where land and labor markets were riddled with imperfections,
power relations, and mechanisms of subordination, it is impossible to overlook
the inequalities based on ethnic identity, caste, culture, etc. that permeated Latin
American society. All of these elements came t9gether to forge a society of
unequals that inevitably left its imprint on the way in which these various sectors
gained access to sources of income, ownership, voice, and power. And they also
determined how much access people had to what is now called human capital,
which can be gauged by looking at the figures for life expectancy at birth and levels
of education: these components played a crucial role in the development of

Table 3.16. Gini index ofland ownership, 1880-1990

Europe 64.4
United States and Canada 53.2
Australia and New Zealand 74.7
Muslim countries 64.8
Latin America 79.9
Baltic and Scandinavian Countries 48.4
Asia 44.3
Caribbean 72.1

Source: Authors" estimations based on Frankema (2009: appendix I)

Commodity-export-led Growth, c.1870-1929 123

marked structural inequalities that overshadowed whatever fluctuations in levels
of inequality might have occurred in one period of time or another.

When the pattern of economic development had to be altered after inter-
national commodity prices and demand plummeted, these characteristics turned
out to be major obstacles for the necessary changes in Latin American society.

FOREIGN CAPITAL, ECONOMIC POLICY, AND THE

DIVERSIFICATION OF PRODUCTION

Foreign capital: patterns of instability and their implications

As we have seen in previous chapters, the short-lived financial boom of the 1820s
(which was associated with the debts incurred in the wars for independence and in
connection with greenfield mining projects and settlement plans) and the defaults
of all the Latin American countries except Brazil were the start of a series of cycles
of financial market access and sudden stops in capital inflows, along with further
defaults followed by more external debt renegotiations. Access to these markets in
the 1860s and early 1870s was followed by the collapse triggered by the worldwide
crisis of 1873. This was followed by the boom of the 1880s, which was concen-
trated in Argentina, and then by the Baring crisis and renegotiations in the 1890s.
Another boom took place in the ten or fifteen years before the First World War,
followed by another sudden stop when war broke out in Europe. Finally, there was
the "dance of the millions" (to use the term coined at the time in Colombian
political debates) of the 1920s, and particularly the second half of that decade,
which was followed by another sudden stop in financing starting in mid-1928,
even before the Wall Street crash of October of the following year (Marichal
1989).

With the exception of the cycle centering around the First World War, all of
these cycles included fairly widespread defaults. They all also led to an abandon-
ment of the gold (or silver) standard by several countries, especially during the
First World War. Access was also highly unequal, even in the case of the larger
countries of the region. Mexico (up to the 1880s) and Colombia (throughout
almost the whole of the nineteenth century) were in virtually permanent default.
And the smaller countries, with the notable exception of Uruguay, had very
limited access.

Table 3.17 provides an overview of the available information on foreign invest-
ment in Latin America. Up until the First World War, Great Britain was the main
source of financing. Government bonds, which were the most common instru-
ment, were used for investments in the railroads and ports and, in some cases, for
financing wars (mainly civil wars, but some border disputes as well). At the start of
each cycle, there was also a significant amount of refinancing as part of the
packages used to restructure the non-performing loans. In addition, there was
direct investment in some mining and infrastructure projects, notably the rail-
roads, especially from the late nineteenth century on. These investments were
later to become a heated issue when they were nationalized. Some of these
investments were made by nascent multinationals, which were to play an

124 Economic Development of Latin America

Table 3.17. Foreign investment in Latin America (in millions of US dollars)

1880 1890 1900 1913 1926

Values per country 868 2,069 2,630 4,867 5,825
United Kingdom 218 664 364 1,002 n.a.
France n.a. n.a. 304 1,276 5,370
United States 1,087 7,145 11,194
Total 2,733 3,298
52
Shares in total by country of origin n.a.

United Kingdom 80 76 80 68 48
24 11 14 100
France 20 n.a. 9 18
100 100 100 28
United States n.a. 72
41
Total 100 0
2
Structure of United Kingdom investments by type of recipient and sector 0
0
Government 69 46 42 32 3
25
Private sector 31 54 58 68 100

Railways 19 39 37 46 1929
32.1
Utilities 6 28 60 67.9

Mining 23 22

Saltpeter 0 1 20

Real estate 02 20

Banking 2 1 22

Various 24 7 18

Total 100 100 100 100

Structure of United States by type of investment 1914
Portfolio 22.3
Direct 77.7

n.a.: Not available
Source: Authors' elaboration based on ECLAC (1964)

important role throughout the twentieth century, even during periods when
financial flows were limited.

