Bulmer-Thomas V., Coatsworth J., Cortes-Conde R. The Cambridge Economic History of Latin America: Volume 2, The Long Twentieth Century
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162 Victor Bulmer-Thomas
Table 4.2. Latin America: consumer prices (Dec–Dec variations)
Latin America: Consumer prices (Dec–Dec variations)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Argentina 7.43.91.60.10.30.7 −1.8 −0.7 −1.540.6
Bolivia 9.38.512.67.96.74.43.13.40.92.3
Brazil 2,477.2916.522.49.65.21.78.96.07.710.9
Chile 12.28.98.26.66.04.72.34.52.63.0
Colombia 22.622.619.521.617.716.79.28.87.67.1
Costa Rica 9.019.922.613.911.212.410.110.211.010.0
Cuba 0.00.0 −11.5 −4.91.92.9 −2.9 −3.0 −0.55.0
Dominican
Republic
2.814.39.24.08.47.85.19.04.48.8
Ecuador 31.025.322.825.530.743.460.791.022.49.7
El Salvador 12.18.911.47.41.94.2 −1.04.31.41.4
Guatemala 11.611.68.610.97.17.54.95.18.96.3
Haiti 44.332.224.814.515.77.49.719.08.110.1
Honduras 13.028.926.825.312.815.710.910.18.87.7
Mexico 8.07.152.027.715.718.612.39.04.45.4
Nicaragua 19.512.411.112.17.218.57.29.94.74.2
Panama 0.91.40.82.3 −0.51.41.50.70.01.6
Paraguay 20.418.310.58.26.214.65.48.68.414.6
Peru 39.515.410.211.86.56.03.73.7 −0.11.5
Uruguay 52.944.135.424.315.28.64.25.13.624.7
Venezuela 45.970.856.6103.237.629.920.013.412.330.7
Latin America 872.4328.726.018.610.710.09.79.06.111.4
Source: Economic Commission for Latin America and the Caribbean, Preliminary Overview of the
Economics of Latin America and the Caribbean (Santiago, 2002), 110.
in the first half of the 1990s, allowing governments to phase out indexation
and making it less likely inflation would return.
This section has concentrated on the traditional measures of macroeco-
nomic performance: growth, trade, capital flows, and inflation. However,
the two decades after 1980 witnessed an important change in Latin America
that consolidated a trend beginning even earlier. This was the demographic
transition, under which the fall in death rates beginning in the 1920s was
finally matched by a fall in birth rates. Thus, the main Latin American coun-
tries faced a more manageable annual increase in population, although a
number of the smaller countries such as Honduras and Nicaragua remained
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Globalization and the New Economic Model in Latin America 163
stuck in the first phase of the demographic transition (i.e., high birth rates
and low death rates).
In the 1980s, the annual rate of growth of the population fell to an annual
average of 2.1 percent and in the 1990sitfell again to 1.6 percent.
47
At the
start of the new millennium, it was still falling. Given that the population
had been growing at nearly 3 percent per year in the 1960s, Latin America
has achieved a big reduction in the rate of demographic expansion. The
full implications of this on the environment, social spending, labor market,
and pensions will take many years – if not decades – to be worked out, but
it does offer some comfort in the light of the disappointing macroeconomic
performance.
CONCLUSIONS
Latin America began the process of adjustment to globalization in the mid-
1980s. The objectives were not only to counter the negative impact of the
debt crisis but also to reverse the disengagement of the region from the
world’s product and factor markets. This reversal had been a consequence
of several decades of inward-looking development coupled with a growing
hostility to DFI.
The goal of countering the negative impact of the debt crisis has been
partially successful. Latin America did succeed in extricating itself from the
debt overhang represented by commercial bank loans, but at the expense
of a huge increase in bond indebtedness. In part, this was attributable to
the exchange of bank loans for bonds under the Brady Plan, but it was also
caused by the ease of tapping the international bond market in the 1990s.
