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Was It Prices, Productivity or Policy? Latin American Industrialisation after 1870*

Published online by Cambridge University Press:  03 December 2009

AURORA GÓMEZ-GALVARRIATO  and
JEFFREY G. WILLIAMSON
AURORA GÓMEZ-GALVARRIATO
Affiliation:
Aurora Gómez-Galvarriato is Professor in the Department of Economics at the Centro de Investigación y Docencia Económicas (CIDE) in Mexico City. Email: [email protected].
JEFFREY G. WILLIAMSON
Affiliation:
Jeffrey G. Williamson is Professor of Economics at Harvard University and at the University of Wisconsin–Madison. Email: [email protected].
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Abstract

The new trade data used here document the significance of industrialisation in Argentina, Brazil, Chile and Mexico after 1870. By 1910 Brazil and Mexico, in particular, led most of the poor periphery in Asia, Africa and the Middle East. While some of this impressive industrialisation was due to fast productivity growth in manufacturing, perhaps yielding some catch-up on their competitors in the United States and Europe, this article argues that there were even more powerful forces at work. Much of the industrialisation that occurred in Latin America was due to a cessation in the seven-decade rise in its net barter terms of trade, trends that reversed the deindustrialisation and ‘Dutch Disease’ forces that had dominated Latin America for almost a century. Equally important for Brazil and Mexico was favourable policy in the form of higher effective rates of protection for manufacturing, and a depreciation of the real exchange rate. These policies were missing in Argentina and Chile, and industrialisation suffered there as a consequence. Changing market conditions and policies seem to have been more important than changing fundamentals in accounting for Latin American industrialisation after 1870.

Abstract

Los nuevos datos de comercio utilizados aquí documentan el significado de la industrialización en Argentina, Brasil, Chile y México después de 1870. Para 1910 Brasil y México, en particular, estuvieron a la cabeza de la mayor parte de la periferia pobre de Asia, África y el Medio Oriente. Mientras que parte de esta impresionante industrialización se debió a un rápido crecimiento en la producción manufacturera, ésta posiblemente cedió terreno ante competidores en los Estados Unidos y Europa, donde funcionaban fuerzas aún más poderosas. Gran parte de la industrialización que se dio en Latinoamérica se debió a un cese en los incrementos de siete décadas de sus términos de intercambio comercial neto, tendencias que revirtieron la desindustrialización y las fuerzas de la ‘Enfermedad Holandesa’ que habían dominado a Latinoamérica por cerca de un siglo. Igualmente importante para Brasil y México fue una política favorable en los términos de protección efectiva para la manufactura y a una depreciación del tipo de cambio real. Tales políticas no se hallaron en Argentina y Chile, por lo que como consecuencia la industrialización se dio con mayor dificultad más allí. Las condiciones cambiantes del mercado y la política parecen haber sido más importantes que en las variables institucionales para explicar la industrialización latinoamericana después de 1870.

Abstract

Os novos dados relativos ao comércio aqui utilizados documentam a importância da industrialização na Argentina, no Brasil e no México após 1870. Em 1910 o Brasil e o México estavam à frente da maioria da periferia global na Ásia, na África e no Oriente Médio. Enquanto essa industrialização impressionante se devia parcialmente ao crescimento rápido da produtividade no setor manufatureiro, defendemos que havia forças mais influentes em funcionamento. Boa parte da industrialização ocorrida na América Latina deveu-se a uma interrupção no aumento do lucro líquido nos termos de troca comerciais, ocorrido durante sete décadas, tendências que reverteram as forças de desindustrialização e da ‘doença holandesa’ que dominavam a América Latina há quase um século. Igualmente importante para o Brasil e para o México foi um programa favorável na forma de índices efetivos de proteção elevados para a manufatura, e uma desvalorização do câmbio real. A industrialização na Argentina e no Chile sofreu devido a ausência desses programas. Ao explicar a industrialização latino-americana após 1870, a transformação das condições de mercado e dos programas aparenta ser mais essencial do que a mudança em princípios básicos.

