By Eric Vandenbroeck and co-workers

The view of foreign investment in Latin America as malign is widely propagated. It is given credence in a second book which, along with Galeano’s, has had a fundamental role in fixing the mental picture of the region’s history carried by Latin Americans and outsiders alike. In the climactic scene of One Hundred Years of Solitude, Gabriel Garcia Marquez describes a massacre of striking workers by troops acting at the behest of an American banana company whose plantations are held to have replaced a prosperous Eden with an oppressive monoculture. In the novel, more than 3,000 workers, women and children are cut down by army machine guns; their bodies are loaded onto a train and thrown into the sea, as the government silences news of the outrage. These scenes are loosely based on a strike in 1928 against the United Fruit Company in Magdalena department, on Colombia’s Caribben coast. But the actual events were very different. Historians estimate that no more than 75 people were killed (an appalling enough figure in any event). The massacre was widely denounced on the radio by opposition politicians, and it contributed to the election of a Liberal government which successfully pressed the company to concede many of the workers’ demands.20 Before the United Fruit Company’s arrival, Magdalena had been one of the poorest and most backward departments of Colombia. The banana industry paid above-average wages, and attracted thousands of migrants.21 Of course, the massacre was reprehensible, as was much else in the record of the United Fruit Company elsewhere in Latin America.22 But by exaggerating its scale, Garcia Márquez distorted its historical import. As Eduardo Posada Carbó, a Colombian historian, has pointed out, the discrepancy in the casualty figures was acknowledged by Garcia Márquez himself. When he realised that ‘the number of deaths must have been very small’, the novelist recalled, ‘This was a big problem, because when I found out that it wasn’t really a spectacular massacre in a novel where everything was extraordinary ... where I wanted to fill a whole train with dead bodies, I couldn’t stick to historical reality.’23 Since the novel’s publication in 1967, the figure of 3,000 dead has taken on a life of its own. In his memoirs, Garcia Márquez notes with satisfaction that ‘not long ago, on one of the anniversaries of the tragedy, a speaker in (Colombia’s) Senate asked for a minute’s silence in the name of the 3,000 anonymous martyrs slaughtered by the security forces’.24 Unlike Galeano, Garcia Máiquez has the good excuse that he is a novelist. Nevertheless, many writers of the magical realism school have played a full part in burnishing the mythology of dependency theory.

Albeit in more scholarly form, dependency theory remains the dominant prism through which Latin American studies are taught in the United States. Take one of the standard introductory texts to the region: Thomas Skidmore and Peter Smith admit to borrowing all but one of the concepts that underpin their book from the dependency school (though they acknowledge ‘limits to the utility of this approach’).25 Certainly, the dependency school can point to a few basic historical truths: the exploitation of Indian serfs and black slaves; the asymmetry of power between rich and poor countries and between the United States and Latin America. Foreign firms have sometimes behaved abusively; the United States has often bullied Latin American countries, from its 1846-8 war of annexation with Mexico to its encouragement of coups to its contemporary ‘drug war’. Latin American economies have often found themselves vulnerable t sudden changes in a world economy over which they have little or no control.

But, for several reasons, dependency does not stack up as an explanatory theory, especially as an economic one. For a start, it is unable to explain what is without doubt the most significant development in the world economy of the past thirty years: the journey towards development through the medium of capitalism and international trade of many Asian countries. That explanatory failure is hardly surprising. Dependency theory rests on flimsy foundations, as Stephen Haber, a historian at Stanford University, has pointed out.26 It employed ad hoc reasoning, such as the notion that foreign investment decapitalised Latin America because the value of repatriated profits over time might exceed the value of the original investment. This confused a stock and a flow, and failed to take into account the creation of value in the host country in the form of jobs, demand for inputs, and transfer of technology (and tax revenues).

The main tenets of dependency theory have been disproved by later empirical research. For example, contrary to Prebisch’s assertion, recent econometric work shows that commodity prices and Latin America’s terms of trade have not suffered secular declines, but rather have shown cyclical swings and no clear overall trend. There is much evidence that local capitalists were powerful, independent and innovative, and that governments often regulated foreign capital to serve the interest of national development.27 This research ‘has led to the virtual redundancy of the concept of the enclave economy’, in which it was held that foreign investment in export products brought little benefit to the rest of the economy.28 Of course, there were exceptional cases, such as Peru’s International Petroleum Company, an affiliate of Standard Oil. From 1916 to 1934, just i6 per cent of the value of its total sales (most of which were exports) stayed in Peru in the form of wages, taxes and payments to local suppliers (of which there appear to have been none).29 But such cases should not automatically be taken as the norm. For example, it is now recognised that foreign investment in railways was crucial in the development of local production and markets, not just for exports. Similarly, recent research has demolished the notion that Latin American economies were ‘underdeveloped’ by free trade.

In fact, the region has been the most protected in the world for most of its history. Even as they paid lip-service to free trade in the nineteenth century, governments levied tariffs on imports because foreign trade was the handiest source of revenue, and the wars and internal strife of 1810-70 needed to be paid for. In a recent study, John Coatsworth and Jeffrey Williamson overturned much conventional wisdom on this subject.30 They found that in a sample of ii of the main Latin American countries, customs revenues averaged 57.8 per cent of total government revenues between 1820 and 1890. But even after internal peace was achieved, in the years preceding the First World War, gornments raised import tariffs, switching from revenuemaximising protectionism to explicit industrial protectionism. That was partly to compensate local producers for the impact of lower shipping rates on the price of imports. And it was partly because the agro-export ‘oligarchy’ had less political clout or was less committed to free trade than is often asserted. Pre-First World War Latin American landowners were never as powerful as the European aristocracy and, anyway, they often invested in manufacturing too. Urban artisans and workers gained increasing political influence as the cities grew. Coatsworth and Williamson conclude that Latin America had very high tariffs for a century before the 1930S - and contrary to the arguments of protectionists, those countries with the highest tariffs grew slowest while those with the lowest tariffs grew fastest.

