Category Archives: Long-Run Growth (The Engerman and Sokoloff Thesis)

REVERSAL OF FORTUNE

REVERSAL OF FORTUNE: GEOGRAPHY AND INSTITUTIONS IN THE MAKING OF THE MODERN WORLD INCOME DISTRIBUTION

D. Acemoglu, S. Johnson & J.A. Robinson

The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov., 20020 pg. 1231-1294

This is a very short summary taken from an essay I wrote. It is not intended to be a full exposition but rather a study aide.

AJR take a similar approach [to Engerman and Sokoloff] albeit they illustrate their thesis with statistical findings. They show there is a negative relationship between countries that were relatively rich in 1500 and economic prosperity today; the “reversal of fortune”.[1] They use population density and extent of urbanization as proxies for economic wealth in 1500 and argue that it was the relatively poor areas in which the “institutions of private property” were established whereas the norm in relatively richer areas was “extractive institutions” where power is concentrated in an elite and expropriation risks for the population in general are large. This is because “relative prosperity made extractive institutions more profitable for the colonizers; for example, the native population could be forced to work in mines and plantations”.[2] They posit that societies with good institutions are more able to take advantage of the opportunity to industrialize as private property institutions are “essential for investment incentives and successful economic performance.”[3] For example, they show that the regression analysis of current income against urbanization in 1500 predicts that Uruguay which had no urbanization in 1500 should have a current income 105% greater than Guatemala which in 1500 had an urbanization rate of 9.2%, and this turns out to be pretty close to the truth.[4] In order to prove the effectiveness of their instrument, and to thus prove that institutions cause growth and not vice versa, they have to show that the urbanization/population density in 1500 has no direct effect on current GPD levels other than through the effect it had on early institutions. Once they include the variable in their regression and control for the effect of institutions they cannot reject the null hypothesis that the coefficient of the instrumental variable is equal to 0, in other words that it does not explain any of the variation in GDP other than through its effect on institutions.[5]

Although similar to the ES hypothesis in that AJR are supporting what has come to be known as the “institutional hypothesis”, the instrument they employ is pointedly different to that of factor endowments. Indeed they specifically control for geographic variables including soil type and climate and do not find them statistically significant in explaining variation in GDP today.  They also engage much more directly with other hypotheses such as the “geography hypothesis” as well as the “colonial identity hypothesis”, the “latitude hypothesis” and the “religious hypothesis” and conclude that once they have controlled for geographic variants, the identity of the colonizers, the position of the colony relative to the equator and the religious makeup of the colonial society, all of those variables do not significantly explain variation in current GDP across ex-colonies.


[1] Acemoglu, Johnson and Robinson Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov 2002) pp. 1231-1294

[2] Ibid.

[3] Ibid.

[4] Ibid

[5] Ibid. 

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THE POLITICAL ECONOMY OF INDUSTRIALISATION

THE POLITICAL ECONOMY OF INDUSTRIALISATION

From WWI to the Great Depression

S. Haber

  • War did not produce a huge disruption in LA industrialization. Foreign goods disappeared from the market thus giving domestic production effective protection.
  • LA was hurt by war in two senses: 1. Financing had largely been coming from GB and thus capital inflows dried up. 2. Inputs became very hard to obtain e.g. coal, chemicals, capital and intermediate goods.
  • Therefore growth slowed during the war years but did not cease.
  • E.g. Brazil’s textile industry doubled in size between 1907-1914 and then did not grow at all until 1921. There was a large contraction of new investment.
  • E.g. Argentina – output stagnated 1914-18. Only industries that relied on home grown raw materials benefitted e.g. woolen textiles. Unemployment rose in urban centres by 10%.
  • e.g. Mexico – growth stalled due to lack of raw materials, machines and spare parts. Haber argues this would have occurred despite the revolution of 1910-.
  • When the war ended GB no longer the primary consumer of goods from LA, nor the source of capital, nor machinery/equipment. In all respects BG was overtaken by the USA.

POST WAR

  • After the war there was a huge increase in industrial investment such as manufacturing, textiles, beverages and began to include intermediate and capital goods too e.g. iron, steel, chems, tobacco etc.
  • Growth came from small workshops that converted to factories during the war, but also from multinationals setting up subsidiaries in LA e.g. GE, Ford, General Motors etc.
  • As investments climbed so did output.

