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Latin America Economic Development Report (Assessment)


Historical Background

The end of the twentieth century was characterized by the rise of emerging economies to the status of global players. The example of the Four Asian Tigers is especially remarkable. One of the Latin American countries is also regarded as an emerging economy with significant potential. At the same time, South American countries have failed to use their potential and are still lagging behind developed as well as developing countries in their economic growth. Kay argues that the region turned out to be unable to surmount various difficulties due to three major reasons (1073). These are state policies, the agrarian reform, and the lack of interactions between agricultural and industrial sectors (Kay 1073). It is possible to look into these issues to understand the peculiarities of Latin American economic development.

However, it is essential to consider a certain historical background to understand the potential of Latin American countries. In the 1950s, it was the most developed region, excluding developed countries. The GDP per capita was ¼ of the US GDP, and it was much higher than in East Asian countries excluding Japan and China (Elson 97). This was mainly achieved through the focus on export. Importantly, only some countries exported goods, whereas the vast majority of the states sold raw materials, including sugar, coffee, cotton, bananas, oil, and so on (Bulmer-Thomas 8). The development of industries was rather inefficient as rather low-quality products offered could not compete in other markets, which led to the increase in domestic loans and the significant load on the financial system of the states (Bulmer-Thomas 8).

It is also necessary to add that the countries of the region tended to unite their effort in achieving economic goals. Such international organizations as the Latin American Free Trade Association and Central American Common Market were created to meet the needs of the states and ensure their growth.

At the same time, the policies implemented proved to be rather ineffective, especially when compared to the progress of East Asian countries. The GDP of this region doubled while the same indicators of South America declined (Elson 97). Importantly, the two regions had quite similar backgrounds as they both include countries that are rich and states that are poor in resources. These regions’ territory is also almost equal. Most importantly, the two regions have similar locations in relation to the most significant markets (Elson 98). The period of the changes that took place is also quite equal as the period covers the past three decades. However, it is clear that the countries of Latin America, in contrast to South Asia, we’re unable to develop efficient policies to foster their economic growth.

State Capacity

As has been mentioned above, the failure of state policies is seen as one of the basic reasons for the decline of the Latin American economy. It has been acknowledged that the remarkable progress of East Asia was due to the efficient state policies that were often characterized by authoritarian practices. At that, understanding of the importance of entering the global market and the effort aimed at this goal should be regarded as primary factors that had an impact on the economic development of East Asia (Elson 109). Researchers note that the regions with similar backgrounds and potentials started developing differently in the second part of the 20th century.

The oil crisis of the 1970s and the financial crisis that broke out in the 1980s are two milestones (Kay 1085). The South American countries turned out to be most vulnerable to such financial turmoil. It is necessary to note that the policy of Latin American countries concerning loans was highly inefficient, and the countries were unable to handle their debt burden without the help of the international organizations such as the World Bank. However, financial situations in the two regions in question were still quite similar, as prior to the crisis, Latin America displayed continuous growth.

The states responded differently to the events mentioned, which was instrumental in the divergence between the development of the two regions. It is noteworthy that up to the 1930s, Latin American countries had been oligarchic, and the power of large landlords persisted in the second part of the twentieth century (Kay 1086). Thus, the governments had to take into account the needs of the elites that exercised significant power in the state. At that, the policymakers also chose the democratic approach, and they had to take into account the interests, needs, and wants of masses. This put the authorities in a challenging position that tended to result in considerable crises.

The economies of South American countries are characterized by significant control of the overall government spheres. Importantly, political leaders in the region often relied on populist policies and decisions, which implied the increase of the control and development of a particular business environment (Moreno-Brid 226). Industrial policy interventions proved to be inefficient in Latin American countries.

It is necessary to add that the inefficiency of governmental control is evident nowadays. For instance, the aftermath of the crisis of 2008 was a favorable macroeconomic environment for the South American countries as the prices on commodities produced in the regions were rather high. However, the countries were unable to use the economic benefits of the situation and implement effective policies aimed at the development of such sectors as agriculture, services, and so on (Devlin and Moguillansky 13).