Britain's pre-eminence throughout the nineteenth century was followed by the
emergence of the United States as the main source of capital, starting with Mexico
and some of the Caribbean countries (especially Cuba). In 1914, the US accounted
for nearly one fifth of all foreign capital invested in Latin America and for
somewhat more than that proportion of direct investment. The region was, in
fact, one of the first destinations for US capital, representing nearly half of the total
volume of capital exported by that country. Unlike what happened with European
investments, which stagnated after the First World War, US funds kept flowing
during the war and the 1920s in the form of direct investments in oil, mining,
agriculture, and, to a lesser extent, public utilities. This fits in with what we have
already seen in relation to Latin America's foreign trade. In the 1920s,. portfolio
investment rose considerably as Wall Street became the prime location for
government and private corporate bond issues from Latin America, as well as
for US firms that were investing in the region (United Nations 1955).

Table 3.18 illustrates another facet of the regional disparities in Latin America
that we discussed earlier, as the countries of Group 3 received six times as much

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Commodity-export-led Growth, c.1870-1929 127

foreign investment in per capita terms as the other two groups of countries did.
Cuba was the only exception to this rule, but it was still far behind the leaders in
Group 3. From the standpoint of the origin and destination of these investment
flows, geographic factors played a very important role, with the United States
clearly being the main investor in Mexico, Central America, and the Caribbean
and with Europe taking the lead in South America.

As pointed out by Triffin (1968) and contributors to the volume edited by
Aceiia and Reis (2000), the gold standard worked asymmetrically and to the
detriment of the countries on the periphery, which tended to witness both a
decrease in commodity prices and a reduction in external financing during crises.
External shocks were transmitted to the domestic economy through the heavy
reliance of public-sector finances on customs duties and the links between the
balance of payments and the money supply. The main victim was invariably
public and private investment, which underwent particularly severe cyclical
movements (Tafunell 2009a and 2009b). Although some countries did learn to
live with sharp cyclical swings while abiding by the "rules of the game" of the gold
(or silver) standard, there were frequent episodes when one or another currency
was declared inconvertible. Among the larger countries, Argentina, Brazil, Chile,
and Colombia all experienced prolonged bouts of inconvertibility.

These episodes, together with the late abandonment of the silver standard (and
consequent adoption of the gold standard) by some countries, generated an
inflationary propensity relative to worldwide patterns. This led to runaway infla-
tion in only two cases, however, and both of these were associated with political
conflicts: in Colombia, during the Thousand Days War, and in Mexico, during the
years following the outbreak of the revolution and especially in 1913. When
currencies were inconvertible, their nominal depreciation was also regarded as a
protectionist and export promotion measure. This also made the establishment or
re-establishment of the gold standard after an episode of inconvertibility quite
costly, since fiscal resources had to be used to provide guarantees for the necessary
reserves and the ensuing adjustments in relative prices hurt export activities and

sectors that were competing with imports.
As stated earlier, the Latin American countries that continued using the silver

standard were able to benefit from the devaluation of their currencies thanks to
the depreciation of silver relative to gold in the 1870s and thereafter. The Latin
American countries that found themselves in this situation were Mexico up to
1905, Bolivia and El Salvador up to 1914, and Honduras up to 1931 (Salvucci

2006: 254-64).

The production structure and its diversification

As noted earlier, the pace of growth during this period was set, to a great extent, by
the expansion of exports, but the domestic market continued to account for a
majority of economic activity (over 80 percent in 1913-29, as shown in
Table 3.10) and grew at an appreciable rate. Furthermore, the domestic market's
growth was somewhat more stable than the export sector's was and gave rise to
important structural changes in terms of urbanization, the development of public
utilities, industrialization, and the development of the state in various arenas.