The bond markets proved just as fickle as commercial creditors. Capital
flowed to Latin America in abundance when global liquidity was strong,
but the inflow proved vulnerable to events over which Latin America had no
control. The Mexican financial crisis in 1994 affected all of Latin America,
although the circumstances in other countries were very different. The
Asian financial crisis in 1997 and the Russian default the following year
proved to be the catalyst for a rise in the country risk premiums in Latin
America despite the lack of synchronization in the real economies of emerg-
ing markets. Last, but not least, the terrorist attack on the United States in
47
SeeBulmer-Thomas, The Economic History of Latin America, 7,Table 1.2.
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164 Victor Bulmer-Thomas
September 2001 led to an increase in risk aversion and a flight to quality
from which Latin America inevitably suffered.
Adjustment to globalization has therefore not ended Latin America’s debt
problems, although they now take new forms. Debt in the 1990s increased
faster than nominal GDP, leading to a rise in the debt/GDP ratio. Similarly,
the increase in the dollar value of exports was in many cases insufficient
to reduce the debt service ratio (interest plus amortization as a share of
exports). The rate of domestic saving rose, but capital formation needed to
rise as well as a result of the neglect of investment in the 1980s. Thus, the
gap between domestic savings and investment remained, leading to a need
for foreign resources.
The second objective – integration into global product and factor mar-
kets – was also only partially successful. The share of trade (exports plus
imports) in GDP rose, but this only meant that trade was growing faster
than GDP. Given the bias against exports and imports under ISI, this rising
trade ratio was hardly surprising. More relevant is Latin America’s share of
world exports.
This share increased after 1990, but the rise is entirely explained by
Mexico. Indeed, when Mexico is excluded from the Latin American figure,
the ratio is virtually unchanged. Just as disturbing is the failure of all the
Latin American integration schemes excluding NAFTA to increase world
market share of exports in the 1990s. Latin America’s export performance
may have been superior to what had gone before, but it still did not measure
up against the competition from outside.
Mexico’s outstanding export performance has many explanations. On
the supply side, competitiveness was increased through tax reform (includ-
ing tariff reductions) and the adoption (after 1994)ofaflexible exchange
rate. Yet these measures were common to almost all countries in the region.
What was different in Mexico’s case was the demand side. Even before
NAFTA was launched, Mexico had become increasingly integrated into
the North American economic space, with many firms taking investment
decisions on a regional rather than a national basis. DFI linked Mexico to
its northern neighbor and Mexican firms began to acquire a presence in
the United States.
48
48
Mexico’s privileged position could not prevent increased competition from China. The entry of the
People’s Republic into the World Trade Organization at the start of the new millennium led to some
investment diversion from Mexico to China and much greater competition for Mexican exports in
the United States.
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Globalization and the New Economic Model in Latin America 165
Mexico’s trading links with the United States proved so strong that they
dominate all of Latin America’s trade links. In the decade from 1988 to
1998, Latin America’s exports to the United States grew at 14 percent a year,
compared with U.S. imports from all sources of 7.8 percent. By contrast,
Latin America’s exports to the European Union, Japan, and other industrial
countries grew more slowly than their imports from all sources. Thus, Latin
America’s share of U.S. imports increased – mainly because of Mexico –
while its share of other markets declined. These other markets were of little
importance to Mexico but of much greater significance for the rest of Latin
America.
Latin America’s integration into world product markets was therefore
disappointing. However, there was one notable exception – the drugs trade.
Despite all efforts at interdiction, including crop spraying, financial support
for substitutes, and draconian measures against money laundering, the
export of narcotics from Latin America continued unabated. A decline in
production in one country simply led to an increase in another; a clamp-
down on distribution through one channel always led to the emergence
of other conduits.
49
Afew voices were heard calling for legalization of the
drugs trade, but the importing countries were not yet ready for such drastic
steps.
Latin America’s integration into global factor markets was more success-
ful than its integration into product markets. By the end of the 1990s, the
region’s share of global DFI had risen to about 10 percent – more than
double what it had been a decade before – and DFI was spread around
the region, attracted not just to Mexico but to other countries as well. The
region was also well represented – perhaps too well – in the global bond
market.
The other global factor market (labor) remained subject to major restric-
tions, although this had not prevented wide-scale migration from Latin
America to other parts of the world – notably the United States.