As has been mentioned above, governments of South American countries used rather populist approaches and stressed the importance of the fair distribution of resources. Nonetheless, in reality, they failed to provide what they declared, unlike East Asian countries that understood the importance of the “welfare-oriented and distributive policy” and invested significantly in education, healthcare, and housing (Kay 1087). In Latin America, the disparity among different groups of people was substantial, and the policymakers failed to reduce it.

One of the important factors contributing to the adoption of such inefficient policies was, ironically, the abundance of natural resources (Kay 1087). Thus, South American countries are rich in natural resources, and they have been reliant on the export of these commodities. This approach has been seen as the most appropriate strategy and the sector that needs the most attention and control. The government used to control major companies operating in the countries. Small businesses were excluded from the sphere due to this attitude as well. However, the price for commodities is very changeable, and the economies of Latin America have often found themselves in a difficult position as other sectors of the economy were underdeveloped and could not contribute to the development of the countries’ GDP.

Agrarian Reform

Another essential factor that led to the decline of South American economies was inefficient agrarian reform. Importantly, in East Asian countries, large landlords were encouraged to innovate and use technology to increase yields. This enabled the landlords to foster the agricultural sector development and, eventually, to diversify and enter different spheres such as industries, services, finances (Kay 1088). It is possible to note that post-war landlords in East Asia became successful modern entrepreneurs. This is especially true for Taiwan and South Korea, where agrarian reforms had a great track record. Thus, the governments subsidized small farms and entrepreneurs who wanted to be involved in the agricultural sector. Small and medium businesses were developing at a high pace, and soon agrarians started contributing significantly to the development of the countries’ GDP.

Latin American agrarian reform was not that successful. One of its primary flaws was the considerable power of landlords who first resisted any reforms. Kay stresses that the changes in the agricultural sectors have not taken place so far in some countries (for example, Brazil) (1088).

As has been mentioned above, exports of commodities were seen as the only possible way to gain profit, and landlords adopted this approach without trying to adjust to the changing world. It is necessary to note that South American countries tried to impose stricter governance in the sphere (aimed at restricting the power of landlords) and provide more freedom through encouraging small businesses to enter the agrarian sector (Singh 69). Remarkably, in some Latin American countries (for example, Peru and Chile), the government introduced subsidies to landlords to encourage them to enter new sectors and diminish their resistance to the agrarian reforms. Nonetheless, the policies were unsuccessful due to limited funds allocated for subsidies, substantial inflation, and distrust towards the authorities that expropriated a considerable portion of their property (Kay 1089).

Another peculiarity of the agrarian sector in Latin America was the ethnic background. The aftermath of colonialism was the specific distribution of land where Europeans’ descendants were usually landlords, and poor indigenous people were peasants or more seldom small farmers (Bulmer-Thomas 10). Therefore, the tension between the two classes was also steered by ethnic issues. It is noteworthy that although there was a certain degree of ethnic tension between landlords and other classes in East Asia, it was insignificant due to the short-lived nature of the Japanese expansion policies (Kay 1089). In Latin America, the long history of colonialism made landlords reliant on such practices as bribes, fraud, usurpation, and so on. South American landlords were unprepared to learn new ways of running the business.

Finally, the state of the agrarian sphere prior to the reform was quite different in the two regions. The East Asian agricultural sector was characterized by the abundance of small farms. At the same time, irrespective of the significant population of the countries, there were few landless people (Kay 1090). Whereas, the system in Latin America implied that landlords owned the resources and employed peasants to work for them for a specific compensation that could include the use of a small plot of land. The vast majority of the population of the countries were landless. Expropriation increased the tension between the classes and did not help much as the land was state-owned. The reform did not lead to the development of the agrarian sector as small businesses were not allowed by the policymakers, subsidies if any were not sufficient for landlords, peasants were unmotivated and discouraged.

Interactions Between Agricultural and Industrial Sectors

The failure of the economic development of the region is also due to the improper relations between the industrial and agrarian sectors that resulted in inefficient industrialization. As far as East Asia, the countries’ governments achieved significant results in industrialization due to the overwhelming control over agricultural and industrial sectors (Kay 1092). Thus, taxation in the agrarian sector provided the necessary funds that were allocated to develop industries. Of course, the process was quite centralized. Importantly, the authoritarian approach implied the suppression of any protest on the part of agriculturalists or working people.