128 Economic Development of Latin America

Table 3.19. Levels of industrialization and urbanization c.l870-1930

Degree of Average Tariff Urbanization Urbanization
(% cities with more rate,
industrialization (Tariff revenue/Imports) than 20,000 1930 (d)
inhabitants) (c)
(a) (b)

Group 1 c.l929 1870-1874 1910-1914 1925-1929 c.l870 c.l913 c.l930 ECLAC
Bolivia 21 56 29 2 8 9
Colombia 6 25
Ecuador 15 24 21 9 16 25
El Salvador 5 22
Guatemala 12 35 22 18 6 15 28
Honduras 5 20
Mexico 8 24 34 23 6 8 13 12
Nicaragua 7 33
Paraguay 26
Peru 30
Subtotal 27
25
Group 2
24
Brazil 13 35 37 24 9 15 20
19 51
Costa Rica 9 18
30
Cuba 25 22 21 27
28
Dominican Republic
57
Panama
so
Venezuela 11 7 17
30 30 24 12 17 63
Subtotal 11 57

Group 3 20 23 21 16 15 34 31
Argentina 13
Chile 16 20 11 21 11 32
Uruguay 16
Subtotal 23 32 17 27 27

22 21 18 18 30 32

Total 10 12 18

Sources:

a. Bulmer-Thomas (2003/1994: table VI.7).
b. Coatsworth and Williamson (2004)
c. Scobie (1991: 209, table I)

d. United Nations Population Division: World Urbanization Prospects (2007 revision).
Population Database (digital format)

What little information is available appears to indicate that between 1870 and
1929 there was a considerable increase in the populations of cities having more
than 20,000 inhabitants. According to ECLAC, the level of urbanization as of 1930
was 30 percent. In keeping with the other indicators that we have seen, the
countries in Group 3 had a level of urbanization of 57 percent in that year,
more than doubling the levels of the countries in the other two groups, with the
exception again being Cuba, which was close to the average for Group 3 (see
Table 3.19).

The cities of 1870 were urban islands in a predominantly rural setting. They
were primarily populated by wealthy people whose lives revolved around the town
plaza, while their poorer compatriots lived on the edges of these urban centers, in

Commodity-export-led Growth, c.1870-1929 129

houses giving on to unpaved streets, in areas that seemed more rural than urban.
By around 1930, however, Latin America contained vast metropolises such as
Buenos Aires, Havana, Rio de Janeiro, and Mexico City. The expansion of the
export-oriented economy and the imports of capital and consumer goods that
were its counterpart were the sectors that made the biggest contribution to urban
growth via the demand that they generated for related services. The members of
the upper class then tended to move out of the downtown area to higher-elevation
zones further away from the city center, although they still continued to manage
the economic, commercial, political, and cultural affairs of the city center, as well
as to work to beautify it. Urbanization led to the growth of the middle class and of
the number of public and private wage-earners. As a result, the cities became the
standard-bearers for more progressive sectors of the population while at the same
time coming under increasing pressure from emerging blue-collar sectors (Scobie
1991: 202).

The development of the urban economy had a strong impact on the services
sector and the construction industry. Banking, insurance, lighting and electricity,
water and sanitation, urban mass transit and long-haul transport, the education
system, and the various administrative functions of the state were all areas in
which economic activity was diversifying.

The idea that manufacturing was a novel phenomenon that arose in the 1930s
as a reaction to the worldwide depression was refuted more than thirty years ago.
The rejection of that idea sparked a number of studies on what was then referred
to as "early industrialization." Therefore, the fact that manufacturing was alive
and thriving in Latin America before the 1929 crash is now beyond question. As
may be seen from Table 3.19, the levels of industrialization that had been reached
prior to 1929 were considerable. In the Group 3 countries, the manufacturing
industry accounted for approximately 16 percent of GDP, and in the largest
country in this group, Argentina, the figure was as high as 20 percent. In the
other two groups, the larger countries (Brazil and Mexico) were far more indus-
trialized than the rest. This differentiation will be reflected in the new country
groupings that will be introduced in Chapter 4.

The early phases of the industrialization process were spurred by various
factors. A fairly spontaneous form of development was triggered by both exports
and domestic economic activity that drew strength from the growth of the
population and rising incomes. Industrialization processes were also quite early
on underpinned by high tariffs, which were introduced as a source of revenue or
as a direct manifestation of outright protectionism.

For the export sector, industrial processing was one of the essential steps in
readying commodities for sale on international markets. Minerals had to be
processed near the areas where they were mined in order to keep transport
costs to a minimum. This led to the construction of foundries and, at times,
refineries, which became the cornerstones for the early stages of the industrializa-
tion of the mining-based economies. The Chuquicamata and El Teniente mines in
Chile were some of the largest in the world. Similarly, sugar had to be processed in
the vicinity of the area where the crop was harvested. Meat exports required the
development of cold-storage technologies, which were used for a number of other
products as well. The Swift and Armour meatpacking facilities in Argentina were
on a par with those firms' factories in the US. Other products, such as oil and

130 Economic Development of Latin America

bananas, called for special capital-intensive transportation networks but not a
grea~ deal of processing. In these cases, large-scale capital investments in com-
modtty export sectors had more limited direct effects in terms of industrialization.