THE GREAT DEPRESSION

  • The depression hit LA hard and before the worst of it hit the US – export prices had been falling for some time. The large scale contractions of 31/32 sent prices to rock bottom. E.g. Mexico output declined 31% between 1929-32.
  • The industries that had seen large scale investment were particularly hurt e.g. BAT was running at only 37% capacity.
  • Medium term things were not so bad – the move away from the gold standard meant large scale currency devaluation in LA and thus export products were priced very competitively in the world markets. There was rapid growth in manufacturing output. By 1939 manufacturing accounted for 16.5% of LA total GDP.
  • The increased output of the 30s was thanks to capacity that had been installed in previous decades. E.g. Brazilian steel companies showed lots of growth in 30s but all the companies had been established and equipped in the 20s.
  • e.g. Mexico – capital machinery inflows were half of their previous levels and yet recovery was in full swing, indicating they were already equipped to pursue growth opportunities in the 30s.
  • Haber does not totally discount the idea that there were new firms in the market, but he contradicts the thesis that LA’s industrial development can be dated from the 30s. The basic model and capacity of LA industry was inherited from earlier decades.
  • Once the effects of the currency devaluation had been reversed (thus ending the de facto protection) there were calls for protection by way of tariffs.
  • Tariff protection increased hugely in the 30s. Yet they were not conceived as permanent, rather they were ad hoc responses to short-term crises. Aside from protectionism they made a good deal of economic sense as the collapse of export revenues meant governments faced BOP problems. The inflow of foreign capital had stopped so a means of preventing a huge forex loss and pay for imports was needed and tariffs allowed for this.

REAL WAGES, INEQUALITY AND GLOBALISATION IN LATIN AMERICA BEFORE 1940

REAL WAGES, INEQUALITY AND GLOBALISATION IN LATIN AMERICA BEFORE 1940

Jeffrey Williamson

 A Summary

  • By 1914 there was great amount of regional variation in the wage levels within LA. How and when did these gaps appear?
  • 19th Century saw a big divergence of living standards across the centre/periphery. This was caused by the industrialization of Britain and others which left many countries way behind.
  • Pre-1914 there was a globalization boom led by commodity trade. This led to a convergence in living standards across the Atlantic nations. LA in this period (1820-70) was in a state of independence and war and was [“lost decades!”] thus an “economic and political basket case”. Many countries actually saw negative growth in this period. The poorest countries were growing slowest and the richest were growing fastest.

The Tyranny of Distance

  • Economic isolation explains underdevelopment (landlocked, no access to coasts, far from trade routes etc). Does this explain LA history? Andean countries, Mexican interior etc. were cut off in the pre railway days (1870).
  • Geographic isolation helps to explain the rankings of countries i.e. most isolated were poorest. Many other factors though – slavery, bad luck in commodity markets, but it is still accepted today that poor economic performance is associated with being land locked
  • Those countries with navigable rivers and long coast lines (Arg, braz, Carib, Central Am) have a comparative trade advantage but may have failed for other reasons.
  • Around 1850 large leaps in transport capabilities drastically reduced the cost of freight and began to thus incorportate LA economies into the world market. (sail to steam).
  • Refrigeration was also a radical development and introduced in a big was in the 1870s. Now LA meat was being exported in large quantities.
  • The impact of the transport innovations was a trade boom!By 1912 exports accounted fro 25% GDP (12% in 1850).
  • However, the globalization that took place in the late 19th Century was not due to an embrace of liberal trade policy (tariffs did not in fact fall). In fact tariffs were used as a defense to competition spurred on by lowered transport costs.
  • The period was actually one of retreat from free trade but this was overwhelmed by transport benefits.
  • The boom led to a commodity price convergence between LA and EU in commodity prices e.g. wheat (58 to 18 % transatlantic price difference reduction). Meat was delayed due to slower development process for refrigeration units.

