Methodological basis

External vulnerability, a reflexion of fluctuations in the prices of primary commodities on the world market, led several Latin American governments to assume growing responsibilities on the economic plane even before the 1929 crisis. We have seen how the need to regulate coffee supplies obliged the Brazilian government to undertake heavy financial commitments, with far-reaching repercussions on the monetary and fiscal planes, and how these commitments took the form of a compensatory policy in the 1930s, with profound consequences for the subsequent evolution of the national economy. We have also drawn attention to the complex exchange controls practised by Argentina during the decade of the Great Depression in order to cushion the domestic impact of external instability and pointed out the positive form taken by the Chilean reaction during the same period: a greater appropriation of resources generated by the export sector (controlled by foreign groups) and their allocation to strategic sectors, through a state agency specifically established for this purpose, with a view to diversifying productive structures.

By and large, the period extending from the end of the 1929 crisis to the end of the Second World War is characterised by development geared to the national domestic markets which Prebisch would call ‘development inwards’ as opposed to the ‘development outwards’ of the preceding period, based on growing participation in the system of international division of labour. After a time, this new development pattern raised the immediate problem of remodelling and broadening infrastructures.

Failure to adjust to the rules of the gold standard

In an earlier chapter it was pointed out that the world economic crisis of 1929 dramatically revealed structural changes that had been taking place in the world economy for some time. Among such changes we must mention the tapering off in world demand for most primary products. The crisis emphasised the magnitude of the ‘external vulnerability’ of economies specialising in the production of raw materials, among which the Latin American economies were prominent.

The financial movements involved in the system of international division of labour, based on so-called comparative advantage, were regulated by the Gold Exchange Standard, which assumed the definition of all currencies in terms of their gold value, free convertibility on the basis of a fixed rate of exchange (at least in so far as foreign transactions were concerned) and the free transfer of funds on the basis of ‘foreign exchange reserves’ held by the monetary authorities of each country. In countries with a diversified economy, characterised by some degree of substitutability between imports and home-produced goods, any sharp fall in exports due to external factors could be offset, to some extent, by an increase in domestic supply. Proper management of monetary reserves and foreign credit, in conjunction with a judicious policy of domestic expansion, could be sufficient to divert productive activity towards new types of export and towards the satisfaction of domestic demand formerly supplied by imports.

Agricultural production

The structural features of Latin American agriculture, described in detail in chapter 7, largely account for the behaviour of this sector in recent years. By and large we find a pattern of extensive farming, that is, agriculture geared to a utilisation of land and labour involving limited capital outlays. Moreover, the emphasis is on production of a few commodities, mainly those destined for export, enjoying a privileged position and monopolising available credit facilities and infrastructure. It is with this background in mind that we must analyse the evolution of the agricultural sector over the past few decades, a period characterised by the weakening of external demand and the expansion of the domestic market. The population explosion, rapid urbanisation and the rise in purchasing power of part of the population failed to elicit the required response from the Latin American agricultural sector, since prevailing systems of extensive agriculture were no longer adequate methods for coping with the situation.

The figures given in Table 14.1 show that agriculture and livestock production did not always keep pace with population growth. It should be added that these figures underestimate the insufficiency of supply since as a result of rapid urbanisation, demand for agricultural surpluses has grown much more rapidly than the population. Even if we assume that the food consumption patterns of the population that has emigrated from the countryside to the towns have remained the same, we would still have to consider the much higher wastage coefficient involved in transporting food.

Export expansion phase

The three decades preceding the First World War were a period of rapid economic development and some social change in Latin America as a whole: in Mexico, where the Porfirio Diaz administration created the conditions for a large inflow of foreign capital directed mainly into mineral production; in Chile, whose victory in the War of the Pacific against Bolivia and Peru enabled her to monopolise the sources of nitrate; in Cuba, where, even before independence was attained in 1898, the country's increasing integration into the United States market had brought about a dramatic expansion in sugar production; in Brazil, where the spread of coffee over the Sao Paulo highlands and the influx of European immigrants hastened the collapse of the slave economy; finally, in Argentina, where economy and society underwent drastic changes under the impact of the great wave of immigration and the penetration of substantial foreign capital.

