A Brief Economic History of Latin America.
A Brief Economic History of Latin America The ¨rules¨ of international trade were written long ago, and although there are valuable lessons to be learned from the way that the Greeks and Romans established trade routes that took them halfway around the world, our modern concept of international commerce really began at the end middle ages. As shipbuilding and navigational technology improved it was only a question of time as to when the new European states would start to venture forth unto the world in search of riches. With the dawn of the ¨Age of Exploration¨ set in motion by Cristobal Colón’s (aka Cristopher Columbus) landmark discovery of the Americas, the age of globalization began. All of the learning objectives in this first portion of the course are clearly illustrated in the way that the colonial economies developed, and I think that it is an important starting place in order to really understand how International Commerce functions operates. Latin American economic history for over three hundred years from the time of Columbus up until independence in the early part of the 19th century was fairly consistent in terms of the role each of the major parties played: Latin America provided raw materials to Spain/Portugal, and then purchased and consumed the finished goods which were sold to them via the Colonial Government’s trade monopoly. For all intents and purposes this is the exact same system which was
used by all of the European nations in regards to their colonies: France in the America’s and later in Africa, Holland in the Americas and in the Far East, England with their colonial possessions, etc. In all cases the ¨mother¨ country established restrictions on trade which severely limited their colonies ability to grow economically. This entire model was based on the concept of ¨mercantilism/bullionism¨, the idea that a country’s wealth is equivalent to the sum of its precious metal supply. As precious metals were a relatively fixed commodity up until the discovery of the New World, this meant that in ...
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used by all of the European nations in regards to their colonies: France in the America’s and later in Africa, Holland in the Americas and in the Far East, England with their colonial possessions, etc. In all cases the ¨mother¨ country established restrictions on trade which severely limited their colonies ability to grow economically. This entire model was based on the concept of ¨mercantilism/bullionism¨, the idea that a country’s wealth is equivalent to the sum of its precious metal supply. As precious metals were a relatively fixed commodity up until the discovery of the New World, this meant that in order for the competing European powers to increase their wealth relative to their neighbors, they had to sell more goods than they purchased. This was the birth of the Balance of Trade, which we continue to use as a major economic indicator today. The raw materials produced by Latin America included precious metals (some gold but mostly silver), lumber, and exotic food items such as coffee and sugar. In order to maintain their monopoly on the production and supply of finished goods, the manufacture and sale of many items including any kind of machinery was strictly prohibited in the colonies. While this arrangement was quite convenient and profitable for Spain and Portugal, it was particularly disadvantageous for the Latin American colonies that understandably felt that their growth and development were being severely limited by Spain’s protectionist policies. However, it is important to keep in mind that the priority for Spain and Portugal were their own economic growth and well being, and the colonies needs were considered to be secondary at best. The capital flow in this case was completely one way – goods of low value were provided by the colonies while goods of high value were provided by the mother country. This is another example of Balance of Trade, this time in a closed economy. As time passed, a class of local elites emerged in all of the major urban centers of Latin American, including Havana, Lima, Mexico City, Santo Domingo, Salvador de Bahia and Rio de Janeiro. These groups came typically came from European families, but were born in Latin America. They felt slighted by the existing economic order, and wanted free access to goods. The Spanish crown, however, knowing full well that their monopoly on colonial trade was extremely profitable and necessary to support their continental military campaigns, went to great lengths to keep the Latin American colonies from trading with other nations, particularly Great Britain and Holland. For much of the period of Spanish rule, Havana and Lima were the only two legal ports of entry and exit in the Spanish Americas, and all imported goods were carefully recorded for taxation purposes. This system functioned from the foundation of the first permanent colonies in the early 1500s and remained basically intact until the Latin American countries declared their independence at the beginning of the 19th century. Upon breaking their ties with their previous colonial masters, one of the first changes that the newly founded governments sought to implement was the development of local industries. Now instead of being at the service of the Spanish Monarchy, the newly proclaimed independent countries immediately begin to look for ways that would allow them to grow economically. Absolute advantage was clear in many cases – whereas the Caribbean states and the northern coastal areas of Brazil lent themselves to the production of tropical commodities such as sugar and tobacco, the high Andean plateaus were better fit for the cultivation of coffee, and the wide pampas of Argentina and Uruguay were perfect for raising the cattle necessary to provide the leather used in the factories throughout Europe. While the system prospered, it left Latin American in the traditional role of a supplier of raw materials. This did little to foment the growth of industry, and up until the end of the Second World War very little real industrial development occurred in the region. After the war ended, however, the governments of the larger countries, specifically Argentina, Brazil, and Mexico, began to invest in the development of National Industries, in many cases state owned or sponsored. This included investments in telecommunications, transportation, automobiles, steel production, building materials, energy, and a variety of other products and services. Protectionism became necessary to give these nascent industries a chance to grow, and high tariffs were placed on imported goods. Thus, where absolute competitive advantage was not possible, comparative advantage was created through the establishment of import duties. While in many cases this enabled an otherwise non-competitive industry to function, in many cases it worked against national interests and led to widespread abuse due to a lack of competition. A clear example of this is that under the state owned Telecommunications monopoly ENTEL, a telephone line in Argentina cost between 8 and 10 thousand dollars in 1970 (approximately two years of salary for an average wage earner), and could take up to fifteen years to be installed. After privatization occurred in the early 1990s, the same line cost under one hundred dollars, and was installed in 24 hours. With the notable exception of Chile, most of the country’s tariff structures still remains largely in place today. While certain inroads have been made by foreign firms, largely through direct investment, markets throughout the region are still fairly protectionist in nature. In a globalized economy, some countries are going to be better positioned than others to compete, and each nation must look for ways to grow in an era of diminished Comparative Advantage. Is the move to globalization always a positive one in terms of the local industry and living standards? In what areas does Latin America have Absolute Advantage? Comparative Advantage? What does this mean for Latin America’s socio-economic growth? What policies would you recommend for countries in the region?