Overall, it is fair to conclude with Haber that ‘in retrospect, dependency thinking about foreign capital and national sovereignty might have had a good deal of accuracy in regard to the smaller countries of Latin America, such as Honduras, Guatemala or Cuba, but held limited explanatory power for the larger countries of the region’.31 The same goes for politics. The smaller countries of the Caribbean rim suffered repeated American intervention. The larger countries of South America, and Mexico, have generally gone their own way. True, the United States encouraged coups, especially during the Cold War. But in nearly all cases those coups were internally generated, and external support, while sometimes important, was not decisive.32 Apart from being wrong, dependency theory had the unfortunate consequence of encouraging Latin Americans to blame all their woes on outsiders, rather than taking a closer look at themselves. (Conversely, many American academics and pundits appear to suffer from a guilt complex that leads them to exaggerate the scale and impact of US intervention in the region as a whole.) As David Landes, an economic historian at Harvard who is by no means a slave to neoclassical economics, noted: ‘Cynics might even say that dependency doctrines have been Latin America’s most successful export ... They are bad for effort and morale. By fostering a morbid propensity to find fault with everyone but oneself, they promote economic impotence. Even if they were true, it would be better to stow them.’33

 

A reactionary culture — but what if it changes?

Dependency theory has been mirrored among some conservative commentators by an alternative explanation for Latin America’s woes, one which is very different in content but is similar both in inducing impotence and in beihg based on assertion more than empirical testing. This school holds that Latin America has been doomed by its culture, and in particular an Iberian, Catholic tradition of social organisation and political thought which, it is argued, is both anti-capitalist and inimical to democracy. The most elegant and erudite expression of this viewpoint is to be found in the writings of Claudio Véliz, a Chilean historian. In The New World of the Gothic Fox, he adapted an ancient Greek metaphor previously employed by Isaiah Berlin, an Anglo-Russian liberal philosopher, to distinguish between two groups of Western thinkers. In the metaphor the hedgehog is said to know one big thing while the fox knows many small things. Berlin called ‘hedgehogs’ those thinkers, such as Plato and Marx, ‘who relate everything to a single, central vision’, as against ‘foxes’, such as Aristotle, Erasmus, Shakespeare or Goethe, whose ‘thought is scattered and diffused, moving on many levels’.34 In other words, the hedgehog way of thinking carries the seeds of authoritarianism and totalitarianism, while that of the foxes embodies liberal pluralism. Véliz argues that Latin Americn culture is like a ‘hedgehog’: he sees it as marked by a monolithic, ordering vision composed of centralisation, civil law, Baroque classicism, and a notion of society as a hierarchical, organic whole, in which each person has his or her place. For Véliz, English-speaking North Americans, by contrast, are ‘foxes’. Their culture has featured decentralisation, the common law, romanticism and the Gothic. Another hedgehog-like characteristic of the Ibero-American peoples, he notes, is their capacity to resist change, and especially the transformations associated with the Industrial Revolution in the Anglo-Saxon world. The reward for this stubborn Catholic conservatism is that values of family and community have been better preserved than in the Anglo-Saxon world.

The architects of this Iberian cultural edifice were the theologians of the Counter-Reformation, ‘the greatest and most enduring achievement of (Spain’s) impressive imperial moment’, according to Véliz.35 Its driving spirit was provided by the teachings of St Thomas Aquinas, which became entrenched at the University of Salamanca. Aquinas held that human society was an organic hierarchy governed by natural (i.e. divine) law. This view of the world was inimical to individualism, pluralism or the clash of competitive interest groups; the only restraint on absolute power was the duty of noblesse oblige, not that of man-made constitutions.36 The mania for central control generated a habit of obsessive regulation which began with Philip II, the austere monarch at the zenith of Spanish power, who sat for long hours in his forbidding monastery-palace of El Escorial, in the hills outside Madrid, penning detailed ordinances to his viceroys across the ocean with only his impressive collection of Titian nudes for relief.

The ‘culturalists’ hold that this mindset still governs Latin America. Thus, Véliz says of the Counter-Reformation: ‘the stability of its uncompromising symmetries largely dominates, even to this day, the lives of the Spanish- speaking peoples almost as convincingly and pervasively as the dynamic asymmetries of the Industrial Revolution preside over the English-speaking world.’37 Sometimes the rejection of capitalism and industrialisation has indeed been turned into an explicit virtue by Latin American thinkers. In Ariel, a hugely influential book published in 1900, José Enrique Rodó, a Uruguayan journalist and man of letters, argued that Latin America, inspired by Hispanic Christianity and classical antiquity, should pursue the ideals of beauty and truth. He admired the vigorous prosperity of the United States, but saw that country as the source of a vulgar utilitarianism. Like some of today’s critics of globalisation, he feared that the United States wanted to impose its ideas on everybody else. Rodó accepted democracy as inevitable, but called for its ‘regeneration’ by an aristocratic intellectual elite.38 Rodó was writing in the aftermath of Spain’s comprehensive military defeat by the United States in the Spanish—American war of 1898. This entailed the loss of Cuba and Puerto Rico (as well as the Philippines) and thus the end of the empire begun by Columbus. Paradoxically, after a century in which many of Latin America’s leaders had imbibed and propagated a leyenda negra (black legend) which attributed all of their countries’ ills to the colonial power, Spain’s defeat in 1898 prompted an outpouring of sympathy in its former territories. Arielismo gave rise both to a conservative and almost racist Hispanicism and, on the left, to a new Latin American nationalism, which included a pronounced anti-Yanqui element. It would not be the last time that leftists and conservatives found common inspiration in an anti-liberal agenda, and one that seemed to justify the conditioning of democracy to other, allegedly higher, values.