50
Migra-
tory movements were also important within Latin America; Bolivians and
Paraguayans, for example, formed a large part of the Argentine labor force
by the end of the century, and Nicaraguans represented at least 10 percent
49
An example is Plan Colombia, adopted with the support of the United States in Colombia. By 2003,
it was clearly succeeding in its aim of reducing coca cultivation and shipments of cocaine to the
United States, but total coca production in Latin America was largely unaffected.
50
Remittances to Latin America by migrants living abroad were estimated at more than US$30 billion
by the beginning of the twenty-first century. In some countries, they reached nearly 10 percent of
GDP.
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166 Victor Bulmer-Thomas
of the Costa Rican population. These labor movements led to a massive
flow of remittances to relatives in Latin America and to a modest transfer
of technology.
Where Latin America still lags far behind is in the knowledge economy.
Its educational deficit remains severe despite high-level recognition in the
1990softhe need for accelerated investment.
51
The use of the Internet is
at very low levels compared with developed countries. By 2001, there were
only 59 personal computers per 1,000 people, compared with 286 in the
euro-zone and 625 in the United States.
52
Signs of a productivity revolution
inspired by the New Economy, as in North America, were conspicuous by
their absence.
Thus, the long march toward globalization has not brought the benefits
many expected. Growth rates have been disappointing and remain below
those before 1980 in most countries. The region has opened up to foreign
trade, but the basis for Latin America’s renewed integration into the world
economy remains unclear. Labor is abundant, but it is not cheap compared
with many countries in Asia.
53
Capital is scarce domestically and can only
be obtained from abroad at high cost. The region is still rich in natural
resources, but the pattern of world demand and residual protectionism
does not favor agricultural exports. That leaves mining exports and it is
a sad comment on 500 years of economic history that Latin America’s
comparative advantage is still seen by many to lie with precious metals and
other minerals.
51
See the chapter by Fernando Reimers in this volume.
52
SeeWorld Bank, WorldDevelopment Indicators, 300.
53
This point is made in some detail in the chapter by Miguel Sz
´
ekely and Andr
´
es Montes in this
volume.
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Part II
ONSET OF MODERNIZATION
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5
THE INSTITUTIONAL FRAMEWORK
alan dye
Conventional explanatory frameworks often depict Latin America’s insti-
tutional structures as static and inflexible. Some conclude that the eco-
nomic successes of Western Europe were not transferable to Latin America.
Others shun potentially misleading international comparisons outside the
region, especially with North America. Institutional rigidities are perceived
as derivative of cultural traits fixed by traditional ideologies or mindsets;
anchored by colonial institutional structures; and labeled as semifeudal,
neoscholastic, patrimonialist, absolutist, corporatist, and so on. Although
it identified the proximate causes with external factors, even dependency
thinking found the root causes of dependency in deficiencies of the Iberian
institutional legacy – in concentrations of power, transnationalism, or entre-
preneurial inadequacies among the elite.
This tendency toward cultural determinism in Latin America’s insti-
tutions falls in sharp contrast to the predominant narratives of North
American institutional history. Contrast, for example, William Parker with
Stanley and Barbara Stein. Parker tells how colonial settlers in North
America almost immediately broke apart the mercantilist and corporate
forms of organization that founded their colonies, whereas the Steins tell
how rigid Iberian mercantilist institutions debilitated Latin America and
subordinated it to peripheral status. Or compare Richard Morse with Alexis
de Tocqueville. Morse characterizes Iberian emigrants to Latin America
as encumbered by the moral obligations of the Old World social hier-
archy, which they carried with them and used to create a New World
social order that mirrored the Old World’s organic social hierarchy of race,
birthplace, and nobility. This perception of inflexibility in institutional
transmission differs from Tocqueville’s description of European migrants
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170 Alan Dye
to North America carrying both the seeds of liberalism and the moral obli-
gations of social hierarchy. He saw them as free to choose and cast off ideas
that encumbered them.
1
One cannot help but ask why the two worlds
were so inconsistent. Why would immigrants to North America be free
to select from among the ideas and institutions of the Old World but not
immigrants to Latin America? Why would the peoples who settled British
North America become empowered then to imitate the economic success
of Western Europe, but not those who settled Latin America?