Keywords

Industrialisationworld marketstrade policyLatin Americaeconomic historyDutch DiseaseIndustrializaciónmercados mundialespolíticas comercialesLatinoaméricahistoria económicaEnfermedad HolandesaIndustrializaçãomercados globaispolítica comercialAmérica Latinahistória econômicadoença holandesa
Type
Research Article
Information
Journal of Latin American Studies , Volume 41 , Issue 4 , November 2009 , pp. 663 - 694
Copyright
Copyright © Cambridge University Press 2009

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References

1 Raúl Prebisch, The Economic Development of Latin America and Its Principal Problems (New York 1950); Singer, Hans W., ‘The Distribution of Gains between Investing and Borrowing Countries’, American Economic Review, vol. 40, no. 6 (1950), pp. 473–85.Google Scholar

2 Prebisch and Singer also predicted that the terms of trade would continue to deteriorate through the late twentieth century as long as the third world specialised in primary products. In fact their prediction was not confirmed. The relative price of primary products did not deteriorate in the second half of the twentieth century, and by the end of the century most of the third world exported labour-intensive manufactures: see Grilli, Enzo R. and Yang, Maw. C., ‘Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows’, World Bank Economic Review, vol. 2, no.1 (1998), pp. 1–48Google Scholar; Daniel Lederman and William L. Maloney (eds.), Natural Resources: Neither Curse nor Destiny (Stanford, 2007); Martin, Will, ‘Developing Countries' Changing Participation in World Trade’, World Bank Research Observer, vol. 18, no. 20 (2003), pp. 187–203Google Scholar; Jeffrey G. Williamson, Globalization and the Poor Periphery before 1950 (Cambridge MA, 2006).

3 Unless otherwise noted, we refer to the net barter terms of trade, the ratio of average export prices (PX) to average import prices (PM).

4 On export-led growth, see Conde, Roberto Cortés, ‘Export-Led Growth in Latin America: 1870–1930’, Journal of Latin American Studies, vol. 24, Supplement (1992), pp. 165–79Google Scholar; Enrique Cárdenas, José Antonio Ocampo and Rosemary Thorp (eds.), An Economic History of Twentieth-Century Latin America (New York, 2000), vol. 1; and Richard Salvucci, ‘Export-Led Industrialisation’, in Victor Bulmer-Thomas, John Coatsworth and Roberto Cortés-Conde (eds.), The Cambridge Economic History of Latin America (2 vols., Cambridge, 2006), vol. 2, pp. 249–92. On deindustrialisation, see Williamson, Jeffrey G., ‘Globalization, De-Industrialisation and Underdevelopment in the Third World Before the Modern Era’, Revista de Historia Económica – Journal of Iberian and Latin American Economic History, vol. 24, no. 1 (2006), pp. 9–36Google Scholar; Williamson, Globalization and the Poor Periphery; Williamson, Jeffrey G., ‘Globalization and the Great Divergence: Terms of Trade Booms and Volatility in the Poor Periphery, 1782–1913’, European Review of Economic History, vol. 12, no. 3 (2008), pp. 355–91.Google Scholar

5 This is not entirely true, since at one point in his famous 1950 paper, Singer noted that ‘if the post-1950 relative price of primary products ever did improve, it would reduce industrialisation incentives in the periphery’: Singer, ‘The Distribution of Gains’, p. 482 (emphasis added). However, Singer never elaborated on this statement, either in the 1950 paper or elsewhere. Nor did Prebisch. Nor did their followers.

6 Beatty, Edward, ‘The Impact of Foreign Trade on the Mexican Economy: Terms of Trade and the Rise of Industry, 1880–1923’, Journal of Latin American Studies, vol. 32, no. 2 (2000), pp. 399–433.CrossRefGoogle Scholar The income terms of trade refers to what export revenues can buy, namely export revenues (PXX) divided by the cost of imports (PM), or PXX/PM.

7 An excellent survey of the literature on the development of industry in Latin America before 1930 can be found in Colin M. Lewis's bibliographical essay accompanying his chapter on ‘Industry in Latin America before 1930’, in Leslie Bethell (ed.), Cambridge History of Latin America (Cambridge, 1986), vol. 4, pp. 624–30.

8 Warren Dean, The Industrialisation of São Paulo 1880–1945 (Austin, 1969); Luis Ospina Vásquez, Industria y Protección en Colombia, 1810–1930 (Bogotá, 1955). For Brazil, see also Stanley J. Stein, The Brazilian Cotton Manufacture (Cambridge MA, 1957).

9 Ezequiel Gallo, ‘Agrarian Expansion and Industrial Development in Argentina, 1880–1930’, in Raymond Carr (ed.), St Antony's Papers, vol. 22: Latin American Affairs (Oxford, 1970), pp. 45–61; Rosemary Thorp and Geoffrey Bertram, Peru 1890–1977: Growth and Policy in an Open Economy (New York, 1978); Henry W. Kirsch, Industrial Development in a Traditional Society: The Conflict of Entrepreneurship and Modernization in Chile (Gainesville, 1977). Fernando Rocchi has provided further evidence supporting the case in his recent book, Chimneys in the Desert: Industrialization in Argentina during the Export Boom Years, 1870–1930 (Stanford, 2006).