Those writers who stress the influence of Iberian culture argue that when Latin American leaders have seemed to embrace change and democracy, it has been, as with the Sicilian aristocrat of Lampedusa’s novel The Leopard, in order that everything should remain the same. Latin American democracy has always been more formal than real, they say. Absent, the argument goes, was the tradition of Anglo-Saxon liberal democracy, associated in particular with John Locke, who stressed the importance of the rights of the citizen and checks on an over-mighty executive. Rather, the notion of democracy that has prevailed in Latin America, it is said, has been one derived from French political philosophy, and especially that of Jean Jacques Rousseau, who argued that the ruler would be legitimated by interpreting the ‘general will’.39 This is at once both a defence of popular sovereignty and the perpetual excuse of the tyrant. Similarly, when Latin America appeared to embrace capitalism and democracy, during what Véliz has called ‘the liberal pause’ from 1870 to 1930, in several important countries it did so under the auspices of positivism. Not only was this another French doctrine, but it was one which essentially justified enlightened despotism or top-down reforms, separating economic freedom from political freedom. In this view, Latin America’s industrial bourgeoisie, far from challenging an aristocratic, authoritarian state as their European counterparts did, allied with it. In this unflattering portrait, Latin American capitalists were rent-seekers rather than entrepreneurs, soliciting the comforts of protection, subsidies and privileges from the state, rather than risk the bracing challenge of unfettered competition. The result, it is argued, is a prevailing corporatist culture, in which Latin Americans see success as deriving not from individual merit but from patronage and personal contact - know-who rather than know-how. Behind a façade of constitutionalism and democracy, hierarchical domination and corporatist anti-individualism are held to thrive.

There is some truth in this explanation of the failure of capitalist democracy to flourish in Latin America. In particular, it is not hard to see in the Iberian legacy the origins of the mania for regulation and red tape that burdens  business in the region. It is undeniably true that corporatism has been * influential in Latin America, and with it the comfortable monopolies granted to many businesses or trade union confederations. It is true, too, that politics in Latin America has long been marked by undemocratic practices, such as ‘patrimonialism’ and ‘clientelism’. The former refers in essence to the hijacking of the government, or bits of it, by powerful private interests. The latter term defines a pattern of politics in which local or national notables or political bosses extract votes and political loyalty from groups of poorer and less powerful followers in return for offering a degree of protection and access to state resources.40

But ultimately, the ‘cultural explanation’ fails to convince as an overarching theory. First, it cannot account for the diversity of outcome within the region. Thy have some countries been so much more successful than others at different periods? Given a presumed cultural heritage in common, why is Chile so different from Argentina, Colombia from Venezuela, or Mexico from Peru? Second, it is simply nonsense to claim that the influence of French political philosophy is self-evidently inimical to democracy per se. Thus, Mario Vargas Llosa, a Latin American liberal democrat par excellence, ‘rofesses himself a passionate admirer of French culture. From it, he says, austere monarch at the zenith of Spanish power, who sat for long hours in his forbidding monastery-palace of El Escorial, in the hills outside Madrid, penning detailed ordinances to his viceroys across the ocean with only his impressive collection of Titian nudes for relief.

The ‘culturalists’ hold that this mindset still governs Latin America. Thus, Véliz says of the Counter-Reformation: ‘the stability of its uncompromising symmetries largely dominates, even to this day, the lives of the Spanish- speaking peoples almost as convincingly and pervasively as the dynamic asymmetries of the Industrial Revolution preside over the English-speaking world.’37 Sometimes the rejection of capitalism and industrialisation has indeed been turned into an explicit virtue by Latin American thinkers. In Ariel, a hugely influential book published in 1900, José Enrique Rodó, a Uruguayan journalist and man of letters, argued that Latin America, inspired by Hispanic Christianity and classical antiquity, should pursue the ideals of beauty and truth. He admired the vigorous prosperity of the United States, but saw that country as the source of a vulgar utilitarianism. Like some of today’s critics of globalisation, he feared that the United States wanted to impose its ideas on everybody else. Rodó accepted democracy as inevitable, but called for its ‘regeneration’ by an aristocratic intellectual elite.38 Rodó was writing in the aftermath of Spain’s comprehensive military defeat by the United States in the Spanish—American war of 1898. This entailed the loss of Cuba and Puerto Rico (as well as the Philippines) and thus the end of the empire begun by Columbus. Paradoxically, after a century in which many of Latin America’s leaders had imbibed and propagated a leyenda negra (black legend) which attributed all of their countries’ ills to the colonial power, Spain’s defeat in 1898 prompted an outpouring of sympathy in its former territories. Arielismo gave rise both to a conservative and almost racist Hispanicism and, on the left, to a new Latin American nationalism, which included a pronounced anti-Yanqui element. It would not be the last time that leftists and conservatives found common inspiration in an anti-liberal agenda, and one that seemed to justify the conditioning of democracy to other, allegedly higher, values.

