Latin America and the world order

More than 510 years after the conquest of Latin America, critical opinions are still voiced with regard to the quality of the subcontinent’s insertion into the international system: “When one begins to see the multiple business connections and interests, it is difficult to avoid concluding that the Plan Puebla Panama (PPP) is more about energy and resource extraction than it is about development”.¹ Arguments along the lines of this PPP critique have been frequently mentioned when discussing topics such as declining terms of trade for raw materials, the unequal access to the world markets, exploitative practices of labour-intense industries, socially detrimental impositions of structural adjustment measures, the increasing hegemony of the United States (US) over Latin America through new free-trade arrangements or projects such as Plan Colombia, and many more.

The purpose of this paper is to look beyond plain accusations by assessing the international arena Latin America found itself in since 1870 as well as the efforts made by Latin America to achieve a more equitable insertion into it. Taking into consideration the complexity of the topic, I will only broadly outline earlier attempts while focussing on efforts taken after the Great Depression of 1929. The essay will be organised in four main sections covering the three major phases plus a conclusions section: Primary commodity exports (PCE), import substitution industrialisation (ISI), neo-liberalism (NL), and the conclusions section which will also cover Latin America’s prospects. The important aspect of regionalism will be split into “old regionalism”, which will be covered in the ISI section, and “new regionalism”, which falls into the phase of neo-liberalism.

Primary commodity exports (PCE)

The PCE phase (1870 - 1930), which is sometimes called the “Golden Age” of Latin America, was characterised by a strong but unilateral and therefore volatile integration into the international system. Pre-independence economic structures of exporting raw materials and cash crops were essentially continued with the only difference that foreign elites were

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1 Latin America Solidarity Centre: The Plan Puebla Panama in a Nutshell: A PPP Primer in 17 Questions and Answers (distributed during a conference on 12 April 2003) replaced by local elites dominating large landholdings and defending the interests of only a tiny portion of society. Despite the fact that overall export incomes were considerable for quite some time, this model showed three main weaknesses: It strengthened the structural conditions for continued inequality, it fell prey to boom and bust cycles of the prices paid for primary materials, and it failed to establish local economic linkages.

The example of Bolivia illustrates the problematic nature of this model. In 1913, Bolivia’s export earnings depended to 72.3 per cent on tin (Thorp, 1998: 53). Macro-economically speaking, this dependency was no major problem due to the strong demand from the US canning industry. In terms of income distribution, however, things looked different. The tin industry - as all mining economies - depended on capital-intense technologies, which could only be provided by foreign enterprises, local elites or through a cooperation of both. The vast majority of Bolivians were either completely excluded from the economy living on subsistence agriculture or provided cheap labour without being able to improve their living standards substantially. This pattern is common to most Latin American countries since no major land reforms were undertaken at an early stage, which could have ensured a better redistribution of gains and the creation of a middle class. “A land reform preceded several of the most successful instances of development, such as those in Korea and Taiwan” (Stiglitz, 2002: 81). When commodity prices for the main exports tumbled due to a declining demand, the dependency and volatility quickly became apparent. The foreign exchange obtained through exports could no longer cover the amounts needed for mainly luxury imports destined to enhance the elite’s life and - which was worse for the normal Latin American who was excluded from direct international trade benefits anyway - tax revenues fell dramatically as the taxation system was based on exports and imports. High tax revenues, however, could have been a useful source of income to finance the provision of better social services to the public, the investment in the creation of local economic linkages as well as the diversification of the economy. Nevertheless, much of the mining or the plantation agriculture, which took place in Latin America during the PCE phase, took on the shape of an “enclave economy”. The insertion into the international economy therefore resulted to be very unilateral, and neither forward nor backward linkages seemed attractive to the local elites who could substantially benefit from the mere export of raw materials without having to be more innovative. If the benefiting elites had spent more money on local products as opposed to foreign luxury imports and, even better, if a larger group of the population had benefited from the exports, stronger income-multiplier linkages could have stimulated the economic and social development to some extent. Yet the combination of an elite-based social structure, the economic backwardness of the region and a lack of constructive leadership prevented a far-reaching developmental progress.

In sum, the initial insertion of Latin America into the international economic order did not provide a stable basis for more equitable conditions later on. On the one hand, some countries - particularly Great Britain - had already gained such an advanced stage of industrialisation that Latin America was naturally turned into a dependent supplier of raw materials. On the other hand, Latin America’s social, economic and political structures were not developed enough to strengthen its role. An exceptional example of a constructive attempt of doing so is the case of the Chilean government, which heavily taxed its nitrate exports to “promote industry, education and social development” (Thorp, 1998: 70-71). This shows that a stronger leadership interested in a more equitable distribution of benefits with a long-term perspective would have been required to use the income generated during this era as a basis for future progress. However, taking into consideration that most countries had just gained independence, that economic structures of primary goods exports - favoured by the international world order - were still in place in Latin America as well as that local elites did associate themselves rather with foreign cultures than with Latin America itself, it is not surprising that this era represents an example of dependent insertion.

