Lesson 2: Economic Heritage

For what reason did the countries of Latin America begin participating in world trade more extensively beginning in the 1840's?

-England dismantled its protection of their domestic agriculture and became more receptive to raw material imports. Now, agricultural producers in temperate climates could benefit from European market demand while those in tropical climates could at least compete with the Caribbean and North America due to considerably lower transportation costs (via Steam Engine, Propeller, and Metal Hull). -Technological advances in transportation and extraction made new mining activity more cost effective to export raw materials to industrial centers. -Rapid industrialization in the United States increased the demand for raw materials and tropical commodities, through which Latin America became an important supplier. It also created a demand for Chile's temperate climate products, which had a considerable cost advantage at the time. -The primary product-exporting economies included economies exporting temperate agricultural commodities, economies exporting tropical agricultural commodities, and economics exporting mineral products.

According to Furtado, in what ways were the demographic patterns of the process of urbanization different in Latin America from those of the more industrially advanced countries?

Celso Furtado notes that the continual expansion of the Latin American rural population was largely unaffected by the region's process of urbanization. This feature differs greatly from more industrially advanced countries, whose rural populations tended to remain relatively stable or decline in the face of urbanization. For example, while the rapid growth of urban cities in Latin America sparked an annual 5.4% increase in urban population throughout the 1950s, the rural population continued to grow at an annual rate of 1.8% (Furtado 10). Tell why!

Tropical agricultural products

Countries that export tropical agricultural products involve over half of the Latin American region, including Brazil, Colombia, Ecuador, Central America, and the Caribbean, and large portions of Mexico and Venezuela. During the years of expanding international trade (1840 onwards), these countries entered the international economy in competition with the colonial regions of the less developed world and the slave-holding regions of the U.S. The rapid expansion of world coffee and cacao demand from the mid-nineteenth century integrated these Latin American countries into the world economy, but world prices continued to be determined by the low-wage colonial areas, ensuring low revenues for producers in Latin America. On the whole, tropical products were not a significant factor in the development of the region, except insofar as they led to the settlement of new areas. Tropical production areas were characterized by low wages, low rates of technological advancement, and the fact that they did not require the development of a complex infrastructure. According to Furtado (whose idea is debatable), tropical products also have low income elasticities, but given the inelasticity of supply of perennial crops, any declines in demand produce drastic price reductions. The countries that produce tropical products are thus highly susceptible to world recessions. (See pp. 48-49 and 55-56 in Furtado.)

Furtado states that during the first half of the nineteenth century, external markets were limited and access to them proved difficult because of two features of the Industrial Revolution. Identify and explain how these two features influenced trade in the region.

During the first half of the nineteenth century, external markets were limited and access to them proved difficult because of the concentration of supplies in England and they key role of the cotton industry.

Mineral products

During the period of expanding world trade discussed by Furtado, the lowering of freight rates for long-distance transport and the rapid expansion of the mechanical industries, by creating an international market for industrial metals, brought about radical changes in mining in the region. Precious metals lost importance, and small-scale artisan production was replaced by large-scale production by foreign interests. The world rise in demand for nonferrous metals coincided with major technical advances in production methods. The development of the export mining sector denationalized the ownership of the resources and, given its high-capital intensity and levels of technology, led to isolation of these sectors within the national economies. Foreign control of these industries, employing small local labor forces, meant that the income generated by these activities usually escaped abroad. And since the system used imported industrial inputs while generating limited wage income, it failed to contribute significantly to the creation of domestic markets. World recessions such as the Great Depression have historically led to a collapse in production in the mining industries. (See pp. 49 and 56 in Furtado.)

Latifundio

Encomiendas evolved into latifundios, or large land holdings, owned by the "creoles," or Spaniards born in the New World. Latifundios are characterized by production for market, low labor intensity of production, and the employment of labor from neighboring minifundios. We will investigate the latifundio further in Lesson 4 in our discussion of the structure of agricultural relations in the region. (See p. 35 of Cardoso and Helwege.)

Encomienda/encomendero

Encomiendas were land grants from the Spanish crown to the conquistadores. The encomendero was the grantee and had the role of guardian and protector of the native population entrusted to him. According to Furtado, the encomenderos were mainly concerned with appropriating a surplus that could be transferred to Europe. (See Cardoso and Helwege, p. 25, and Furtado, pp. 17-18.)

According to Furtado, what two distinct movements are noticeable in the struggles for independence in Latin America? Which was dominant? Why do you think it was?