Those writers who stress the influence of Iberian culture argue that when Latin American leaders have seemed to embrace change and democracy, it has been, as with the Sicilian aristocrat of Lampedusa’s novel The Leopard, in order that everything should remain the same. Latin American democracy has always been more formal than real, they say. Absent, the argument goes, was the tradition of Anglo-Saxon liberal democracy, associated in particular with John Locke, who stressed the importance of the rights of the citizen and checks on an over-mighty executive. Rather, the notion of democracy that has prevailed in Latin America, it is said, has been one derived from French he has learned above all ‘to love liberty over all other things and to fight everything that threatens and contradicts it’. This ‘insubordinate, libertarian, rebellious tradition and its universal vocation’ is ‘the most fertile and remains the most current’ among ‘the various tributaries of the great river of French culture’, he said when accepting an honorary doctorate from the Sorbonne in 2005.41 Third, in the two centuries since independence, Latin America has been shaped and enriched not just by its indigenous peoples and the Iberian legacy but by migration from other parts of Europe and from Asia, as well as from Africa. Some of those migrants have adhered to authoritarianism, just as many Iberians have been democrats. As Alain Rouquié, a distinguished scholar of Latin American militarism, asked mischievously: ‘How much do generals Stroessner, Geisel, Medici, Leigh and Pinochet owe to Castile?’42

Above all, the ‘cultural explanation’ cannot explain recent, dramatic change in Spain itself. For much of the past two centuries, Spain was notorious for political instability and authoritarianism and for economic backwardness. Since the end of the Napoleonic invasion, Spain saw six constitutions, seven military pronunciamientos, two monarchical dynasties (and four abdications), two dictatorships, four civil wars and then the 36-year dictatorship of General Francisco Franco. ‘Thus, Spain in the early 1970S stood in sharp contrast to the rest of Western Europe, except for neighbouring Portugal. While democratic systems had been fully entrenched for decades nearly everywhere else, Spain lacked a tradition of stable democratic governance throughout its history,’ as a recent study put it.43 Yet thirty years later, Spain has become a consolidated democracy and the world’s ninth-largest economy, its success a marked counterpart to the travails of Italy. If culture was the problem, clearly the culture has changed. And if it can change in Spain, then it can change in Latin America. The Spanish transition was still fresh in the mind when the democratic wave swept over Latin America in the 198os. Behind much of the recent disillusion in Latin America would appear to lurk the contrast with Spain’s successful democratic consolidation. It is only fair to note that Spain enjoyed two big advantages as it embarked on its transition to democracy. First, its income per head was considerably higher than the average that prevailed in Latin America when it followed suit. That greater wealth was the result of more than 15 years of rapid economic growth, starting when Franco, at the urging of technocrats from Opus Dei, a Catholic group, opened Spain’s economy to foreign trade and investment in the late 1950s. Second, the prospect of entry to the European Economic Community (as it then was) was a powerful incentive to adopt the rule of law. And while poverty and inequality in Spain were high by West European standards, they were nowhere near the levels in Latin America. The underlying point remains: culture is not the main obstacle to either democracy or development.

So what is? Take economic development first. Economic theory says that growth comes from the accumulation of physical and human capital (in other words, investment and education), from applying technological innovation and from- the efficiency with which all these are combined (i.e. productivity). Why has Latin America been relatively poor at doing these things? Some economists focus on policy mistakes. Thus, they looked at the rapid growth of some East Asian economies from the 1950S onwards, and argued that Latin America’s choice of desarrollo para adentro and state intervention were catastrophic mistakes. Latin America opted to close its economies, limiting its access to new technology, just when world trade was about to enter a period of unprecedented growth. Yet countries such as Brazil and Mexico remained open to foreign investment in manufacturing in this period. And there is much debate about which combination of factors lay behind the Asian miracle:

while promotion of exports was crucial (and lacking in Latin America), some observers also pointed to superior educational performance and prior land reform in Japan and South Korea, and to their protection of infant industries. Even so, neo-conservative writers imagined that merely to dismantle the mistaken policies of state intervention and protectionism would propel Latin America along a seamless path of development. The free play of market forces and openness to trade and investment, it was thought, would raise the rate of growth. This would cut poverty and expand the middle class, and thus create a sound basis for democracy as well as economic development. This belief echoed the arguments of some Latin American leaders in the immediate aftermath of independence that free trade and the encouragement of European migration would be enough to achieve European levels of development. Some of the enthusiasts for the Washington Consensus appeared to share a similar faith in the unalloyed power of open markets and open trade.

Yet setbacks in the 199os quickly showed that Latin American development remains an obstacle course. Argument rages as to whether the ‘lost half- decade’ of 1998-2003 was caused by the policy reforms themselves or because these had not gone far enough. Some economists say that the abrupt lifting of barriers to trade and capital movement (‘shock therapy’) made Latin America more vulnerable to financial crises originating in the outside world. Others argue that the problem was not the opening in itself, but the failure to deal with its consequences. These included increased flows of short- term foreign capital and overvalued currencies. In economies that were only partly reformed, these changes eventually triggered financial crises because of weaknesses in local banking systems. But the wider point, on which of policies and institutions many agree, is that getting macroeconomic policies right is a necessary but not sufficient condition for sustained high growth. Among the reformers themselves, by the mid-199os it had come to be recognised that ‘Institutions Matter’, to cite the title of a World Bank report on Latin America.44 Its authors noted that while the policies of the Washington Consensus had brought macroeconomic stability and raised growth rates (from the anaemic levels of the 1980S), they had not had the anticipated impact on poverty, inequality or job creation. To achieve these goals, and to raise the rate of growth, the report stressed the importance of microeconomic reforms (sometimes known as ‘second-generation’ reforms); of such institutions as labour markets, banking systems, legal systems and machinery for the enforcement of contracts, the state bureaucracy and regulatory bodies.