There were also indirect linkages associated, for the most part, with the
cons~mer. demand generated by rising incomes, especially among wage-earners
and ~~ regwns where, although the mean income level was not very high, markets
were mtegrated. The size and degree of integration of domestic markets were the
outcome of.a combination of export growth, urbanization, and the development
of .modern mfrastructure. The positive effects of this type of development were
hetghtened when a national integration strategy was in place. In other cases,
howe:er, the development of modern modes of transportation did not, at first,
contnbute to domestic market integration, as connections between various loca-
tion~ in the country with the rest of the world improved while in-country transit
contmued to be based on traditional modes of transportation. Eventually, how-
ever, modern forms of transport did help spur domestic market integration. The
changeover from railroads to trucking also played a role in this regard, but that
occurred during the transition to the state-led industrialization model.

Growing domestic demand for manufactures pushed up imports, but it also
paved the way for the early stages of the industrialization process. Some of the
region's economies were exporting agricultural staples which were also part of the
consumption basket. While, in one sense, this was counterproductive because it
tended to reduce the surpluses that were available for export, it did promote the
development of local consumer industries. In other cases, the expansion of
consume~ ~eman~ had a strong impact on imports that eventually opened up
opportumttes for rmport-substitution industries. The demand effect often com-

bined with the impact of high transport costs to generate what might be described
as a .na~ural form of protection for consumer goods such as beer, printing and
pubhshmg and, later on, cement and other industries linked to the construction
industry. In these cases, domestic production kept pace with the growth of
demand, and no significant upswing in imports came about. In other cases

domestic activity fluctuated sharply depending on the extent to which the busines~

cycle opened up or constrained access to imported goods. As a result, there was
overa~ a rapid: spontane?us de:elopment of traditional consumer goods and
some mtermedtate goods mdustnes that catered to the domestic market.

While the Latin American manufacturing sector was composed primarily of
small com?anies that, on average, employed very few workers, large companies
were also m place whose operations were not confined to the export sector. In
some b:anches of industry, such as beer and textiles, there was a nucleus of large
ent~rpnses, some of which are still in operation to this day, such as the Argentine
Quilmes and Biekert breweries, Brazil's Antartica, and Mexico's Cuauhtemoc.
There are large corporations in other branches of industry as well, such as the
popular Argentine footwear company Alpargatas and others in the textile indus-
try. Suzigan (1986: appendix 3) lists no fewer than four textile firms in Rio de
Janeiro that had more than 500 workers each prior to 1905.

Even so, .the fact ~hat some industrial firms had adopted modern capitalist
manufacturmg techmques does not mean that these techniques transformed the
indust:ial structure, since many out-of-date companies remained in operation
alongstde the few modern firms in this sector. Technological capacity was

Commodity-export-led Growth, c.1870-1929 131

Table 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

Brazil Mexico

Total Textiles %Textiles Total Textiles %Textiles

1895-99 121 144 26 77 62 50
1900-04 102 125 29 166 89 34
1905-09 242 248 23 143 47 20
1910-14 404 369 21 160 13 4
1915-19 89 91 26 431 125 23
1920-24 279 343 28 856 209 18
1925-29 444 497 27 331 93 32
1930-34 216 229 27
1935-39 424 499 28

Source: Authors' elaboration based on:
Brazil: Suzigan (1986: 359-364, appendix 1), based on exports of machinery from Germany, United States, and
France in 1913 constant po4nds.
Mexico: Haber, S. (2006: table 13.5), based on exports of machinery from United Kingdom to Mexico in constant
1929 US dollars.

fragmented and quite diverse, and this stood in the way of system-wide develop-
ment and inter-sectoral interaction, which stifled the creation of forward and
backward linkages, and a symbiotic relationship between large- and small-scale
industry never took shape (Lewis 1991: 241).

The limited impact of large-scale industry can perhaps be grasped by examining
the figures shown in Table 3.20, which show, on the one hand, that machinery
imports soared in Brazil and Mexico between the start of the century and the end
ofthe 1920s. In Brazil's case, the textile industry followed the general industrial trend.
In Mexico, this sector grew more slowly than others. But in every case, the huge
portion of total imports represented by textile machinery imports is striking, espe-
cially when we consider that, for Brazil, at least, these figures include all machinery
imports, including imports of transport and electrical power generation equipment.