10 Stephen Haber, Industry and Underdevelopment: The Industrialization of Mexico (Stanford, 1989). Other scholars had previously developed this argument implicitly, among them Fernando Rosenweig, ‘La Industria’, in Daniel Cosío Villegas, Historia Moderna de México, vol. 7: El Porfiriato, La Vida Económica (Mexico, 1965), pp. 311–481; Dawn Keremitsis, The Cotton Textile Industry in Porfiriato, Mexico (New York, 1987 [1973, in Spanish]); and Robert A. Potash, Mexican Government and Industrial Development in the Early Republic: The ‘Banco de Avío’ (Amherst, 1983).

11 González, Rafael Dobado, Gómez-Galvarriato, Aurora and Williamson, Jeffrey G., ‘Mexican Exceptionalism: Globalization and De-Industrialization, 1750–1877’, Journal of Economic History, vol. 68, no. 3 (2008), p. 775.CrossRefGoogle Scholar

12 The 1833 estimate and the smaller of the two 1887 estimates are from Tirthankar Roy, The Economic History of India, 1857–1947 (Oxford, 2000), p. 126. The larger 1887 estimate comes from B. R. Tomlinson, The Economy of Modern India, 1860–1970 (Cambridge, 1993), p. 107.

13 Sevket Pamuk and Jeffrey G. Williamson, ‘Ottoman De-Industrialization, 1800–1913: Assessing the Shock, its Impact and the Response’ (National Bureau of Economic Research, Working Paper 14763, 2009), Table 1. The wide range for the 1910s is due to differing assumptions about the treatment of yarn imports. Both figures are far lower than Mexico's, however.

14 Jeffrey G. Williamson, ‘Globalization and the Great Divergence: Was Indian De-Industrialisation after 1750 Different?’ (paper presented at the Conference on Economic Change Around the Indian Ocean in the Very Long Run, Venice, 22–4 July 2008), Table 1.

15 For further confirmation, see Keremitsis, The Cotton Textile Industry, p. 703.

16 Pamuk and Williamson, ‘Ottoman De-Industrialization 1800–1913’, Table 1; Roy, The Economic History of India, p. 126; Williamson, ‘Globalization and the Great Divergence: Indian Deindustrialisation’, Table 1.

17 Thorp and Bertram, Peru 1890–1977, pp. 26–38 and 118–31.

18 Stephen Haber, ‘It Wasn't All Prebisch's Fault: The Political Economy of Twentieth Century Industrialization in Latin America’ (unpublished paper, Stanford University, 2002), pp. 7–8.

19 Ibid, p. 11.

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22 César Yáñez, Mar Rubio and Albert Carreras, ‘Economic Modernisation in Latin America and the Caribbean between 1890 and 1925: A View from the Energy Consumption’ (paper presented at the 44th Cliometrics Conference, Binghamton, 2–4 June 2006; a version of this paper is available at www.helsinki.fi/iehc2006/papers3/Yanez.pdf); Tafunell, Xavier, ‘On the Origins of ISI: The Latin American Cement Industry, 1900–1930’, Journal of Latin American Studies, vol. 39, no. 2 (2007), pp. 299–328Google Scholar; Tafunell, Xavier and Carreras, Albert, ‘La América Latina y el Caribe en 1913 y 1925: enfoque desde las importaciones de bienes de capital’, El Trimestre Económico, vol. 75, no. 299 (2008), pp. 715–54Google Scholar; Xavier Tafunell, ‘Un factor clave del nexo entre energía y desarrollo durante la primera globalización: la dotación de maquinaria en América Latina, 1890–1930’ (paper presented at the First Congress of Latin American Economic History, Montevideo, 5–7 Dec. 2007).

23 For eight Latin American countries in 1913, these three exporters accounted for 86.5 per cent of total machinery imports into the region.

24 We used exactly the same list of machinery imports described in Suzigan, Indústria brasileira, pp. 385–90. Unfortunately, it is impossible to exclude items from the British source since, with the exception of a few years, the data reported there refer to aggregate machinery and hardware exports.

25 Items such as radiators and cast-iron house-heating boilers, barbed wire, car wheels, safes, rails, railway bars, stoves, cutlery, edge tools, files and saws, firearms and adding machines were excluded in the case of US data. For UK data we included wrought and unwrought iron, given that no detailed categories were reported.

26 According to Carreras and Tafunell, ‘La América Latina y el Caribe en 1913 y 1925’, the shares of the United States and the United Kingdom in total Latin American machinery imports in 1913 were the following: Argentina 60.6 per cent, Brazil 56.6 per cent, Chile 56.3 per cent and Mexico 85.2 per cent. However, the comparison of our Brazilian data (which includes only imports from the United States and the United Kingdom) with Suzigan's (which includes France and Germany as well) indicates the following: as an average over the period 1870–1914, our series was 99.3 per cent of Suzigan's and both series have exactly the same trend.