The dividing lines between culture and institutions and between institutions and policy are blurred. ‘Culture’ refers to the prevailing sets of customs, values and beliefs of a society. Institutions may express such habits, values and beliefs. But another way of looking at institutions is to see them as the result of policy choices: ‘We can view institutions as the cumulative outcome of past policy actions.’45 In recent decades, many economists have come to see institutions as fundamental to explaining how economies work. The ‘new institutional economics’, as it is called, does not reject orthodox neo-classical economics, but attempts to build into it more realistic assumptions about the way that markets operate. Institutions, meaning rules, though these are normally expressed in or applied by organisations, serve to reduce uncertainties and transaction costs in human exchange.46 What matters is that decisions by the state should be predictable, the rule of law, rather than of arbitrary, dictatorial whim, or the opaque bending of justice according to private interest. Crucially, even where sound macroeconomic policies are in place, poor regulation and ill-defined or poorly enforced property rights can serve to restrict rather than stimulate economic activity, encouraging rent-seeking rather than rising productivity.

This argument was powerfully expressed by Hernando de Soto, a Peruvian economist, in El Otro Sendero (‘The Other Path’), published in 1986. De Soto applied the new institutional economics to the vast ‘informal’ sector of unregistered businesses that had grown up in Lima and other Latin American capitals. His research institute, the Instituto Libertad y Democrácia (ILD), calculated that the informal sector accounted for 39 per cent of Peru’s GDP and employed 48 per cent of the workforce. In Lima, some 440,000 people, more than a tenth of the capital’s population at the time, worked as street vendors or in ‘informal’ commerce. Informal businesses also ran nearly all of the city’s buses. More than 40 per cent of the houses in Lima were selfbuilt. 47 Traditional conservatives saw the informals as unfair, tax-evading competitors, while the left, following the tenets of dependency theory, saw the informals as marginalised by an economic order of ‘urbanisation without industrialisation’.48 De Soto, by contrast, saw the informal sector as an ‘insurrection’ against the legal institutions of a corporatist state: ‘access to private enterprise is difficult or impossible for the popular classes, legal norms are excessive and vexatious, public and private bureaucracies are enormous, redistributive coalitions have powerful influence in the formulation of law and the intervention of the state is patent in all activities.’49 Informality, he argued, has ‘turned a large number of people into entrepreneurs’.5° The ILD found that the obstacles to setting up a legal business were gigantic. To prove the point, it set up a small tailoring shop; registering this required ii different permits, which took ten months and cost $194 (or five times the minimum wage in Peru at the time). Far from being an unfair advantage, informality was a crushing handicap: the ILD found that informal businesses paid io to 15 per cent of their gross revenues in bribes. They were restricted to buying and selling among family and trusted friends, unable to develop economies of scale or get access to bank loans, De Soto, a brilliant marketer of ideas, subsequently developed this work into a broader theory of why capitalism has struggled in developing countries.5’ The poor have plenty of assets, he argued, but because they are not documented by the formal legal system they cannot be mobilised as capital. Instead, the poor have developed extra-legal arrangements, based on a mixture of custom and informal consensuses. The challenge for governments is to merge these two legal systems.

The value of de Soto’s campaign lies in highlighting the way in which law, property rights and enforceable contracts underpin economic development, and that the weakness of these institutions in many Latin American countries raises the costs of transactions and stunts growth, affecting informal and formal businesses alike. This approach has spawned a host of more or less successful government efforts to cut red tape. Yet useful though it is, it does not add up to a complete theory of underdevelopment. The problem with de Soto’s argument is that gaining legal title for their assets doesn’t necessarily allow the poor to turn them into investment capital. For most poor people in Latin America, their self-built house is too important to risk losing by offering it as guarantee for a loan. Take the example of Felipe Copaja, a stocky 45-year old of Aymara descent who owns a small workshop in a side-street in the city of El Alto in Bolivia. He set up his own business making pumps and parts for wells and greenhouses. On the wall of his living room, in his simple but comfortable three-room house in a corner of the workshop yard, hangs a framed certificate that shows that his business is legally registered. But his situation is still precarious. He works with his brother and nephew, taking on outside labour only when business is good and then only temporarily. His legal title means that he could get credit to expand the business, but he has not done so. ‘The banks will lend against title, but at i8 per cent in dollars. I prefer not to risk losing my home so that I can sleep easily.’52 Not only does the house provide the family with shelter but it can also be a source of income, by renting out a room or two. A study in Buenos Aires found that titling did lead residents to spend more on improving their homes, but had no significant effect on their access to credit.53 But perhaps the most powerful evidence comes from Peru itself, where under de Soto’s influence over 1.2 million property titles were issued to urban households between 1995 and 2003. Research hs found that those with titles were no more likely to obtain a loan from a commercial bank than those who lacked one, perhaps because banks fear that the courts will recoil from exercising the loan guarantee by seizing the homes of the poor.54 However, urban squatter families who lack property titles have to devote more time to protecting their homes. Titling does lead to a substantial increase in hours worked outside the home by adults, and a reduction in child labour.55 While some informals are indeed entrepreneurs, many choose to work for themselves because they lack the skills to obtain decent employment. Poverty, lack of education and good healthcare are formidable barriers that better legal institutions alone will not change.