This natural growth of industrial output had very clear limitations, however, and
did not trigger any major structural change in the Latin American economy. The
industrialized countries had already developed far greater capacities which effectively
blocked the Latin American nations from gaining access to industrial markets. In fact,
many Latin American crafts industries were literally overrun by industrial competi-
tors, with handmade textiles being the most well-known and most researched case,
both in Latin America and elsewhere. Consequently, this period cannot be accurately
described as one of industrialization ifwe are to understand that term as referring to a
sharp increase in the industrial sector's share of total output and to a stage in which
manufacturing had become a strong engine of economic growth.

Economic policy: The tax structure, early
protectionism, and state banking

The obstacles to the expansion of industrial output that were encountered at a
time when rising per capita incomes were increasing the demand for industrial

132 Economic Development of Latin America

goods leads us to take a closer look at industrial protectionism. While this period
is generally identified as being a worldwide era of free trade, the advances made in
opening up trade were neither as significant nor as widespread as was once
thought (Bairoch 1993). The work of Coatsworth and Williamson, in particular,
has shown that tariffs were very high relative to the value of imports in Latin
America. In fact, they were among the highest in the world and, as such, were,
quite tellingly, more or less comparable to the levels of protection being main-
tained by the United States and the countries of Australasia.

Why were customs duties so high and what impact did they have on the growth
of industry?

As we have seen in Chapter 2, the establishment of a new tax base in Latin
America's young republics was a convoluted and complex process. In densely
populated areas, in particular, the taxes paid by indigenous groups helped to fill
metropolitan governments' coffers, and these taxes were generally collected by the
hacienda owners, who took a portion of those funds for themselves (usually in the
form of in-kind labor). The emerging republics abolished these taxes at the outset,
but in some cases they were gradually reintroduced later on. As liberal reforms
made inroads, these taxes were finally eliminated in the countries that had
continued to levy them after others had desisted: in Peru in 1854 and in Ecuador
in 1857.

Although various attempts were made to set up a direct taxation system, which
was a particularly attractive option for some liberal thinkers during this period,
the implementation of such a system would have been a very costly undertaking
for the new republics, especially in the case of agricultural activities, which were so
widely spread out. Customs duties seemed to be an attractive means of boosting
revenues, and they were also comparatively easy to collect. Customs adminis-
trations were concentrated in a few critical locations, especially ports, and they
were much easier to monitor. This was not merely a technical problem, however,
as it involved the elite's desire to appropriate the rents generated from natural
resources.

In the economies that were exporting agricultural commodities, there was also
staunch resistance on the part of large landholders to the direct taxation of their
main asset: land. In these sectors, as well as in the mining industry, where
exporters did not have to pay taxes, customs duties were the main and sometimes
the only instrument to indirectly tax export activities. They obviously had a very
different distributional impact from what a direct taxation system (which was
hardly tried out at all) would have had. Thus, most of the governments readily
applied customs duties, despite their commitment to the development of the
export sector and to liberal principles.

Although the main reason why governments set high tariffs was to increase tax
revenues, they also had a protectionist effect. In fact, and contrary to what modern
schools of academic thought tend to argue, the expansion of exports and protec-
tionism were not regarded as opposing but rather as complementary strategies for
promoting modernization. As a result, some Latin American countries (particu-
larly Brazil, Chile, Colombia, and Mexico) were very active in applying protec-
tionist measures long before the advent of the state-led industrialization model. In
these cases, early industrialization (starting in the late nineteenth century) was
closely associated with protection.

Commodity-export-led Growth, c.1870-1929 133

The tariff structure of the time was based, in most cases, on specific tariffs
(including ad valorem tariffs applied to an official price list). Specific tariffs
afforded special protection to industrial goods having a low value-to-weight
ratio (e.g., simple, widely used textiles, as opposed to more complex or more
highly processed fabrics). Under such a tariff system, inflation eroded the protec-
tionist effect of the duties while deflation raised them. This generated a counter-
cyclical trend in protectionism, which compounded the effects of the
countercyclical trend in exchange rates in countries that did not follow the gold
standard. Consequently, during external booms, domestic demand expanded but
disincentives for the production of manufactures were generated by declining ad
valorem tariffs (due to inflation) and real exchange rate appreciation. In contrast,
the deflation that took place during crises raised the real level of ad valorem tariffs,
and this, more than devaluations (when they were applied) spurred import
substitution. In addition, during the First World War, the actual scarcity of the
manufactures that had been imported from Europe created additional incentives

