Victor Bulmer-Thomas's Economic History

Victor Bulmer-Thomas, The Economic History of Latin America Since Independence, 2^nd ed, Cambridge Latin American Studies 77 (Cambridge, UK: New York: Cambridge University Press, 2003)

            I am recommending an economic history of Latin America because, at this time in my life, I find the most compelling reason for studying Latin American commodities is to determine the causes of underdevelopment in the region.  There are many “noble dreams” embedded in the study of history.  One is that we might acquire knowledge that could help alleviate poverty in the world.  I think this is Victor Bulmer-Thomas’s hope which he expresses in his dedication:

            “For the 30 percent who receive 5 percent – a ray of hope;

                 for the 5 percent who receive 30 percent – a warning.”

“The economic development of Latin America since independence is a story of unfulfilled promise.  Despite abundance of natural resources and a favorable ratio of land to labor, and after nearly two centuries of freedom from colonial rule, not one republic has achieved the status of a developed country.  Furthermore, the gap between living standards in Latin America and those in the developed countries has steadily widened since the early nineteenth century, when – by some accounts – the subcontinent was the most prosperous of the developing-country regions.” (392)

“Peripheral status has often been used to explain Latin American backwardness.  Other countries faced the same constraints, however, and still managed to transform their position while abiding by the rules of the game.” (392)  “[T]he main reasons for the relative backwardness of Latin America are to be found within the region itself. “(393)

            To explain Latin America’s failure to achieve economic development at the level of today’s developed countries, Bulmer-Thomas analyzes the two phases of economic development that preceded the on-going current phase.  From independence to the Great Depression most Latin American countries attempted to develop their economies through export-led growth based on primary products.  The basic idea was that Latin America would take advantage of local low-cost labor and foreign capital (machines and infrastructure provided in large part by foreign sources) to produce commodities that could be sold on the world market.  The success of the plan to achieve economic growth through exports depended upon a rapid increase in the quantity of exports sold and, most importantly, the transfer of profits from the export sector to the local non-export economy.  The export-led economy would provide the capital (investment needed for machinery, infrastructure, and improvements in human capital) to generate growth in the non-export economy.  The intended result was total economic development.  While exports in various countries did increase, only Argentina and Chile achieved a level of growth in their export economies that was sufficient to lead to real, although modest, growth in their total economies.

            Economic growth requires that individuals become more productive: each laborer becomes capable of producing more units of product in a day than he did at some prior point in the past.  This kind of growth depends upon laborers having access to more equipment and higher skill levels based upon increased education and training.  Capital also achieves increased productivity: a machine or unit of land produces more and better output than in the past.  Technological advancement is critical to this process.  It is the new ideas and ways of doing things that enable people and machines to become more productive.  Investment funds are transformed into new equipment and training.  This is not what happened in Latin America during the export-led period of development.  Increase in output was often achieved by adding more units of labor and capital (most often extension of agriculture to unused land), not by increasing the productivity of the units.  Often the profits from exports went to the foreign investors.  Those Latin Americans who did receive profits spent them on consumption items rather than investing them in new economic activity.  Local governments did not often grant concessions to foreigners in exchange for benefits of permanent value to the local economy.  While this phase of growth was taking place, the developed world that provided the consumers for Latin America’s exports did increase its standard of living.  Therefore, the gap between the living standard of the peoples of Latin America and the rest of the world widened during this first phase.

            The second phase of Latin American economic activity from the Great Depression to the credit crisis of the 1980s reflected an awareness that the export-led growth model had not succeeded.  Bulmer-Thomas calls this next phase the inward-looking phase.  Economists like Raul Prebisch called for development of local industries to produce the consumer goods that Latin Americans were buying on the world market.  Bulmer-Thomas recognizes that this was a reasonable approach for many countries to take.  As their incomes rose, consumers in developed counties were turning to manufactured goods, and their appetite for primary product exports did not increase.  Many primary products were inelastic in relation to increases in income; as incomes rose people did not want more bananas.  Local industries protected by tariffs would replace imports, and through this process Latin American economies would develop.  Many economists agree that manufacturing provides multiple opportunities to increase technological knowledge and develop economic linkages that have potential to increase national production.  Frequently foreign businesses had captured the more lucrative aspects of commodity chains where further processing added value to the product.  In the second phase of economic development Latin America hoped to capture the kinds of activities that generated wealth in the developed world.

            There were several problems associated with the new internal-industrial-development phase.  Because tariffs prevented local industries from facing international competition, attention to quality and innovation atrophied.  Often oligopolies controlled production which further reduced the beneficial impact of competition on price, quality, and technological advancement.  The focus on local industry also caused many Latin American countries to ignore international markets at a time when there was a huge surge in international consumption as a result of pent-up demand following the Second World War.  Latin America missed out on a boom-time in international consumption.  Missing this boom meant Latin American countries fell further behind the developed countries.  Latin American industrial development did not generate low-cost consumer products that could be sold to those segments of the world market where more expensive products were beyond consumer reach.  Other developing countries outside Latin America used their new industrial skills to capture low-end markets.  Although the Mexican textile industry had access to cotton at world prices, and a supply of inexpensive labor relative to developed countries, it was unable to produce clothing that could compete with world prices and world standards.  The major failures of the first phase of development persisted into this phase: there was little increase in the productivity of labor and capital, and there was minimal focus on research and development to generate technological advancement.

            The end of the second period of development occurred during the credit crisis of the 1980s.  The state’s ability to capture wealth from economic activity was limited.  Often the state provided local elites with privileges for engaging in economic activity in exchange for political support.  Pressure to resolve the many problems of the majority of poor people intensified following the Second World War as did pressure from the middle class.  States borrowed heavily to address public needs, and in the 1980s many went into default.  International agencies like the IMF required countries to re-enter the world market as a condition for debt restructuring.  The third phase of economic growth is one in which, once again, Latin America actively sells exports as a source of national wealth, but Latin American states also engage in manufacturing activity for internal consumption and export.  Diversity of economic activity within the region has increased.  This can only help the region weather the cycles that are endemic in global commodity markets.  This third phase of economic growth in Latin America is still in progress.

            As the dedication to his book indicates, Bulmer-Thomas insists that public policy must address social needs.  The state must encourage commercial activity in order that the economy can supply the state with the funds needed to improve social conditions.  Problems of inferior health care and education for the majority persist.  The informal (black market) economy is large which may or may not promote economic growth.  At this time states have not been able to capture much profit from the informal economy.  Governments continue to support economic activities that represent elite interests.  Bulmer-Thomas declares that throughout the post-independence period both local entrepreneurs and foreign governments have entered into economic projects only after they have worked out an agreement with local governments about what the rules of the game will be.  One can hope that Latin American governments and the elites who have dominated them will recognize that not only is vibrant economic activity essential if underdevelopment is to be reversed, but that economic growth must be used to benefit society at large.  A healthy, educated labor force is a key factor in all the developed countries of the world.  These problems are enormous, and the solutions to them have to come from within Latin America.

            I suggest that we supplement the cultural approach we have taken in our study of commodities, and look at commodities from an economic perspective with the understanding that a country’s economy has an enormous impact on the quality of life of its citizens.  I propose we read Victor Bulmer-Thomas’s conclusion (18 pages) and discuss how it relates to the commodity studies we have read so far in our class.  I see many connections.  For those who want to read Bulmer Thomas’s book it is available on Amazon.  There is even a third edition.  For students of Latin American history I think this book is essential.