That said, there can be no doubt that good legal institutions do indeed matter a lot for economic growth. One recent large cross-country econometric study, by Dani Rodrik, an economist at Harvard University, and two colleagues, found that institutional quality, measured by the perceptions of investors regarding the effectiveness of contract enforcement and protection of property rights, has a big impact on the income level of a country.56 This study also looked at the influence of geography and the intensity of trade on development. It found little evidence that either by themselves cause countries to be richer or poorer (though richer countries tend to trade more). However, geography does appear to have an indirect impact on income by influencing the quality of institutions, on which more in a moment. Deficient legal institutions do much to explain the shape of Latin American businesses, in which the family-owned diversified conglomerate has long been the dominant force and Anglo-Saxon-style equity capitalism has struggled to take off. Research by a group of economists from the universities of Harvard and Chicago suggests that the French civil-law tradition of the Code Napoleon adopted by Latin America on independence provides markedly less protection for outside minority shareholders than either Anglo-American common law or the civillaw systems of Germany and Scandinavia.57 Yet sceptics might object that the Code Napoleon has not stopped France from becoming one of the world’s richest economies.

It is a mistake to seek a single, overarching explanation for Latin America’s relative failure, as the dependency theorists, the advocates of cultural explanations and de Soto all do in their differing ways. Much of the answer to the Latin American conundrum surely lies in the interplay between several sets of factors. History (the circumstances in which Latin America was colonised, became independent and related to the world economy), geography (climate, obstacles to transport, the presence of a large indigenous population), political institutions and policies have combined to mould the region’s fate. A recent study by Rosemary Thorp and others stresses this interplay between institutions, geography and natural resource endowments.58 It also notes that institution-building, the development of markets and a modern state, was crucial in determining the Latin American economies’ ‘capacity to change’. By that they mean both the capacity to absorb new technologies and to innovate and to respond to shifting external conditions.

As an increasingly rich and lively academic debate on Latin American economic history unfolds, inequality, of wealth and of political power, is moving to the heart of the story. Two American economists, Stanley Engerman and Kenneth Sokoloff, argue that geography in the form of different ‘factor endowments’ (meaning climatic suitability for particular crops, natural resources, and the relative abundance of labour) has played a crucial role in the different way in which institutions were structured in the two halves of the Americas, and that this in turn had an effect on growth.59 Thus, in Brazil and the Caribbean, the soils and climate favoured sugar, cotton and coffee, which were all of high value and attracted economies of scale. These crops stimulated the formation of large plantations and estates, and the import of slaves to work them. In Mexico and Peru, wealth came from exploiting mines and the initially large population of sedentary Indians. Again, large landholdings were the rule. In both cases, extreme inequalities of wealth and power were the norm. The institutions of colonial Latin America served to protect those inequalities. By contrast, in Canada and the northern British colonies (not the pre-Civil War South, whose economy was similar in many ways to those of Latin America), climatic conditions favoured mixed farming of grains and livestock, with no economies of scale. So small family farms became the norm, there was less demand for slaves, and a more equal society emerged. ‘It seems unlikely to have been coincidental that those colonies with more homogenous populations evolved a set of institutions that were more oriented towards the economic 2spirations of the bulk of the adult male population,’ Engerman and Sokoloff rgue.60 These arrangements tended to persist because factor endowments cere difficult to change. Although they concede that the relationship between the price of inequality equality and economic growth is complex, the authors argue that the more egalitarian society of the United States encouraged early industrialisation by providing a market and by making technical innovation easier. in Mexico and Brazil, by contrast, access to patents was in practice restricted, by costs and regulations, to the wealthy or influential. In addition, in Latin America the close correlation between economic status and race may have served to make inequality harder to break down.

Others argue that inequality restricted growth not because it begot poor institutions but because it generated economically costly political conflicts. Coatsworth argues that extreme concentration of land, wealth and power in Latin America did not date from the colonial period, but from the second half of the nineteenth century when the region’s economies began to grow as a result of being drawn into the world economy in a first period of globalisation.61 But inequality, he notes, did not impede growth: governments cut deals with local and foreign investors in a kind of ‘crony capitalism’.

Yet those political arrangements condemned Latin America to a series of vicious circles. Perhaps the most important example concerns the labour market. In Latin America, as in the United States, land was abundant and labour was scarce. That should have lead to higher wages and labour-saving innovations to increase productivity. This is what happened in farming in the United States. In Latin America, on the whole it did not (Argentina was a partial exception). Perhaps because of the prevalence of slavery and forced Indian labour during the colonial period, Latin American landowners were reluctant to pay higher wages, preferring continued coercion. There was a profusion of different forms of servitude associated with the haciendas or large estates. Indeed, the desire to gain control of labour, rather than the accumulation of land itself, was probably the main factor driving the expansion of haciendas at the expense of communal landholdings in the nineteenth century. These patterns in land and labour markets discouraged both innovation and the growth of the domestic market, and thus were an important factor delaying industrialisation.62 In Europe and the United States, the benefits of economic growth were eventually spread wide because, as productivity increased, trade unions secured higher wages and democratic governments established welfare states. That did not happen to the same degree in Latin America. Importsubstitution industrialisation served to reduce competition and to maximise the gains and privileges of the politically well-connected. Inequality remained high and poverty widespread. The beneficiaries of the established order blocked the adoption of the reforms, of landholding, trade, taxes, credit and education, which might have promoted greater equity. Yet such arrangements became harder and harder to sustain, leading to an increase in political instability and populist attempts to remedy inequality by expropriations of land or businesses (or the rhetorical threat of them). There is evidence that such political instability undermined economic growth, and served to make it more volatile.63 Such political conflicts also help to explain why for so long Latin America seemed to defy modernisation theory.

