What should the United States learn from the lack of equitable growth in Latin America?

This post is part one of a two-part essay on equitable growth in Latin America. For part two, click here. The combined piece has been featured by the Washington Center for Equitable Growth.
When the improbably-named Fernando Fajnzylber published the unappealingly-titled Unavoidable Industrial Restructuring in Latin America in 1990, it hardly had the makings of a classic. But Fajnzylber had identified a problem so fundamental to the region’s economies that it became exactly that. At the beginning of the book, he made a two-by-two grid, labeling the rows by high and low equity and the columns by high and low growth. Looking at the period from 1965 to 1984, Fajnzylber found Latin American countries that had managed high growth, countries that had high equity, and some that had neither. But one box was conspicuously empty: the one showing simultaneous high equity and high growth.[1] Fajnzylber’s work helped make filling his “empty box”—getting to growth with equity—a policy goal of most economists and governments in the region ever since.
            To be sure, the period from 1965 to 1984 that Fajnzylber analyzed was not just any time in the history of Latin America. A wave of military dictatorships had taken power in the major economies of South America. They blamed high inflation and economic turmoil on the left and sometimes on powerful unions. To combat those problems they turned to the recipes of the Chicago school: “shock therapy” that involved ending price and wage controls, privatizing state-owned businesses, and reducing tariffs to very low levels. Terror ensured that people could not effectively organize to protest their lost wages. After initial economic contraction, some countries experienced strong growth. The fact that this growth was coupled with major reductions in real purchasing power for workers and hence with widening inequality was not the sign of a process gone wrong: it was the intended policy outcome. Debt crises in the 1980s led to a lost decade for growth and further “neoliberal” reforms, as state monopolies were sold off—mostly to be replaced by private near-monopolies that created enormous fortunes for those connected to the state (for example, Mexico’s Carlos Slim, who eventually became the world’s richest man).
            Of course, inequality—Latin America’s original economic sin, more so than poverty itself—was hardly new to the region. Class divisions run deep throughout Latin American economies.[2] It would be a mistake to attribute this to immutable and ahistorical national characteristics, but it is a very old phenomenon. The region’s colonial economy was driven primarily by the wealth extracted by mining precious metals and by plantation agriculture. The basic situation for European colonists—after the reduction in the indigenous population due to disease and, later, campaigns of removal—was that land was cheap but labor was scarce, and the best way to resolve that problem was through a variety of forms of coerced labor, in particular the enslavement of Africans and the indigenous people who remained. The resulting gaps between those with political and economic power and those without were enormous.
            The reforms that liberal and positivist elites enacted in the early nineteenth century, after independence was achieved in the most of the region, did little to ease inequality. Liberals believed in free trade and individual landholding: they tried to distribute lands held in common to individual proprietors and reduce the power of the Catholic Church, which had operated as the region’s largest landowner, bank, educator, and welfare institution. Though they succeeded in the latter goal over the course of the century, the states they headed lacked the capacity to replace the church’s functions, and in some ways, they actually exacerbated inequality. Recent work by Moramay López Alonso, for example, on the second half of the nineteenth century in Mexico, shows that even in a period of economic growth and modernization, living standards (as indicated by heights) declined for the majority of the population.[3] In other words, growth without equity is nothing new to Latin America.
            In the twentieth century, Latin America has been practically synonymous with the problem of underdevelopment. There are rival theories about its cause. To reduce things to their most basic, two frameworks have been dominant. The first was the “dependency” school, which placed responsibility for Latin America’s underdevelopment on its disadvantageous dependence on the advanced economies of Europe and the United States. The basic problem, it was thought, was of Latin America’s insertion into an imperialistic world-system. Some dependency theorists sought solutions in moderate reforms, such as introducing protections for domestic industries. These were sometimes successful, and sometimes led to the creation of uncompetitive businesses that couldn’t survive in the absence of state support. More radical interpretations of dependency also emerged, counseling armed socialist uprising and economic autarky. After its revolution of 1959, Cuba tried a version of this. Inequality fell from the levels of Brazil to levels of Sweden in a few short years, and some forms of extreme poverty were eradicated. But, facing an economic embargo from the United States, it had to rely on the Soviet Union, and its measure of “dependence” increased. To say nothing of the absence of fundamental political freedoms, economic management has careened from one unstable plan to another, and what was once one of Latin America’s richest countries has consistently lost ground.
            Over time, the grounds for belief in strong forms of dependency theory looked increasingly flimsy, and historians began to offer explanations based on a growth-economics tradition.[4] The decline in the terms of trade between raw materials and finished goods that had inspired the original dependency analysis proved cyclical, not secular. Close analysis showed that Latin American economies were not helpless participants in the international economy, but able to influence important commodity prices. And socialist revolution proved either unattainable or economically disastrous. Historians and analysts increasingly explained Latin America’s economic conditions as problems of “institutions” that needed reform, not only its position in the world economy.
            From the point of view of generally left-wing dependency theory, this “institutional” analysis sometimes has the appearance of victim blaming and political conservatism. But it needn’t be understood in those terms. Kenneth Sokoloff and Stanley Engerman, for example, have argued that Latin America’s institutions are precisely the result of colonial inequalities and the largely successful struggle of outnumbered elites to maintain their privileges. Their data shows, for example, a clear inverse relationship between extant inequality and the years that voting rights are extended to cover most of the population.[5]Frightened elites do not invest in, and indeed actively suppress, dangerous forms of human capital formation among the common people. The persistence of inequality is, according to this model, the expected result of elites acting to maintain their privileges over decades and even centuries. That explanation takes a view of things from a very great height, and leaves the details to be worked out elsewhere. But it sounds a powerful warning to the United States as levels of inequality there approach those traditionally associated with the other Americas. If Latin America has a lesson for the United States today, it is that maintaining a relatively egalitarian society is not only important for growth, it is also important for keeping politics balanced within boundaries that can support a healthy and responsive democracy.

[1] Fernando Fajnzylber, Unavoidable Industrial Restructuring in Latin America (Durham, N.C.: Duke University Press, 1990), 2. Fajnzylber’s standard for high growth was an average annual growth rate over 2.4%, the industrial world’s average. His measure of equity was the take ratio of the lowest 40% to the highest 10% of 0.4, half that of the developed world average in the late 1970s/early 1980s.
[2] As Branko Milanovic has put it, inequality in Asia is based on location—some countries are much richer than others—while inequality in Latin America is based on class. Branko Milanovic, The Haves and the Have-nots: A Brief and Idiosyncratic History of Global Inequality (New York: Basic Books, 2011), 185.
[3] Moramay López-Alonso, Measuring Up: A History of Living Standards in Mexico, 1850-1950 (Stanford: Stanford University Press, 2012).
[4]For a introduction to this debate, see especially Stephen Haber, ed., How Latin America Fell Behind: Essays on the Economic Histories of Brazil and Mexico, 1800-1914 (Stanford: Stanford University Press, 1997).
[5] Kenneth Sokoloff and Stanley Engerman, “Institutions, Factor Endowments, and Paths of Development in the New World,” Journal of Economic Perspectives 14, no. 3 (Summer 2000): 226.

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