Furtado asserts that two discernible movements in the struggles for Latin American independence were the rise of a European-influenced bourgeoisie and the emergence of anti-colonial forces. The European-influenced bourgeoisie wanted to rid the divided New World of its colonial past and amalgamate the regions into a profitable center of international trade. Meanwhile, opposing forces endorsed a distinctive and independent Latin American cultural personality that would integrate native populations into their social and political regimes. The former movement dominated Latin American affairs throughout the nineteenth century due to European-oriented urban interests (namely the influx of English imports) and their economic dominance resulting from the Industrial Revolution, while the latter movement gained relevance following the Mexican Revolution (Furtado 36).

According to Cardoso and Helwege, how did the Spanish crown perpetuate its trade surplus with the colonies and prevent the development of stronger economic independence in the region?

Mercantilist policies kept Spain in control of Latin America's natural resources during the mineral boom as the country's silver and gold symbolized their increasing ability to buy goods from other regions. The ability to acquire bullion through trade with colonists helped discourage any manufacturing or agriculture in the New World that would compete with Spain. By monopolizing trade routes to and from the colonies, the Spanish crown perpetuated its trade surplus with the colonies and forbid them from trading with other European countries. Their mercantilist restrictions also prevented the development of stronger economic independence in the region by denying colonists the rights to ship between ports in Spanish America. Although smuggling became widespread, the potential output and trade the region was capable of was significantly hindered by Spanish efforts and went on to dominate their economic activity throughout the seventeenth and eighteenth centuries (p. 26). Royal monopolies reduced output and growth in Latin American industries. They also prohibited industries that could compete with output in Spain. The limits on trade prevented Latin Americans from taking advantage of regional differences in resources and forced inefficient local production vs. specialization somewhere else (p. 32). An opening of trade could have realized a greater comparative advantage in Latin American markets.

Mita

The mita system requisitioned one-seventh of the native male population for work in the mines during the early years of the conquest. To prevent outright slavery in the encomienda system, the crown adopted the mita system, which secured communal lands for the indigenous population and protected their integrity. Native workers under the mita system are referred to as mitayos. (See p. 27 of Cardoso and Helwege and p. 17 of Furtado.)

Did the presence of English merchants and investors in Latin America during the first decades of the nineteenth century disrupt or consolidate the existing social and economic structure? Explain.

The presence of English merchants and investors in Latin America during the first decades of the nineteenth century disrupted the existing social and economic structure rather than consolidating it. This was primarily due to the their involvement in creating an import trade that changed consumption habits and altered artisan activity within the Latin American economy. With the influx of English-manufactured goods distributed by numerous English import houses, many Latin American countries were forced to depreciate their exchange rates and apply for foreign loans in order to ease their balance of payments. The periodic price increases that resulted hit the urban population the hardest, who were driven to revolt at times. Though an export drive would have helped ease the social and economic tensions, external markets were difficult to access at the start of the Industrial Revolution as England was able to supply her products and many raw materials like cotton could be produced cheaply from the US.

Temperate agricultural products

These are commodities that require extensive use of land, and in the period of expanding international trade in the 1840s, were characterized by high profit margins. During this period, the production of temperate agricultural products occurred essentially in Argentina and Uruguay. The extensive nature of agriculture and the volume of freight required necessitated the creation of a widespread transportation network, indirectly leading to the rapid unification of the domestic markets of these countries. These countries, because they competed with the production of countries at more advanced stages of development, were integrated early into an international economy that was characterized by high rates of technological advancement. Because demand for temperate commodities has a low income elasticity, particularly in richer countries, and because the price elasticity of supply is relatively high, countries that specialize in these products are relatively less severely affected during world economic downturns, such as the Great Depression. (See pp. 47-8 and 55 in Furtado.)

Minifundio

These are small plots of land that are farmed intensively for subsistence. With the evolution of the latifundios from the encomiendas, the indigenous and poor mestizo (mixed Spanish and indigenous blood) populations crowded onto the remaining land. Usually, the minifundios do not yield enough to sustain family consumption, thus forcing minifundistas to work for additional income on the neighboring latifundios. (See p. 35 of Cardoso and Helwege.)

"Growth poles"

This concept was introduced by Furtado to describe the regions that developed economically and thus fomented the growth of their surrounding areas. For instance, in an area where mining became important, urbanization and the creation of "satellite economies" occurred. As the growth pole grew, so did the sectors of the economy that became necessary to support the growth pole. The areas where those sectors were based grew, and so forth. (For examples, see pp. 26-28 in Furtado.)