for domestic production.
The combination of protection with financial and transport development

policies led some countries to use approaches that can be considered as preludes
to the state-led industrialization phase that prevailed after the Second World War.
The case of Mexico during the government of Porfirio Diaz may be the most
interesting example to consider here, since it embarked on a relatively compre-
hensive industrialization strategy that encompassed the earliest forms of develop-
ment banking and incentives for infant industries, combined with an aggressive
domestic market integration policy (Cardenas 2003: ch. V). This is what accounts,
as we have seen, for the fact that the expansion of Mexico's economy during those
years entailed a very good balance between the growth of its export and domestic
sectors. In this case, the silver standard could have provided an added stimulus for
the production of tradable goods. In Chile, protectionist measures and the gov-
ernment's strong commitment to the development of infrastructure had a similar
effect (Palma 2000). In these and other cases, the development of the manufac-
turing activities that catered to the domestic market were not seen as the antithesis
of the development of the commodity export sector but rather as simply another
facet of a modern development process.

It is, in any case, important to point out that, as can clearly be seen from
Table 3.19, there was absolutely no correlation between the levels of industrializa-
tion and protection, as demonstrated by the fact that the countries with the
highest levels of protection were not the most industrialized nations.

When foreign investors held significant shares in export activities, the issue of
the appropriation of the rents from natural resources was intertwined with their
"return values," i.e., the portion of earnings from exports that stayed within the
country. This percentage depended on the state's capacity to capture a portion of
foreign companies' rents via direct or indirect taxes (on exports, in the latter case).
Tax revenues from mining activities were significant in some cases, but much less
so in others. The most obvious cases in which high levels of tax revenues were
obtained from mining operations were in countries that had a large share in the
corresponding world markets (Peru in the case of guano and Chile in the case of
nitrates). Nonetheless, this issue was at the center of political debates in all the
economies where mining activities were important.

134 Economic Development of Latin America

How great a contribution did the development of the domestic financial market
make to economic development and the diversification of production? This is a
difficult question to answer because, aside from a growing body ofliterature at the
national level, there are almost no comparative studies on this issue that deal with
the period under consideration here. The work done some time ago by Goldsmith
(1973) indicates that, of the seven largest countries in the region, Argentina was
far out in the lead in terms of financial deepening in 1913 and 1929, followed by
Brazil and pre-revolutionary Mexico, while the remaining four countries in this
group lagged far behind. Curiously enough, the lack of financial-market develop-
ment led countries to finance their public-sector deficits with foreign borrowing,
while their domestic public debts were very low relative to those of the developed
countries. During the closing years of this period, financial development tended to
lag behind that of countries outside the region that were at the same or higher
levels of development. This was true even in Argentina, which was the region's
leading economy at the time. This indicates that domestic financing was unable to
provide a satisfactory substitute for external funding (Della Paolera and Taylor
1998). In all of these cases, the banking system was oriented toward short-term
lending and, as a result, even the fairly undeveloped stock markets in the region
were at times a better source of long-term financing. Mortgage lenders were also
active, but they were all apparently dependent on external resources.

The state played a major role in the creation of financial institutions. The
countries with more highly developed financial markets were, here again, leading
the way, with the Banco de la Provincia de Buenos Aires (1822), the Banco de la
Naci6n Argentina (1891), and many others in that country,5 while Brazil had the
Banco do Brasil (1808) and the Caixa Econ6mica Federal (1861). In Argentina, the
Banco de la Naci6n increased its market share and, by the end of this period,
controlled nearly half of the country's banking system. Another interesting case is
that of the two small countries, which developed public banking institutions early
on: the Banco de la Republica, in Uruguay (1896), and the Banco International de
Costa Rica (1916), which would later (in 1936) become the Banco Nacional de
Costa Rica. Many other attempts were made in the region to set up state-owned
or partially state-owned financial institutions, although not all of them were
successful.

Various other public-sector institutions, apart from commercial banks, served
as financial agencies for the government and, in an implicit sense, as central banks
until actual central banks were established, which was quite long in coming in
some cases. Most of the Andean countries established their central banks in the
1920s (1923-8) under the influence of Princeton University Professor Edwin
Kemmerer, who was involved in the establishment of the central banks of
Colombia, Chile, Ecuador, and Bolivia, in that order, and the reorganization of
Peru's in 1931, which had started up in 1922. All of these institutions firmly
followed gold standard principles (Drake 1989) but they were also the institutional
bases on which the monetary and financial activism that arose in the 1930s would
be built.