The urbanization had been quite effective in Latin American countries before the 1950s (Bulmer-Thomas 9). People from rural areas moved to cities to look for employment and other opportunities. However, it slowed down significantly in the second part of the 20th century. The industries were unable to employ all the peasants and working people who could not satisfy the needs in intensive labor skills (Kay 1097). The transfer of the surplus in agriculture was held inefficiently, and the industries received insufficient funds. As has been mentioned above, governments of South American countries provided subsidies to landlords. These funds were supposed to be allocated into the development and diversification. Thus, landlords could invest in the use of technology to produce goods and commodities (Bulmer-Thomas, 14).

This would contribute to the development of the corresponding industries (machinery production and maintenance, for example). However, landlords relied on the strategies they had used for years. The subsidies mainly became a part of landlords’ profits rather than their investments. It is also necessary to add that the agricultural sector in South America was not very successful, and the taxes imposed were a considerable burden for many people involved in the agrarian sphere, which had a devastating effect on the development of small businesses in the agrarian sphere.

As has been mentioned above, the East Asian government used an authoritarian approach and could control major stakeholders distributing resources among them. However, South American policymakers did not have such power. They had to take into account landlords’ and oligarchs’ interests who exercised significant power. At the same time, they tried to address the needs of the working class, as this was their electorate. Clearly, democratic ways were unable to equip the political leaders with the tools to meet the expectation of such different classes in countries where corruption was high while social standards were still low.

Finally, East Asian governments understood the importance of innovation and encouraged the stakeholders to innovate through subsidies, decreased taxes, and so on. Importantly, the industries that could facilitate the development of agriculture were heavily supported, and entrepreneurship in such spheres was encouraged. It is noteworthy that the most part of the funds of people involved in agriculture was allocated into the purchase of fertilizers, but Latin American landlords relied on the use of sophisticated machinery (Kay 1096). At that, the innovative products were not produced in the region but were mostly imported, which was a result of the ineffective relations between industrial and agrarian sectors.

In contrast to such policies as well as the structuralist approach adopted, Latin American policymakers failed to decrease protectionism and the reliance on the industrial export. The countries failed to develop an industry that could provide goods that would be competitive in the global market. For instance, to compare the progress of such states like Taiwan or South Korea and Brazil (which is regarded as one of the most successful Latin American countries), the rate of manufacturing exports are around 75% in the East Asian country while the rate is only 10% in Brazil (Kay 1096). The export of commodities led to stagnation in industrial and agricultural spheres.

Conclusion

It is possible to note that the Latin American and East Asian countries had similar backgrounds and potentials, but the former failed to develop their economies while the latter stunned the world with compelling economic gains. The three primary reasons account for this failure. These are the lack of state capacity, the inefficient agrarian reform, and limited interactions between agricultural and industrial spheres. At the same time, these factors are deeply rooted in the historical background, primarily colonialism. The population of the countries, as well as their policy makers, proved to be unprepared to change alongside with the rest of the globalizing world.

The disparity between different groups in the South American region is a remarkable obstacle to adopting efficient strategies that became instrumental in the economic wonder of other states. It is apparent that the Latin American elites should acknowledge the benefits of some policies employed in other countries (including but not limited to East Asian countries). Innovation and efficient policymaking are key principles that should be adopted.

Works Cited

Bulmer-Thomas, Victor. The Economic History of Latin America Since Independence, New York: Cambridge University Press, 2003. Print.

Devlin, Robert, and Moguillansky Graciela. Breeding Latin American Tigers: Operational Principles for Rehabilitating Industrial Policies, Washington: ECLAC and World Bank, 2003. Print.

Elson, Anthony. “The Economic Growth of East Asia and Latin America in Comparative Perspective: Lessons for Development Policy.” World Economics 7.2 (2006): 97-114. Print.

Kay, Christobal. “Why East Asia Overtook Latin America: Agrarian Reform, Industrialization and Development.” Third World Quarterly 23.6 (2002): 1073-1102. Print.

Moreno-Brid, Juan Carlos. “Industrial Policy: A Missing Link in Mexico’s Quest for Export-led Growth.” Latin American Policy 4.2 (2013): 216-237. Print.

Singh, Jewellord T. Nem. “Governing the Extractive Sector: The Politics of Globalization and Copper Policy in Chile.” Journal of Critical Globalization Studies 3 (2010): 60-88. Print.

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