Aresurgence of interest in the historical study of institutions has brought
new vigor to these large questions of institutional foundations and their
long-run economic consequences. Against prior convention, the new work
takes inspiration from international comparisons, especially from the evo-
lutionary dynamics of transatlantic New World colonization. It adopts a
perspective that aims at a consistent understanding of the long-run diver-
gence or distinctiveness of New World paths of institutional change. It
rejects as inconsistent the notion of rigid exogenous institutional trans-
mission, and significantly, it pursues explicit counterfactual reasoning to
conceptualize a greater range of possibilities for institutional change in
Latin America.
NEW WORLD INSTITUTIONAL DIVERGENCE
The progress of recent decades could not have been made without the
precise definitions of institutions and formal approaches developed under
the rubric of the New Institutional Economics. After three decades of
refinement, the theory now combines two complementary approaches.
The first approach emphasizes the function of institutions as humanly
devised constraints. This approach was pioneered by Douglass North, who
characterized institutions as the “rules of the game” that shape human
interaction. Such rules may be embodied formally, as in laws, regulations,
and procedural codes, or constituted informally, as in social norms, conven-
tions, or customs. A second approach conceptualizes institutions as rules or
social norms that produce sustained or equilibrium behavior. This approach
came out of game-theoretic research seeking to explain the emergence and
1
Richard M. Morse, “The Heritage of Latin America,” in Louis Hartz, ed., The Founding of New
Societies (New York, 1964); William N. Parker, “Political Controls on a National Economy,” in
Europe, America, and the Wider World: Essays on the Economic History of Western Capitalism,vol. 2
(New York, 1991); Barbara and Stanley Stein, The Colonial Heritage of Latin America (New York,
1970); Alexis de Tocqueville, Democracy in America, trans. George Lawrence (New York, 1966 ).
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The Institutional Framework 171
sustainability of social norms, conventions, and other apparently unselfish
cooperative behavior not underpinned by third-party enforcement.
2
The
critical insights in the second approach are that, in many social interactions,
people make decisions based on what they expect others to do. Significantly,
some cooperative behavior appears to be sustainable only when it is self-
enforcing; that is, only when multiple individuals’ actions, based on their
expectations about others’ actions, are all mutually consistent with the joint
outcome.
Institutional innovations are feasible through the endogenous decisions
of individuals in collective settings. However, formal institutional changes
are often impeded without complementary and compatible changes of a
complex array of informal rules or social norms. In postindependence Latin
America, there was a proliferation of liberal institutional innovations – new
constitutions and legal codes, reorganizations of judiciaries, modernization
of monetary and fiscal institutions, and liberalization of sectoral economic
policies. A prominent question in the literature has been whether West-
ern European liberal ideas were or could be reshaped to fit these different
political environments. New institutional theory says it may not be straight-
forward. For example, it may not be possible to achieve the intended effects
from introducing Western European ideas of the individual right of prop-
erty or the U.S. institution of federalism without complementary and con-
sistent changes in social expectations. Furthermore, introducing foreign
institutions into Latin America’s distinct social environments could have
unintended consequences. Embedded social norms or other institutional
rigidities often prevent institutions from deviating far from preexisting ideas
and practices, thus making them path dependent and highly sensitive to
the critical historical moments of institutional formation. According to the
theory, institutional frameworks with radically different formative histories
might never converge, even if one is observed to be superior to another.
Stanley Engerman and Kenneth Sokoloff, using this theoretical con-
cept, offer an alternative endogenous explanation for the persistent insti-
tutional divergence of Latin America and the United States – one that
departs from conventional culturally deterministic explanations.
3
Their
main insight is that the institutional divergence was associated with key
2
Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge, 1990),
3–4, 7. The main contributions to the second approach are surveyed in Masahiko Aoki, To ward a
Comparative Institutional Analysis (Cambridge, MA, 2001).
3
Stanley L. Engerman and Kenneth L. Sokoloff, “Factor Endowments, Institutions, and Differential
Paths of Growth Among New World Economies: A View from Economic Historians of the United
States,” in Stephen Haber, ed., How Latin America Fell Behind (Stanford, CA, 1997), 260–304.