5 For a history of the proliferation of public banks in Argentina and the collapse of many of them
during the Baring crises of 1890, see Marichal (1989, Chapter 5).

Commodity-export-led Growth, c.1870-1929 135

International technology transfer and innovation

The question of technology transfer and innovation capacity-building warrants

special consideration.
Generally speaking, the combination of a pattern of production that was highly

specialized in commodities with unskilled labor subject to various forms of
coercion was associated with low levels of innovation and technological change.
And in the case of Latin America, the sluggish pace of technological change
reflected the relative absence of technological qualifications on the part not only
of the workforce but of the elite as well.

In this kind of situation, international technology transfer became a crucial
factor. Even the technological changes that did bring Latin America closer to the
rest of the world-such as the transport revolution-and that clearly reached its
shores, did not necessarily find their way into inland or more remote areas in the
region's countries. In fact, as has often been pointed out, stronger external trade
ties sometimes actually reinforced conventional forms of coercion and the use of
outmoded technologies. In other cases in which numerous technologies were
introduced and adopted (irrigation systems, fencing), they did not necessarily
change the fundamental pattern of production. At the institutional level, the
establishment of mining and mercantile codes and the improvement of banking
and currency regulations-which in large measure came about as a result of
foreign investment-represented considerable advances during this stage of the
region's development.

This has been an ongoing subject of debate in connection with the paradigm of
modernization, since, according to this view, the modernization process consists
of a progressive expansion of a modern sector at the expense of traditional sectors.
The structuralist school of thought, on the other hand, does not see the modern
sector as absorbing traditional ones but rather, in many cases, as presupposing
their existence, as linking in to them and perpetuating them, thereby giving rise to
dependent forms of development-peripheral capitalism, oligarchic development
patterns, truncated industrialization, and other processes of these types.

The main two vehicles for international technology transfer during this period
were foreign investment and immigration (Bertola et al. 2009).

A direct relationship between technology transfer and per capita foreign invest-
ment can be discerned. Foreign investment was not confined to the export sector;
it had a very strong impact on a number of activities that permeated domestic
markets, such as tramways, railroads, electricity, insurance, banking, etc.

Immigration has been a subject of a great deal of interest on many counts,
although less so from the standpoint of international technology transfer, which,
in this case, takes on the form of the transfer of tacit knowledge. Many immigrants
already had the experience ofliving in an industrial civilization; they brought with
them knowledge, practical experience, an entrepreneurial and technical culture, a
work ethic, knowledge of new forms of commercial organization, and direct
experience with major export and import markets. They were not all the same,
of course. Many were fleeing competition and industrialization and brought with
them techniques and even cultures that were becoming outmoded. In addition, in
rural areas, many technological failures and inefficient technological approaches

136 Economic Development of Latin America

were due to attempts to transfer technologies and techniques that had been
efficient in other contexts to extremely different situations.

There has been a great deal of debate as to whether the immigrants who arrived
in Latin America were less skilled than those who went to other regiorts and
whether those who went to the southern parts of South America were the "poorest
of the poor." Apparently, however, these immigrants did not have lower skill
levels than the mean level in the areas from which they came (Alonso 2006). And,
in fact, in most cases the poorest of the poor did not have enough money to
emigrate anyway.

We know that immigrants to Latin America made up a large part of the
business sector, even in countries where migration flows were not very significant.
We can therefore posit that greater inputs of knowledge and business skills were
received by countries that became home to large numbers of immigrants. In other
words, when the situation is viewed from the vantage point of international
technology transfer, it can be seen that differences in immigration rates help to
explain the differences in performance between one Latin American nation and
the next.

Yet even though sharp differences exist among Latin American countries, the
region is set off from others by the fact that even its most advanced nations lag
behind the world leaders. Recent studies that compare the countries of the River
Plate area with those of Australasia have shown how the pattern of land appro-
priation and the way in which it influenced the institutional structure had a strong
impact on the formation of land markets, functional income distribution, the
differentiation of production activities, the rate of absorption of technological
change, and the formation of radically different innovation systems in the agrar-
ian sector. Whereas, for example, New Zealand established an innovation system
early on and processed sweeping changes in the natural environment, in Uruguay
large-scale ranchers focused primarily on economic rents and on blocking pro-
gressive forces in urban areas by political means (Alvarez, Bertola, and Porcile
2007).