 

 

Real Wages

  • Williamson wants measure growth by real wages not GDP as wages offer distributional information (when looking at urban workers esp) and living standards are btter captured by wages than GDP as people really earn wages not GDP.
  • He looks at unskilled wages in LA vs. the same in Britain using purchase power parity rather than exchange rates. At turn of the century Arg/Uraguay are close to Britain, mexico at 58% and northeast Brazil at a mere 5% of the wages earned in Britain (they had only just freed the slaves and exports were performing badly).
  • Some effort has been made to compare these regional gaps to other areas in the world, but Williamson argues the gaps were actually much wider in LA.
  • The 20th Century was a time of convergence of wealth within LA. The close in the gap between richest and poorest closed dramatically in the 80 years from  WWI, although the hierarchy of wealth remained the same (expcept Brazil) indicating that there is a strong historical perseverance of the “wealth of nations”. E.g. if Chile, Cuba, Arg are 100 the 1910 figures for wage rates in Braz, Ecuador and Ven were 26.3. 33.4 and 34.3% respectively. By 1990 this was 80.7 53.2 and 127.7%
  • There are two main periods of convergence: 1910-1930 and 1970-1990.
  • There is no evidence for any real convergence prior to the turn of the centrury.
  • In spite of convergence within, there was divergence without. Until the war only Argentina seemed to be catching up with Britain in terms of real wages. Cuba and mex were nto performing badly but there was no progress toward the UK level.
  • In the 20th Century the gap widened significatntly. Why?

Real Wages and Migration

  • Immigrants from Spain and Portugal were poor by EU standards and went to LA to exploit higher relative wages. The wage gaps determined the spread of immigrants – i.e. better rents in labour scare parts of the continent.
  • As wages fell relative to EU in the 20th Century immigration also slowed.
  • Economic failure in Portugal and Spain created the mass migrations.

Wage Rental Ratios

  • The wage/rental ratio fell drastically until WWI. Exports of land intensive products lead to an increase in land value whilst the increased imports of labout intensive manufactured products caused the demand for labour to fall. i.e. inequality was on the rise. Other explanations are that there was a process of labour intensification with the arrival of immigrants and this increased supply suppressed prices.
  • Exactly the opposite trend was occurring in Eu. Inequality was falling.
  • In LA the wage rate growth was falling way behind the GDP p.c. growth (pre war) and the opposite is true post war.

LATIN AMERICA AND THE INTERNATIONAL ECONOMY 1870-1914

LATIN AMERICA AND THE INTERNATIONAL ECONOMY 1870-1914

W.P. Glade

 A Summary

In A Nutshell

Whilst this article is dense with information, it is useful to show that institutions are not the only thing worth accounting for when thinking about growth in LA. The structure of dependence upon core countries is also really important as well as technological changes.

  • Post colonial mix of capitalist and non-capitalist relations of production.
  • Began to integrate into world economy exporting wool, minerals and coffee but ease of borrowing in this time meant there were no home grown technological developments
  • Post independence left a politically unstable region – coups uprisings etc. and this led to inefficiency, indiscipline and corruption.
  • Last 25 years of 19th century stability began to be exhibited. Government authority increased especially in Brazil, Chile, Arg and mexico – and this meant policy could be directed toward securing material prosperity.
  • This stability lead to a more reliable and thus hospitable investment environment for foreign investors and for local private investment/capital accumulation.
  • Foreign investors were investing not just in businesses but in the government bonds so substantial infrastructure improvement could also take place. The money was better used as stability means less wastage and pilfering associated with constant regime change.
  • During the 19th century growth in world trade in primary products outstripped that of manufactured goods and this was so until the 1st quarter of the 20th century. Thus the growth seen in Latin America during this time of “high capitalism” was driven by industrialization in the economic centre.
  • The reliance on this demand driven by the economies of the North lead to unsteady growth due to shocks or political instability in those countries. Nevertheless during this period expansion was “export led” and therefore induced by the pull of demand in industrial countries.

Export Markets

  • The integration into the world economy changed the pattern and geography of production in LA
  • e.g. Argentina – Wool, hides, meat (with advent of frozen shipping capabilities) and most significantly (and recently to 1870) wheat and maize. The pampa and areas to the west of BA had been converted for farming cereals, and wool production shifted form the pampa to Patagonia.
  • e.g. Chile – Wheat, Copper and nitrates (more acquired after war of the pacific – a radical example of the changing geography of the region! [ Chile acquired mineral deposits in land from Peru and Bolivia])
  • e.g. Mexico was favoured with good geography i.e. close to shipping routes to Europe but also the northern border with the US – silver, gold, copper and under Diaz, Petroleum (was 3rd in world petrol producing nations). The diversity of exports (rubber, hides, cattle, lead chick peas) meant that there was more stability in external sector. Since the exporting regions were not close to each other many different regions were touched by flourish international trade. Thus we would expect to see regional subnational economies (such as the coffee economies around Rio in Brazil) but there was little of this and the average Mexican was not benefitted by growth even if the exports were coming from his locale.
  • Elsewhere a monocultural pattern of development e.g. Colombia 46% exports were coffee leading to basic instability of export economy.