A closer look at the three largest countries reveals the importance of the changes that occurred during this period. In Mexico, the population increased from 9.4 million in 1877 to 15.2 million in 1910. In the last of the nearly three decades of the Porfirio Diaz administration (1900-10), the annual average growth rate of the real per capita product was 3.1 per cent.

Industrialisation induced by expansion of exports

In countries specialising in primary production for export, that is, countries in which productivity was raised in response to the expanding world demand for raw materials, the change in the structure of production particularly the process of industrialisation, is characterised by a number of distinctive features which constitute one of the most interesting aspects of the economic theory of underdevelopment. The rise in productivity and the consequent increase in the purchasing power of the population led to diversification in the pattern of overall demand involving also a more than proportionate rise in the demand for manufactured products. It has been observed that in countries with a per capita income level below 500 US dollars there is a high income-elasticity of demand for manufactured goods, the coefficient value being between 1.3 and 1.5. Hence any rise in the population's purchasing power will mean not only diversification of demand but diversification in a particular direction, requiring a more than proportionate increase in the supply of manufactures. Since specialisation in primary exports (almost invariably only one or two products) concentrates resources in a few lines of production, the evolution of the productive structure will be the inverse of that of the demand schedule.

Traditional exports

In studying the long-term trends of the Latin American economies, the single most striking feature is the immutability of the region's export pattera Apart from a few special cases, we find that despite the considerable changes that have taken place in the production structures of a number of countries, the region's capacity to import is still dependent on exports of a few primary products, which were already being exported before 1929. However, we have seen that the importance of primary products in the pattern of the world economy, and more particularly in the pattern of international trade, has been declining and will tend to decline still further. It is hardly surprising, therefore, that the region's share in world trade should be diminishing, as can be seen from Table 19.1.

The figures in Table 19.1 show that in the period 1948 to 1970, the value of Latin America's exports grew at a rate which was less than half that of the increase in the total value of world trade. The region's participation in world trade, which was 11 per cent in 1948, fell to 7 per cent in 1960 and 5 per cent in 1970, and in the latter year its share of the total was smaller than before the Second World War. In the group of underdeveloped countries, Latin America has also lost ground: the growth rate of the exports of underdeveloped countries taken as a whole was 5.3 per cent in the post-war period.

Latin America: from geographical expression to historical real

For a long time the term ‘Latin America’, popularised in the United States, was used only in a geographical sense to designate the countries situated south of the Rio Grande. Far from showing any interest in what they had in common, the nations that emerged from the Iberian colonisation of the Americas sought to emphasise their distinctive characteristics in an effort to define their own national personalities. With the exception of Brazil, colonised by Portugal, and Haiti, colonised by France, the remaining Latin American republics share much of their colonial history and, in Spanish, a common language. Nevertheless, the fact that the pre-Columbian cultural heritage contributed in such widely diverse ways to the formation of the present national personalities makes the differences between countries such as Argentina and Mexico as great as the similarities. The same can be said of the African ethnico-cultural contribution, which is no less unevenly distributed. Even leaving aside the case of Haiti, whose African-French origins place it in a category of its own, the differences between the countries of the Caribbean region, where there is a marked African ethnico-cultural influence, and the Andean countries, where indigenous ethnico-cultural elements predominate, are as marked as is possible for countries sharing part of their history. None the less, the emphasis on diversity was less a reflexion of the real extent of the differences between the Latin American countries than of their awareness of a common origin.

The success of the first edition of this book confirmed my impression that there was a growing interest, both in University circles and among the general public, in Latin American economic issues and in interpretations of these issues originating from within the region itself. This new edition has been kept more or less to the same length as the first, but many chapters have been extensively rewritten to give greater depth to the study of the institutional framework which is the basis of the structural matrix prevailing in the region, as well as to include up to date information on recent economic developments. In the six years since the first edition was written, Latin America has emerged from a phase of slackening economic growth to enter an expansionary cycle comparable to that of the first half of the 1950s. Moreover, there has been an intensification of the effort to bring about structural change, particularly in the agrarian sector; at the same time, new economic policy models have been introduced, and the ideological bases of these policies have been widened. The richness of Latin America's historical experience, stemming from a wide variety of situations, which cover the full range of contemporary underdevelopment and the entire spectrum of ideological approaches, accounts for the interest which the region arouses in the socalled developed countries as well as in the countries of the Third World.

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.