27 Our resources did not permit us to expand the data retrieval to include France and Germany, although we hope to do so in the near future.

28 We do not show machinery imports separately since the series shows pretty much the same trends.

29 No doubt many factors were at work causing the Mexican slowdown, including the US crisis in 1907, the political troubles starting in 1906 which turned into a civil war in 1910, the adoption of the gold standard in 1905, and the end of the secular depreciation of the price of silver in 1902.

30 Kirsch, Industrial Development in a Traditional Society, pp. 3–28.

31 Gabriel Palma, ‘Trying to “Tax and Spend” Oneself out of the “Dutch Disease”: The Chilean Economy from the War of the Pacific to the Great Depression’, in Cárdenas et al. (eds.), An Economic History of Twentieth-Century Latin America, vol. 1, p. 227.

32 Suzigan, Indústria brasileira, pp. 82–9.

33 Rocchi, Chimneys in the Desert, p. 19.

34 Angus Maddison, Statistics on World Population, GDP and Per Capita GDP, 1–2006 AD, available at www.ggdc.net/Maddison (accessed Oct. 2008).

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38 The tariff rates would, of course, be even higher if we looked only at manufactures.

39 Palma, ‘Trying to “Tax and Spend” Oneself out of the “Dutch Disease”’, p. 239.

40 Kirsch, Industrial Development in a Traditional Society, p. 133.

41 See also Suzigan, Indústria brasileira, pp. 110–11.

42 Victor Bulmer-Thomas, The Economic History of Latin America Since Independence (Cambridge 1994), p. 140.

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44 Coatsworth and Williamson, ‘Always Protectionist?’.

45 Rocchi, Chimneys in the Desert, p. 208.

46 Haber, ‘It Wasn't All Prebisch's Fault’, p. 16. By 1960, Mexico had much lower tariffs on capital goods and industrial raw materials than Argentina and Brazil. Taylor, Alan, ‘On the Costs of Inward-Looking Development: Price Distortions, Growth, and Divergence in Latin America’, Journal of Economic History, vol. 58, no. 1 (1998), pp. 1–28CrossRefGoogle Scholar; Stephen Haber, ‘The Political Economy of Industrialisation’, in Bulmer-Thomas et al. (eds.), The Cambridge Economic History of Latin America, vol. 2, p. 574.

47 Williamson, ‘Globalization, De-Industrialisation and Underdevelopment’; Williamson, Globalization and the Poor Periphery; and Dobado González et al., ‘Mexican Exceptionalism’.

48 Throughout, Latin America refers to an 1870 population weighted average of the countries which are included in the region sample.

49 The real exchange rate also depreciated by about 50 per cent just between 1885 and 1892, and it never recovered: see Catão, Luis, ‘Mexico and Export-Led Growth: The Porfirian Period Revisited’, Cambridge Journal of Economics, vol. 22, no. 1 (1998), p. 74.CrossRefGoogle Scholar There is further discussion of this below. See also Salvucci, ‘Export-Led Industrialisation’, p. 283.

50 Williamson, ‘Globalization, De-Industrialization and Underdevelopment’; Dobado González et al., ‘Mexican Exceptionalism’.

51 Beatty, ‘The Impact of Foreign Trade on the Mexican Economy’.

52 Unless, of course, productivity growth was faster in domestic manufacturing, where prices were determined in world markets.

53 Note that we definitely are not talking about ‘immiserising growth’ and price inelastic demand here. A recent paper has shown that price inelastic demand only applies to one commodity case, that of Brazil's green coffee – a case that warranted export taxes, which Brazil indeed applied in the late nineteenth century. See Tamara Todorova, ‘World Demand as a Determinant of Immiserizing Growth’ (unpublished paper, American University, Bulgaria, March 2007).

54 The figure ranged from a quarter in Argentina to a sixth in Chile and an eighth in Mexico. These figures are poor indicators of relative industrialisation, since country statisticians grouped workers in the different sectors using different rules. Data on the share of the labour force in manufacturing come from Kirsch, Industrial Development in a Traditional Society, p. 41; Seminario de Historia Moderna de México, Estadísticas económicas del Porfiriato: fuerza de trabajo y actividad económica por sectores (Mexico, 1965), p. 48; Adolfo Dorfman, Historia de la industria argentina (Buenos Aires, 1970), p. 310; see also Salvucci, ‘Export-Led Industrialisation’, p. 289.

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