Domestic Markets

  • Large changes in consumer habits in all countries of LA. Imports largely from Britain (although some artisan industries never entirely died out).
  • Industrialisation was patchy but nevertheless it was the dawn of the factory age inspired by a change in tastes that favoured factory goods over traditional goods.

New Characteristics of the Market

  • Doubly joined to the world market: firstly the organization for export expansion provided central resource allocation dynamic. Foregin, not domestic demand called the tune. Secondly changes in domestic demand reveal that consumption was heavily commited to participation in foreign trade.
  • Not everyone accepted the liberal economic model, some variation to laissez-faire was introduced in the region.
  • All product innovation originated abroad so all monopoloy profits accrued to foreign entities.

Factor Markets

Land

Land was fundamental to the nature of the export economies (the good exported were land intensive”) and it also conditioned the social and political arrangements of the period.

The large increase in the supply of land needed to grow exports came from three sources:

  1. Private appropriations of the public domain – coffee pushed cattle/farming to ever further outlying parts of the region. Huge amounts of land that once belonged to the state then fell into private hands, either a family or company (in the case of mining land). Small/medium mines would be family run until they presented significant attractiveness at which point they would be bought by international companies – “denationalistion” was most significant for mining than rural properties (although banana plantations of central America etc.)
  2. Conversion of land held by haciendas to commercial use – triggered by railway lines as they moved into new areas. Previously unused estate land would be converted to producing export goods. Some estates were subdivided, but others were concentrated into larger production units.
  3. Corporate holdings in the more traditional areas – e.g. church land e.g. mexico – 1850s legal reform put church land in the hands of private owners. Market purchase and simple seizure were both used.
  • Generally large land owners had the upper hand as concessions for mining etc. were given to those who could influence politicians. Where export products were demanded the demand for land went up and so did prices pushing those peasant farmers etc. to the furthest periphery as they had no access to credit etc.

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.

COLONIALISM, INEQUALITY AND LONG-RUN PATHS OF DEVELOPMENT

COLONIALISM, INEQUALITY AND LONG-RUN PATHS OF DEVELOPMENT

S.L. Engerman & K.L Sokoloff

NBER Working Paper 11057

A Summary

[The following is summarized within an essay written in the MT. It is not intended to be a complete summary, but rather an aide for future essay writing.]

ES suggest that institutions are a fundamental determinant of growth, and the quality of the institutions in Latin America explain why the colonies “that were the choices of the first Europeans to settle in the Americas, were those that fell behind” relative to those North American colonies of the today’s USA and Canada.[1] In reviewing the history of these colonies they claim the systematic factor that explains the diversity of quality in institutions across the “New World” is “extreme inequality in the distribution of wealth, human capital and political influence” in the early settlements. This led to the development of institutions primarily devised by elites to ensure the persistence of such inequalities and it is this poor institutional base that explains long-run economic underdevelopment. The degree of inequality was itself determined by the “factor endowments” that the colonists faced upon arrival in the New World.

The rich soils and warm climates prevalent in much of the Caribbean Latin America but particularly Brazil, leant itself to agricultural practices such as the cultivation of sugar, that exhibited large economies of scale and were thus most effectively produced on large estates using slave labour imported from Africa.[2] Elsewhere in Spanish America, where land was not so fertile, the primary export products were metals extracted particularly in Mexico, Bolivia and Peru. These territories were characterized by a large native population that survived contact with the European settlers. Land was distributed to a similarly small elite in similarly large quantities, and thus the estate owners had control over a large workforce which despite having better social standing than the slaves of Brazil, were nevertheless coerced into service in the mines.[3]

The slave economy of Brazil and the similarly coercive economies found in Spanish America obviously imply that inequality in political power, human capital and wealth was extremely high. Power was concentrated in the hands of a small European elite, and particularly in Spanish America this situation was maintained externally by “restrictive immigration policies”.[4]

Conversely, the soil and climate coupled with the relative dispersion of the native population (and thus the unavailability of coerced labour), meant that the factor endowments that the colonizers of the Northern American territories faced were “more hospitable to the cultivation of grains” which were most effectively produced on small farm holdings. The absence of economies of scale in agriculture meant that production was based on labourers of European descent so there was drastically less human capital inequality relative to rest of the New World. Furthermore “large landholding unravelled because even men of rather ordinary means could set up independent farms when land was cheap and scale economies were absent.”[5] What ES show is that the factor endowments of the Northern colonies meant land, wealth and thus political power was spread much more evenly over a relatively homogenous European population. In short, extreme inequality was absent.