The burden of history is great in Latin America, but it is not absolute. The diversity of experiences across the region is a caution against the notion of inevitability. To take just one example, Colombia’s coffee boom rested in large part on family farmers: in 1932, 6o per cent of the country’s production of coffee beans came from farms smaller than 12 hectares.64 The broader point is that the advent of increasingly established and durable mass democracies in the region provides grounds for optimism. True, democracy involves particular problems of collective action. But at least in theory, it holds out the possibility of the peaceful resolution of conflicts, of lasting political stability, of swift problem-solving, and the speedy copying of successful models within the region. It thus offers Latin America an unprecedented opportunity to combine faster growth with greater equity. And in a globalised world in which rich countries have become post-industrial, there are many new opportunities as well as problems. Rather than being culturally or externally determined, it is more fruitful to see Latin American history as a contest, between modernisers and reactionaries, between democrats and authoritarians, between the privileged and the excluded. That contest is the subject of P.2.
 

1. See Fernández-Armesto, Felipe (2003), The Americas: A Hemispheric History, Random House Modern Library, New York, Chapter 3.

2. Bulmer-Thomas, Victor (1994), The Economic History of Latin America Since Independence, Cambridge University Press, p. 27.

3. Quoted in Platt, DCM (1972), Latin America and British Trade 1806-1914, A & C Black, London, p. 4.

4. Maddison, Angus, The World Economy, p. 126.

5. Cárdenas, Enrique, Ocampo, José Antonio and Thorp, Rosemary (eds) (2000), An Economic History of Twentieth-Century Latin America. Vol. 1: The Export Age, Palgrave, Chapter 1.

6. Bulmer-Thomas, The Economic History of Latin America, pp. 6i—6.

7. Ibid., p.417.

8. Financial Times Special Report on the World Economy, 13 September 2006.

9. Hartlyn, Jonathan and Valenzuela, Arturo (1994), ‘Democracy in Latin America Since 1930’, in Bethell, Leslie (ed.), The Cambridge History of Latin America, Vol.VI, Part 2, pp.99—100.

10. Thorp, Rosemary (1998), Progress, Poverty and Exclusion: An Economic History of Latin America in the 20th Century, Inter-American Development Bank, pp. 122—3.

11. Cardoso, Fernando Henrique and Faletto, Enzo (2003), Dependencia y Desarrollo en America Latina, Siglo XXI, Argentina, p. 23.

12. Ibid., p. 151.

13. Cardoso, Fernando Henrique with Winter, Brian (2006), The Accidental President of Brazil: A Memoir, PublicAffairs, pp.96-8.

14. See, for example, Gunder Frank, Andre (1969), Capitalism and Underdevelopment in Latin America, Penguin Books.

15. Skidmore, Thomas E and Smith, Peter H (1997), Modern Latin America, 4th edition, Oxford University Press, p.7.

16. Galeano, Eduardo (1997), Open Veins of Latin America, Monthly Review Press, New York.

17. Ibid., p. 267.

18. Ibid., p. 8.

19. To take just two of many possible examples of Galeano’s questionable historical interpretations, contrast his view of the defeat in a civil war in 1891 of José Manuel Balmaceda, a Chilean president whom he portrays as an economic nationalist toppled by British intrigue, with the very different view in The Cambridge History of Latin America. (Blakemore, Harold, ‘From the War of the Pacific to 1930’, in Leslie Bethell (ed.) (i993b), Chile Since Independence, Cambridge University Press, pp. 33-85.) This concludes that ‘Balmaceda had nothing like the clearly constructed policy on state intervention in the economy, including nitrates, ascribed to him.’ (p. 55) Similarly, Galeano champions the Paraguay of Dr Gaspar Rodriguez de Francia (1814-40), a sinister dictator, and his successors as ‘Latin America’s most progressive country’. As Paul Gootenberg, a historian of leftish sympathy, has remarked: ‘The dependency rehabilitation of such freakish characters as Dr Francia of Paraguay, who are now held to offer nineteenthcentury Latin America its most viable and progressive path to development, should alert us that revisionism has gone astray.’ (Gootenberg, Paul (1989), Between Silver and Guano: Commercial Policy and the State in Postindependence Peru, Princeton University Press, p. 10)

20. Bushnell, David (zooo), Colombia: Una Nación a Pesar de sI Misma, 5th edition, Planeta, Bogota, p. 246.

21. See Bucheli, Marcelo (2005), Bananas and Business: The United Fruit Company in Colombia, 1899-2000, New York University Press, Chapter 5.

22. See Chapter for its record in Guatemala.

23. Posada Carbó, Eduardo, ‘La historia y los falsos recuerdos’, Revista de Occidente, Madrid, December 2003. My translation.

24. Garcia Márquez, Gabriel (2002), Vivir para contarla, Knopf, New York, p. 74. Garcia Mfrquez is an incorrigible hyperbolist. In this work, the first volume of
his memoirs, he narrates his experience of the riots in Bogota in 1948 known as the Bogotazo. ‘The deaths in the streets of Bogota, and at the hands of the official repression in subsequent years, must have been more than a million.’ (p.348) In fact, even the most pessimistic of historians put the figure at no higher than 200,000 over ten years, again, appalling enough, but not on the same scale.

25. Skidmore/Smith, Modern Latin America, p. 10.

26. Haber, Stephen, ‘Introduction: Economic Growth and Latin American Economic Historiography’, in Haber, Stephen (ed.) (1997), How Latin America Fell Behinth Essays in the Economic Histories of Brazil and Mexico, 1800-1914, Stanford University Press, pp. 1-33.