Mercantilism

This idea is that a country's prosperity increases with the amount of gold and silver in its coffers. During the colonial years, the European governments tried to increase exports and decrease imports in an effort to accumulate reserves of bullion as an end in itself. To a mercantilist, trade is a "zero-sum game," meaning that one's gain is another's loss (as opposed to more modern approaches that emphasize the universal gains from trade). Mercantilism lost favor as a theory of economic development at the time of the Industrial Revolution, as economists shifted their emphasis to more productive assets than bullion reserves and to analyzing the benefits of commerce. Mercantilist policies limited development in Latin America by imposing royal monopolies on essential goods and limiting trade within the region and outside the region with other European countries. (See Cardoso and Helwege, pp. 31-32.)

Repartida

This is the share of the output on the encomienda that was required to be transferred to the crown in exchange for the encomenderos' right to use indigenous labor. Since the indigenous population were considered subjects of the crown, the encomenderos were required to pay "rent" for their use. (See Cardoso and Helwege, p. 26.)

Demographic dependency ratio

This ratio is supposed to measure the proportion of nonworking to working populations. It is defined as the ratio of the population aged 0-14 plus the population aged 65+ to the population aged 15-64. It measures the burden on the working-age populations of having to support those who are not productive in the economy. It can be criticized as an inadequate measure because the actual ages at which people enter the work force differ from country to country, depending on the level of development. For instance, the actual level of demographic dependency should be higher in the U.S. than in Mexico, because in Mexico, workers are forced to enter the labor force at a younger age.

Dutch disease

This term derives from the Netherlands' experience with natural gas and refers to the tendency for new developments in resource industries to drain capital and labor away from existing industries in response to higher wages and rates of return. In the early 1970s, oil-rich countries (particularly new oil exporters) found that their non-oil industries were declining because wages and profits were much higher in the oil sector than in other sectors. In Nigeria, cocoa production plummeted; in Britain and Norway, industry declined; and in Mexico, the agricultural sector stagnated—previously diverse economies turned their emphasis to oil production. Dutch disease has infected Latin America on several occasions, as commodity booms skew resource allocation to those expanding sectors. (See p. 33 of Cardoso and Helwege.)

Demographic transition

This term refers to the fact from empirical observation that all developed nations have passed through essentially the same three stages of population growth. First, prior to economic modernization, these economies experienced stable or slowly-growing populations due to high birth rates (births per thousand population) and equally high death rates. Second, as these countries developed economically, improvements in diets, health care, and standards of living reduced mortality. The decline in death rates was not, however, accompanied by commensurate declines in birth rates, for various cultural and economic reasons (can you think of some?) resulting in high population growth rates. Third, as these societies developed further, around the end of the nineteenth century birth rates began to fall, and population growth rates tapered off. Underdeveloped countries have not, in general, duplicated this historical pattern. In underdeveloped regions, birth rates are generally higher than they were in preindustrial developed nations. In addition, beginning in the middle decades of this century, medical advances have been transferred to the developing nations, resulting in declines in death rates that have far exceeded those in the preindustrial developed nations. Birth rates continue to be high in many areas, resulting in current high population growth rates throughout the developing world.

What were the main features of the transformation of the world economic system during the second half of the nineteenth century?

Throughout the later 1800s, the world economic system was transformed by industrialization, innovations in transporting agriculture, and increased foreign investment. As the United States and European countries began to expand their industrial output (and England virtually eliminated tariffs on primary imports), their demand for raw materials increased the demand for exports rapidly throughout developing areas such as Latin America and strengthened their trade links with the rest of the world (which were facilitated significantly by the advent of steamboats, reducing transportation time and costs). The construction of railroads stimulated agricultural development by allowing access to previously uninhabited areas, while the discovery that meat could be shipped across long distances under refrigeration further expanded new market territory. The sophistication of capital markets during this time also made foreign investment more appealing to center economies, creating improved infrastructure in regions like Latin America and subsequently leading to export expansion (Cardoso 43).

What were the main characteristics of the encomienda system? How have the social relations that evolved during this period influenced those of contemporary Latin American societies?

Under the encomienda system, Spanish conquistadors seeking wealth in the New World were granted a number of native peoples to provide labor on their huge tracts of land. In exchange for the right to labor, the owner (known as the "encomendero") would allocate a share of the output (the "repartida") to the Spanish crown and instruct his laborers in the Roman Catholic faith (Furtado 17). This mercantilist scheme provided a way for Spanish natives to extract the land's natural resources and ship their wealth home, as they had no desire to colonize the area (Cardoso 27). It resulted in highly concentrated control over vast pieces of land, depriving the indigenous population of their resources and forcing them into slavery (Cardoso 35). The encomienda system paved the way for an extremely divided class structure dominated by aristocracy, whose attributes have directly influenced the prevailing income inequality and widespread rural poverty faced in Latin America today.