ES argue that this equality in the Northern colonies set in motion a path of institutional development that focused on democracy, state investment in public goods and infrastructure and equality of opportunities both economic and political. Conversely, “where there was extreme inequality, political institutions were less democratic, investments in public goods were far more limited and the institutions that evolved tended to provide highly imbalanced…access to property rights and economic opportunities.”[6] They explain that in the highly unequal societies the elites were concerned that democratic institutions would place too much power in the hands of the poor majority who would use that power to redistribute land and redress the societal imbalances as regards opportunities. In such societies anti-democratic processes are essential for the elite to maintain their hegemony. Conversely in societies where wealth and human capital are more evenly distributed the demand for and merits of (in the eyes of those with political power) a more broadly participatory system are greater because “institutions are established in a society that has some power relations and they must reflect the distribution of this power”[7]. Furthermore, even had the elites in the Northern colonies perceived an advantage in anti-democratic institutions, they could not have instituted them as they were reliant on attracting European migrant labour which would not have been forthcoming had political and economic inequalities been great. In the Spanish colonies elites were able to act on exactly such perceptions as they were at the same time trying to restrict immigration due to the already extensive cheap labour.[8]  This explains why at the beginning of the 20th century none of the Latin American states had the secret ballot nor “more than a miniscule fraction of the population casting votes”[9] whereas the US and Canada had extended the franchise to a much greater extent, removing restrictions based on wealth and literacy.

Similarly education provision by the state in unequal societies is far less likely to develop in unequal societies as small elites are able to command private education for their offspring. There are be significant collective action problems associated with public school provision in such societies tiny elites are the major source of tax revenue (a cost to them) but the major beneficiaries of such schooling provisions are the poor majority. Therefore the benefits and the costs to the elite are hugely misaligned. In more equal societies where a larger proportion of the population makes up the taxable base, those costs and benefits are more equal vis-à-vis the individual taxpayer so public education provision becomes more feasible. As above, education may also have been used to lure migrant workers from Europe. Thus we see why “the rest of the hemisphere trailed far behind the United States and Canada in primary schooling and literacy”.[10]

The two examples above illustrate the method that ES employ. Although not strictly empirical (there is no data analysis in their work on this topic), the method is consistent with the search for the instrumental variable. The thesis would be testable under statistical conditions, and although perhaps more historical in approach, ES are trying to show that causality moves from institutions to growth as the instrument of “factor endowments” through its effect in inequality in early colonial economies in the New World varied the quality of the institutions but cannot be thought of as affecting current growth trajectories. The method is thus decidedly economic in style.


[1] Engerman and Sokoloff Colonialism, Inequality, and Long-Run Paths of Development National Bureau of Economic Research Working Paper 11057 (2005)

[2] Engerman and Sokoloff Factor Endowments, Inequality, and Paths of Development Among New World Economies National Bureau of Economic Research Working Paper  9259 (2001)

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Engerman and Sokoloff Colonialism, Inequality, and Long-Run Paths of Development National Bureau of Economic Research Working Paper 11057 (2005)

[7] A. Przeworksi Institutions Matter? Government and Opposition Vol. 49 No. 4 (2004) pp.  527-540

[8] Coatsworth  Structures, Endowments and Institutions in the Economic History of Latin America Latin American Research Review, Vol. 40, No. 3 (2005) pp.126-144

[9] Engerman and Sokoloff Colonialism, Inequality, and Long-Run Paths of Development National Bureau of Economic Research Working Paper 11057 (2005)

[10] Ibid.

IDEOLOGICAL PERIODS IN POLITICAL ECONOMY

IDEOLOGICAL PERIODS IN POLITICAL ECONOMY

A. Hira

Chapter 2 and Conclusion from Ideas and Economic Policy in Latin America

 In a Nutshell

Ideas are important.