27. See, for example, Marichal, Carlos (coordinador) (1995), Las inversiones ext ranjeras en America Latina, 1850-1930, Fondo de Cultura Economica, Mexico; or Yarrington, Doug, ‘The Vestey Cattle Enterprise and the Regime of Juan Viceute Gómez 190 8-1935’, Journal of Latin American Studies, Vol. Part 1  February Gómez 190 8-1935’, Journal of Latin American Studies, Vol. Part 1, February2003, pp. 89-115.

28. Marichal, Las inversiones extrarigeras en America Latina, p. 23.

29. Thorp, Rosemary and Bertram, Geoffrey (1978), Peru 1890-1977: Growth and Policy in an Open Economy, Macmillan, p. 104 (table).

30. Coatsworth, John H and Williamson, Jeffrey G, ‘Always Protectionist? Latin American Tariffs from Independence to Great Depression’, Journal of Latin
American Studies, Vol. 36, Part 2, May 2004.

31. Fiaber, How Latin America Fell Behind, p. 12.

32. The coup in Guatemala in 1954 was an exception in being wholly generated by the CIA. Landes, David (1998), The Wealth and Poverty of Nations, Little, Brown, New York, p. 328. Italics in original.

34. Véliz, Claudio (1994), The New World of the Gothic Fox: Culture and Economy in English and Spanish America, University of California Press, p. 12. Other works in this vein include Wiarda, Howard, The Soul of Latin America; Harrison, Lawrence E (2000), Underdevelopment Is a State of Mind: The Latin American Case, Madison Books, Lanham; and Harrison, Lawrence E (1997), The Pan-American Dream: Do Latin America’s Cultural Values Discourage True Partnership with the United States and Canada? Basic Books, New York. See also Vargas Llosa, Alvaro (2005), Liberty for Latin America, Farrar, Strauss and Giroux, New York, which mixes cultural and institutional explanations.

35. Véliz, The New World of the Gothic Fox, p.53.

36. Wiarda, The Soul of Latin America, Chapters and s. Véliz, The New World of the Gothic Fox, p. 53.

38. Rodó, José Enrique (1994), Ariel, Kapelusz Editora, Buenos Aires.

39.Wiarda, The Soul of Latin America, Chapter5.

40. Foweraker, Joe, Landman, Todd and Harvey, Neil (2003), Governing Latin America, Polity Press, Chapter 3.

41. ‘El Amor a Francia’, El Pals, 19 March 2005

42. Rouqulé, Alain (1987), The Military and the State in Latin America, University of California Press, p. 4.

43. Gunther, Richard, Montero, José Ramón and Botella, Joan (2004), Democracy in Modern Spain, Yale University Press, p. 2.

44. World Bank (1998). Rodrik, Dani, Subramanian, Arvind and Trebbi, Francesco, ‘Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development’, revised October 2002. Available at http://ksghome.harvard.edu/ drodrik, p. 20.

46. Harriss, John, Hunter, Janet and Lewis, Cohn M (1995), The New Institutional Economics and Third World Development, Routledge, London. See ‘Introduction: Development and Significance of NIE’, pp. 1—13.

47. de Soto, El Otro Sendero, pp. 13-14.

48. See, for example, Matos Mar, José (2004), Desborde Popular y Crisis del Estado: Veinte Anos Después, Fondo Editorial del Congreso del Peru, Lima.

49. de Soto, El Otro Sendero, p. 288.

50. Ibid., p. 296.

51. de Soto, The Mystery of Capital.

52. Interview with the author, El Alto, January 2004.

53.Galiani, Sebastian and Schargrodsky, Ernesto, ‘Property Rights for the Poor Effects of Land Titling’, Centro de Investigación en Finanzas, Universidad Torcuato di Tella, Buenos Aires, Documento de Trabajo June 2005.

54. Field, Erica and Torero, Maximo, ‘Do Property Titles Increase Credit Access Among the Urban Poor: Evidence from a Nationwide Titling Program’, March 2006. Available at www.economics.harvard.edu/faculty/field/papers. This study finds evidence that those with titles were somewhat more likely to gain a loan for construction material from the government-run Materials Bank.

55. Field, Erica, ‘Entitled to Work: Urban Property Rights and Labor Supply in Peru’, March aoo6, unpublished paper available at website cited above.

56. Rodrik et al, ‘Institutions Rule’.

57. La Porta, Rafael, Lopez de Silanes, Florencio, Schleifer, Andrei and Vishny, Robert W, ‘Law and Finance’, National Bureau of Economic Research Working Paper 66i and ‘Legal Determinants of External Finance’, NBER Working Paper 5879.

58. Cárdenas/Ocampo/Thorp, An Economic History of Twentieth-Century Latin America, Chapter 1.

59. Engerman, Stanley L and Sokoloff, Kenneth L, ‘Factor Endowments, Institutions and Differential Paths of Growth Among New World Economies’ in Haber, How Latin America Fell Behind, pp. 260—304.

60. Ibid., p. 275.

61. Coatsworth, John H, ‘Structures, Endowments, and Institutions in the Economic History of Latin America’, Latin American Research Review, Vol. 40, No. 3, October 2005.

62. Bulmer-Thomas, The Economic History of Latin America, p. 88.

63. Przeworski, Adam with Curvale, Carolina, ‘Does politics explain the economic gap between the United States and Latin America?’

64. Cárdenas/Ocampo/Thorp, An Economic History of Twentieth-Century Latin America, p.72.

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