STRUCTURES, ENDOWMNENTS AND INSTITUTIONS

STRUCTURES, ENDOWMNENTS AND INSTITUTIONS IN THE ECONOMIC HISTORY Of LATIN AMERICA

J. Coatsworth

Latin American Research Review, Vol.40 No. 3 (2005) pg. 126-144

In a Nutshell

This is a wide ranging look at theories of long run growth in Latin America. The parts that a relevant for me are the specific criticisms made against the Engerman and Sokoloff thesis, and as such this summary will focus on those criticisms.

The main takeaway is that although there was extreme concentration of wealth and land in LA this cannot be attributed to factor endowments as the inequalities did not arise until much later than E&S imply and for very different reasons including technological change, north-south relations, violence etc.

Examples

Although totally reliable data are not available on growth and GDP in the early years of colonialism Angus Maddison provides data upon which there is much agreement which indicates that the areas of LA under Spanish/Portuguese control probably enjoyed per capita incomes on a par with Western Europe and at least equal to those in the USA (at that time  British colony). Additionally it appears that there was very little economic growth in the 50 years post 1810 and independence in the region. This poses problems for the institutions thesis: if growth is determined by institutional settings, and the institutional setting in LA highly unequal in its provision of access to infrastructure, education and government thus harming growth potential, it would seem that convergence of incomes up until the early 18th century followed by divergence should not be a possible outcome as factor endowments were presumably constant throughout this period. Particularly problematic is the convergence with the USA, as this northern colony is the example in the E&S thesis of a good institutional setting.

AJR argue that the divergence occurred during the period of industrialization in the mid-19th century up to the beginning of the 20th century; the age of industry created a considerable advantage for societies with institutions of private property, advantages which many Latin American countries were thus unable to capitalize upon. Whilst perhaps more coherent in the  face of the data, this interpretation seems to gloss over the possibility that the inability to industrialize and capitalise on new technologies and thus the origin of the enormous divergence in growth that occurred as between Latin America and USA/Western Europe, may have been in some way related to the decades of violence and civil war that followed independence earlier in the 19th Century. The period of industrialization coincided with the “lost decades” of insurgency (Bates, Coatsworth and Williamson) , political instability and economic stagnation in Latin America and this left the region an “economic and political basket case.” (Williamson). However, factor endowments were surely constant across independence including soil types and climate, as was the population density in 1500. Even if those causal mechanisms are longer important, as operating only through the institutions they inspired, it is surely implausible to assert that growth in the 19th century was not linked to the conditions that created the independence movement, and the subsequent internal violence (factors exogenous to both the ES and AJR model), but rather to failings in the institutions of private property. After all, economic agents behave differently when they fear for their life, family’s welfare and source of living (North, Weignast)

The institutional thesis can no more explain the divergence from 1810 than it can the resumption of growth from 1870 until WWII when LA grew faster than most of the industrialized world.

Furthermore although the institutions that governed LA from colonization were very similar there was a wild divergence of early GDP. Indeed those societies that were most unequal seem to had the highest GDP e.g. Cuba. At this time inequality therefore seems to be positively correlated with economic development.

Coatsworth argues that the concentration of land ownership was actually a much later phenomenon than suggested by E&S. Until the late 18th century and the arrival of the railroads, and increased shipping capabilities, much of Latin America was unused with land values extremely low. It was only exogenous technological change in transportation that brought value to the land.

Additionally, whilst inequality has always been a feature of LA society it was this early globalizing period that greatly entrenched inequality, and then the subsequent ISI period reinforced this with wage increased for protected sectors and government jobs to the exclusion of particularly the agricultural sector which was a great proportion of society. This inequality was driven by policy models, external dependence and ideology of decision makers, not by factor endowments. Thus it may be that institutions are important for growth (as they surely are) but that the long run causes of these institutions are not as dependent upon the spent historical determinants of factor endowments, as upon concurrent contexts.

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