Individual action and the ‘encomienda’ system

The essential features of what was to become the social structure of the Latin American countries originated in the Spanish conquest itself and in the institutions established by the Spaniards and Portuguese to create an economic base which would consolidate their conquest of the new lands.

The circumstances attending the lengthy process of Spain's reconquest of her territory from the Moors permitted the creation of a highly centralised state, although the different regions of the Peninsula retained markedly feudal characteristics. Compared with other regions of Europe, commercial capitalism had made a belated appearance in the Iberian Peninsula. In Portugal the development of commercial capitalism was intimately bound up with the monarchy from the very beginning.1 By basing its strength on commercial activities and becoming the promoter of a grand commercial design, the Portuguese monarchy achieved autonomous development within the Peninsula. However, placing commercial activities under the aegis of the State led to a centralism not very different from that of Spain.

Adventurous spirits from all over Europe had been attracted to Spain by the war against the Moors and, at the time of the discovery of America, which coincided with the end of the Reconquest, Spain had large numbers of men able and ready to embark on military adventures likely to bring them handsome rewards.2 The conquest of the American lands was organised along the same lines and guided by the same principles as the long struggle to reconquer the homeland from the Moors.

Intrinsic limitations of the first phase of industrialisation

The industrialisation process that had started in some Latin American countries was profoundly affected by the 1929 crisis. This does not mean that the crisis represents a watershed between a period of prosperity and a period of depression. Indeed, some countries had already shown symptoms of a decline in the export sector in the period immediately preceding the crisis. In Brazil, for instance, there had been recurrent crises of overproduction in coffee since before the First World War, and rubber had lost its privileged position in world trade in the 1920s. In Chile, the nitrate crisis sparked off by competition from the synthetic product had been a burden on the country's economy for more than a decade. Nonetheless, with the exception of Brazil, in all the region's most economically significant countries the quantum of exports was 50 to 100 per cent higher in the 1925-9 period than in the first decade of the century. It was in relation to the nature of the industrialisation process that the 1929 crisis constituted a landmark. Until then, the development of the industrial sector had been a reflexion of export expansion; from then on, industrialisation was induced largely through the structural tensions provoked by the decline or inadequate growth of the export sector. The exception to this rule is represented by countries that were to experience a phase of vigorous export growth in a later period: Venezuela, Peru and the Central American countries.

After a century and a half of separation from their former European metropolises, the Latin American countries still present, jointly or severally, a profile not yet fully delineated. Each sub-region is at a different stage of a process of cultural homogenisation, of social and political modernisation and of an economic process that is in many respects sui generis. The institutions that formed the substratum of colonial society - the hacienda, the dependent indigenous community and the agricultural enterprise producing for export - remained virtually intact in the period that followed and provided the foundation for the formation of the nation-states. Economic development, insignificant in the three preceding centuries, gained momentum in the mid-nineteenth century, with the entry of the region into the system of international division of labour that emerged from the Industrial Revolution. Up to the beginning of the present century this development consisted in making extensive use of available land and labour resources for the purpose of specialising in the export of primary products. In many cases this required substantial infrastructural investment, generally financed abroad. Thus, the penetration of modern technology favoured the infrastructure rather than the directly productive activities.

Modernisation of infrastructures provided agglomeration economies favouring the urban populations, which began to increase in the last quarter of the nineteenth century as a reflexion of the expanding external sector and the final consolidation of the nation-states. With urbanisation, the transplanting of private and public consumption standards from countries with an industrial-based civilisation was intensified.

Overall regional trends

During the last two decades, the economy of the Latin American countries, taken as a whole, has experienced a marked expansion and has undergone structural changes of real significance. Measured in 1960 prices, the region's gross product, which had barely exceeded 40 billion dollars in 1950, rose to more than 135 billion in 1970. Output of ingot steel, which was just over 1 million tons in 1950, was more than 15 million in 1970. Nevertheless, despite these and similar indicators that could be taken into account, it would be wrong to assume that the regional economy had achieved the combination of conditions needed for development to become self-sustaining. On the contrary: the figures show that the pace of growth of the regional economy has not even been sufficient to maintain the region's relative position in the world economy. In the two decades under consideration, the annual rate of growth of the world economy was 5.5 per cent, while that of Latin America was 5.2 per cent. In terms of population growth, however, the difference is greater, since the world growth rate was 3.5 per cent and the Latin American rate only 2.4 per cent.

Development as a consequence of structural change

The countries specialising in primary production for export, within the framework of the system of international division of labour that developed in the nineteenth century, created economic structures with a highly inflationary bias. We have seen that cyclical crises in these countries entailed not only a fall in the quantum of exports but also deterioration in the terms of trade, flights of capital and obstruction of foreign credit lines. Thus there was a more accentuated and more rapid reduction in the capacity to import than in the flow of the money income generated internally by the export sector, creating pressures on the balance of payments which could not be eased simply by mobilising gold and exchange reserves. The immediate alternative was a devaluation of currency, bringing about an expansion in the export sector's money income, an increase in the tax revenue derived from exports and a rise in the prices of imported goods. Inflation was thus a consequence of the economic system's effort to adapt itself to a combination of external pressures. Since it was not feasible to defend the currency by manipulating interest rates and mobilising gold and exchange reserves, and since the short-term capital movements aggravated the critical state of the balance of payments on current account, it was natural that flexible exchange-rate systems should have come to prevail. The disadvantage of these systems is that they make speculation easier and thus accentuate the tendency to instability.