Traditional interpretation of the neo-liberal reforms in LA miss the fact that the political economies of Brazil and Venezuela are very different but the tried the same reforms. Moreover, despite the heterogeneity of system and history within the states of Latin America, whether it be the period of inter-war globalization, post was import substitution or late 20th Century liberalization, the region has moved often in a similar direction. Thus to focus only on international actors or domestic conditions etc. is to miss the importance of the power of ideas. Criteria such as the was the relationship between a state and the world economy is viewed informed distinct orientations toward development that are signs of different ideological perspectives. It is the dynamic creations to the answers of development issues that constitute the discourse on development.

Whilst it is true to say that dominant coalitions select policy to suit themselves, the menu of economic policies available is derived from the economic ideological frameworks that are available at a particular time in history. Paradigms of development represent pools of ideas that delimit policy choices. These ideologies are worked into the state apparatus by knowledge networks which during the time of interest consisted of expert technocrats (previously the knowledge networks were driven by ECLAC and then the Chicago boys].

Crisis is an important feature of this type of analysis. This is because paradigms change as anomalies accumulate (i.e. something that cannot be explained by the current paradigm). When the accumulation of anomalies reaches a crisis limit a new paradigm must come to dominate. Thus a crisis is an acclaimed failure of the current framework of economic policies to achieve their stated goals. Whilst not the only way to change an ideology, it is one of the most fundamental instigators of change. [This would place a greater emphasis on crisis than Armijo & Faucher allow for. In other words it was not until ISI was thoroughly discredited that a new paradigm fed by expertise from USA and Britain etc. could come to dominate. Without the hegemony of that idea, the selection of neo-liberal policies would not have been possible, as policy makers can only select policy from a menu which contains those policies available under the dominant ideologies.] It should be noted that international pressures and domestic coalitions are still need to pressure for change and support it, and particularly important are the reverberations between the two, but an active ideology is also essential. The ideology legitimizes.

A hegemony of ideas breeds stability in policy making. First ECLAC then the Washington Consensus. It is this stability that is essential for growth. [It could then be argued that the failure of ISI and the crisis of the 1980s, international and exogenous conditions aside, could be partly attributed to a faltering ideology, which led to instability of policy. The actions necessary to complete the ISI model such as regional integration faltered as there was a lack of political will both because the ideology was not strong enough now, coming out of ECLA, and secondly that the B-A did not have at their core the same ideology as the previously populist regimes.]

[This is important for evaluating the Engerman and Sokoloff thesis (EH451) and also the AJR thesis:  Doctrinal and ideological changes and their effects on growth are also not understandable in the light of the institutional hypothesis. Although doctrine and ideology are doubtless formed against a backdrop of institutions there is a wealth of other factors – social, economic, international, that shape them as they in turn shape policy, institutions, incentives and thus growth. From the importance of Comte in the positivist strains of thought at the turn of the 20th Century[1] to the extraordinary influence of Raul Prebisch, Latin American politics and policy specifically related to growth and development has often been dominated by thinkers that exist outside of its own institutional makeup. Furthermore an institutional focus does not recognise the social causes of populism such as rapid urbanization, an increasingly “mass society”, plus the electoral gains to be made (in certain periods of history) from nationalism in casting foreign investment/involvement in a malicious light.[2] It therefore cannot explain the cyclical nature of Latin America’s dalliances into large scale redistributionary politics. A similar story can be told in relation to the apparent cycles of authoritarianism. What we see in Latin America are periods of large doctrinal and ideological changes and these change economic outcomes in ways that endowments cannot predict.[3] We see this even in the modern history of the region: the shift toward liberalization as doctrine and the consequent effects on growth in the 1980s was caused in part by debt crisis, external pressures and trends in thought, and internal political pressures as part of the transition to democracy.[4] The institutions of private property and the more wide institutions of the market surely were important in seeking to redress the allocative inefficiencies of the structuralist period, but they are again only part of the story. Therefore the ES and AJR hypotheses are not sufficiently sensitive to such ideological contexts and their causes.]


[1] Hale Political Ideas and Ideologies in Latin America, 1870-193  in L. Bethell (ed.) Ideas and Ideologies in Twentieth Century Latin America (1996)

[2] Dix Populism: Authoritarian and Democratic Latin American Research Review XX 2 (1985) pp.29-52

[3] North, Summerhill and Weingast Order, Disorder and Economic Change: Latin America vs. North America

[4] Astorga, Berges and Fitzgerald, The Standard of Living in Latin America During the Twentieth Century, Economic History Review, LVIII, 4 (2005), pp. 765–796