THE TRANSITION TO A NEW ERA

As the export-intensive era was coming to a close, conditions were changing. The
First World War gave way to the inter-war period, which was marked by the
slowest growth rates of the entire century in the European economies and was
unique in that it was the only time during which the growth rate for external trade
was even lower than the extremely sluggish rate of GDP growth.

This critical period for the international economy was the outcome of a set of
contradictory forces both in the domestic economies of developed countries and
in the international financial and commercial system itself.

As we have seen, some Latin American economies, particularly those in the
Southern Cone, soon felt this change in trend. However, others that had been
slower to join in the preceding wave of expansion (and that had closer ties to the
US market) continued to grow until the 1929 crash.

Commodity-export-led Growth, c.1870-1929 137

At this new juncture, the Latin American region that now had to find a way to
position itself in the international economy was a quite different region than it had
been before. All inter-country differences aside, Latin America was home to many
new types of stakeholders that came onto the scene during the period dealt with in
this chapter: the urban middle class, a working class whose members were
seasoned combatants in social struggles, a group of industrial entrepreneurs,
and new groups in the agrarian economy. And, in addition to all of this, there
was another highly influential stakeholder that had greatly expanded its sphere of
influence: the state.

The state's action was not confined to the protection of property rights.
Governments had, in many cases, begun to play a leading role in protecting infant
industries in the manufacturing sector, in promoting the development of national
banking systems, and in the construction of infrastructure, all of which laid the
groundwork for the establishment of state-owned enterprises in most of the
countries at a fairly early stage. Governments also became involved in the distri-
bution and utilization of rents from natural-resource-based activities, in develop-
ing linkages between exports and domestic economic activities, and, starting in
th~ early twentieth century, in shaping labor and social development institutions.

Although this model was not akin to the interventionist state that came into
being in the 1930s in Latin America, it did not fit in with the image of a laissez-
faire state that some nostalgic authors who harken back to the commodity-export
era have projected either. The more traditional items of expenditure (general
administration, defense, and debt servicing) had already begun to shrink in
relative terms as allocations of government resources for transport and education
were increased (see Ol.rdenas, Ocampo, and Thorp 2000a). And this new force
was to be called upon to play a decisive role not only in Latin America but in the
entire world economy in the course of a cycle that was unleashed in the 1930s,
which is often associated with Keynesianism but which, in Latin America, was
more closely associated with developmentalism.

4

State-led Industrialization

The Great Depression of the 1930s and the world trade shocks triggered by the
Second World War dealt a fatal blow to export-led growth. Instead of a swift
transition to a new development model, countries had to cope with a series of
enormous macroeconomic shocks as best they could. In many cases, these re-
sponses were completely improvised or simply replicated the steps being taken by
industrialized countries. At the global level, the changes that were taking place
resulted in the collapse of the world's first globalization process. Some of the
factors leading to that collapse (the slower growth of international trade and
difficulties in maintaining the gold standard) had been in evidence since the
First World War, but the death knell was not sounded until the Great Depression.
This process was accompanied by increased state intervention in the economy, the
waning influence of liberalism at the global level,1 and its outright collapse in the
face of the rise of fascism in a number of countries and of the Communist Party in
Russia. Even in economies that held on to more liberal principles, the sphere of
state action expanded as greater pressure for social reform came to be exerted by
labor movements, by the economic planning exercises in which all world powers
engaged during both world wars, and by the need to deal with the serious
macroeconomic shocks generated by the Great Depression.

This opened the way for the emergence of a new development pattern in Latin
America that we will refer to as state-led industrialization. This term combines the
two main characteristics of this process: an increasing focus on industrialization as
a mainstay of development and a considerable expansion of the scope of state
action in economic and social affairs? A third characteristic of this pattern was
that it was geared toward the domestic market. This orientation has been referred
to in ECLAC writings as "inward-looking development" but is more commonly
known as "import-substitution industrialization." As we will see, however, import
substitution was not the most salient feature of this pattern over time, nor one that
was shared by all countries during the half-century in which this development
strategy held sway. This term is therefore not the most appropriate one for the
stage of development that we will be dealing with in this chapter.

The emergence of a second wave of globalization, as new international trade
patterns and a new international financial system gradually took shape, also had a

1 Polanyi (1957) provides the clearest picture of how historical events unfolded after the collapse of
liberalism.

2 Here we are relying heavily on the conceptual work of Cardenas, Ocampo, and Thorp (2000b) and
Thorp (1998a).


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