Import substitution industrialisation (ISI)

This section will cover the era of ISI (1930 - 1980), which is generally associated with a resurgence of national identity, the creation of institutions as well as a new role for the state, and was finally triggered by the devastating effects of the Great Depression and aggravated by World War II. The “old regionalism” will be embedded before the conclusive part of this section.

Major new restrictions on trade and finances, the falling demand for exports, declining terms of trade, and the scarcity of imports created a sense of trade pessimism. As a result, an endogenous dynamism emerged. Structuralist theorists such as Prebisch, Furtado and Sunkel, whose ideas where taken up by the newly created United Nations Economic Commission for Latin America and the Caribbean (ECLAC), made a crucial contribution by drawing the attention to structural factors although it is today recognised that internal structural factors were partly underestimated (Martinussen, 1999: 52). The more extreme fraction of the structuralists, the dependistas, took on a rather antagonistic stance blaming the unjust international system for all evils suffered; interestingly enough, some dependistas have still survived particularly in Third World and solidarity groups.

Latin America started to withdraw from the international markets in order to industrialise behind high tariff barriers, financing this undertaking with income gained from agriculture and later through substantial amounts of foreign borrowings. Since saving rates are traditionally low in Latin America and capital flight characterises the wealth of the rich partly due to underdeveloped and unreliable banking systems, savings as an internal means of financing were not an option for most countries (except Colombia). Instead, 60 billion petrodollars, which were readily available at that time, entered Latin America as foreign loans between 1975 and 1982 alone (Green, 1991: 73). The efficient use of those resources can be questioned as the elite-based social structure had not yet changed dramatically and national institutions were still in their infancy – mismanagement and corruption were widespread.

Despite the fact that Raúl Prebisch had urged to overcome the export bias after the initial phase of industrialisation, a re-opening towards international markets was not implemented quickly enough, which led to uncompetitive products. Yet this was not the only problem that arose during ISI: The impressive growth rates achieved during the first phase could not be maintained “when the demand from the consumers with considerable purchasing power had been satisfied” (Martinussen, 1999: 77). Besides, the “easy phase of import substitution” was not followed by a diversification of the industrialisation and all countries continued to be dependent on the import of machinery and other capital goods from the industrialised countries (Martinussen, 1999: 144).

In sum, due to the failure to modernise the agricultural sector, the dependence on external finances which led to the debt crisis after interest rates rose dramatically, the limitations of local markets together with the fact that protectionist measures had been maintained for far too long, the strategy ran into serious problems. Very few countries, such as Brazil, managed to reach a stage of industrialisation beyond non-durable and durable consumer goods. And even those rather advanced countries did not manufacture products, which could compete on international markets. As late as in 1984, Brazil introduced an Informatics Law to foster a home-grown electronics industry. The result was an “uncompetitive high-cost and low-tech domestic industry” (MacDonald et al., 2000: 157).

Within the framework of ISI, the “old regionalism” deserves to be mentioned. As national markets were relatively small, lingering ideas of regional integration became stronger. For this reason, in the 1960s and early 1970s, several regional groupings were founded: the Latin American Free Trade Association (LAFTA), the Central American Common Market (CACM), the Andean Pact, and the Caribbean Community (Caricom). Aims were ambitious, but the political will and cooperative skills in terms of joint policy-making did unfortunately not meet expectations, so that the overall results of such agreements generally remained rather diluted; one exception was the fact that intra-regional trade was boosted to some extent.

It is hard to imagine how - at that time - the spirit of national protectionism should have been successfully combined with a dynamic of regionalism if even today neighbourhood relations are still poisoned by historical hostilities: A highly lucrative natural gas project was delayed in Bolivia due to a bitter debate over which neighbouring country (Peru or Chile) should host the pipeline that would pump the gas to the Pacific Ocean and from there to their export markets; hard feelings about the War of the Pacific of 1880 [!] still prevail (Lozada, 2003).

Yet comparing the growth of the gross domestic product (GDP) between 1900 and 1996 by period, ISI was considerably more successful than both primary commodity export and neo- liberalism, which will be dealt with in the following section (Thorp, 1998: 15):

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¹ Latin America Solidarity Centre: The Plan Puebla Panama in a Nutshell: A PPP Primer in 17 Questions and Answers (distributed during a conference on 12 April 2003)