Institutional framework

As we have seen in earlier chapters, the export of primary products was the starting-point for an initial industrialisation process in many Latin American countries. However, externally induced structural change was dependent on the parallel action of domestic factors such as the relative importance of wage payment flows, the degree of domestic control over export activity, fiscal policy, the existence of a significant volume of recent immigration of European origin, etc. Among such simultaneously acting factors probably none was quite so important as the size of the country, if we take this to mean, firstly, the relative population size and, secondly, the natural-resource base. Thus, in the case of the five Central American countries each with a population averaging just over one and a half million inhabitants in 1950, it can be said that the main cause of their relative backwardness was closely related to their small size.

The Central American isthmus, excluding the present territory of Panama - the latter was an integral part of the Viceroyalty of New Granada and remained a province of Colombia until 1903, when it seceded to become, with the help of the United States, the Republic of Panama - was governed in colonial times from the Captaincy of Guatemala and, when it broke away from Spain in 1821, was organised as a Federal Republic. The federation succumbed to centrifugal forces unleashed during the Wars of Independence and broke up into five nation-states seventeen years later.

End of the colonial era

The break-up of the Spanish and Portuguese Empires at the time of the Napoleonic Wars was the last act in the complex historical process that unfolded throughout the eighteenth century, and was intimately related to the economic and social changes that had taken place in Europe. Spain's attempts to diversify the economies of her American colonies encountered two major obstacles: the protectionist barriers erected in the principal European markets as a result of prevailing mercantilist policies and her own inability to supply the colonies with manufactured goods. The colonies sought a way out of this situation by trying to find direct markets (through the contraband trade) or by producing domestically the articles they needed. Both attempts involved direct conflict with the metropolis. In regions with a developed export agriculture, such as Venezuela, or with a flourishing trade, such as Buenos Aires, awareness of these problems had crystallised very early under the influx of liberal ideas from England and France. With the outbreak of the Napoleonic Wars, Spain's isolation and the rapid penetration of British commercial interests precipitated changes difficult to reverse after the establishment of autonomous local authorities in various regions. In most cases, these governments arose in circumstances which did not involve hostility to the metropolis, then occupied by the French. But the very dynamic of the process led to breakaway movements, which in some cases took the form of prolonged and cruel struggle against the obstinate attempts of the Spaniards to restore a situation which had long ceased to exist.

Montevideo treaty and its operation

The four southernmost Latin American countries - Argentina, Brazil, Chile and Uruguay - had traditionally carried on a relatively important reciprocal trade in primary products. The bulk of this trade was between Argentina and Brazil, consisting on the part of Argentina mainly of wheat, and on the part of Brazil of tropical products - coffee and cocoa - and timber, an exchange which generally resulted in an adverse balance for Brazil. During the Second World War, difficulties in securingexternal supplies boosted intra-regional trade. Argentina increased her imports from Brazil and stepped up her trade with other Latin American countries. After 1945, balance of payments difficulties led to an intensification of bilateralism, within the framework of which trade among the southern countries mentioned could continue to develop. In 1950, exchanges between these four countries accounted for 9.2 per cent of their total foreign trade and in 1953 for 12.2 per cent. From the mid-1950s, however, the effort made, under pressure from the International Monetary Fund, to promote trade liberalisation and extend tariff preferences on a multilateral basis, initially in Argentina and Chile and, later, in Brazil, led to a sharp decline in the reciprocal trade of these countries, a problem which caused increasing concern in the region. To some extent, bilateralism had performed the role of protectionism extended over a wider area and, given the characteristics of the national economies concerned, it could reasonably be held that its disappearance would entail a fall in the level of activity.

The study of the economic development of the Latin American countries has been attracting increasing interest, both in Europe and in the United States and in the countries of the Third World generally. An independent political life, which began practically at the same time as the Industrial Revolution, and an even longer experience of the international division of labour system as exporters of raw materials, single out this group of countries from among the now numerous family of nations with so-called underdeveloped economies. To these reasons must be added the growing awareness that, to a greater extent in Latin America than in any other important areas, obstacles to development are mainly of an institutional nature, a circumstance that makes it doubly difficult to try to identify evolutional trends in the region. Moreover, the problems posed by economic development at its present stage are leading Latin American peoples to see their situation in more truthful terms and to value those aspects that constitute the features of a common cultural personality. This book was written with the dual purpose of helping students outside the area to form some idea of the socio-economic profile of the region and of contributing to the provision of a wider perspective for studies of the development of individual Latin American countries. In seeking to avoid dealing with each country in isolation - which would be to ignore the existence of a cultural reality in process of becoming homogeneous- I have also tried to avoid giving the false impression that there is a Latin American economic system.