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How Did Latin America Fall Behind?

There are different theories that try to explain the reasons of the contrast of economic development in the colonized countries. It is widely believed that it is fair to assume an equivalent rate of economic growth in countries that were colonized and later emancipated within the same periods of time, especially if those countries also share geographical and cultural similarities. Such is the case of the Americas hemisphere.

Any economist nowadays finds evident the fact that North America has evolved at a more rapid pace than Latin America. Its economic development and its political and military forces are among the most powerful in the globe, matching and even surpassing those of the European colonizing powers. But when did this contrast in development become evident? How did Latin America fall behind? What were the main reasons of the diverging paths of these economies?

Most economists consider the structure of institutions as a main factor for economic progress. It is well known that corruption or bureaucracy (among other institutional issues) can easily tear a country apart even when this is at the peak of economic maturity (e.g. modern Venezuela). According to Stanley L. Engerman and Kenneth L. Sokoloff, the structure in which institutions were created in a country is a crucial point to take into account in order to understand the later development of the country as a whole. It is necessary to study the initial factor endowments of these economies and the institutions built around them, in order to find a more accurate pattern that indicate the real reasons for this slow economic growth.

There is a misconception that credits the success of North American countries to the superiority of British heritage or the better match of Protestant faith with market institutions; however, systematic investigation concerning these fallacies is very limited. Research rather mentions the late arrival of the British as the main reason for the superiority of their colonies in the long-term. Once the British had arrived, they had to settle in the least fertile areas, as every piece of land that could potentially grow important crops or exploit relevant mines was already occupied by other European kingdoms. The latter prevented the British colonies from being largely benefitted from cheap labor derived by slave trade, but it created a more homogeneous society that gave rise to competitive institutions without limitations of power for elite members.

Engerman and Sokoloff classified the New World colonies into three categories, according to their initial endowments. Those suitable for the plantation of lucrative crops, those convenient for the extraction of mineral resources (e.g. Gold, Silver) and those applicable for small-scale agriculture (Engerman and Sokoloff, 2013).

The first two types were largely benefited by the international slaves markets or by the oppression of local native populations. The low labor supply costs and the high marginal productivity of labor were essential to the successful progress and exploitation of crops and mines in the New World. However, this heterogeneity in populations gave rise to institutional structures that greatly advantaged certain elite classes, while disadvantaging the vast rest of the population (Engerman and Sokoloff, 2002). Unfortunately, this structure of unequal opportunities was embedded into the culture and remains up to date. Latin America is considered one of the most unequal places on Earth. It is famous for its corruptive institutions that are far more likely to benefit the class elites before looking for the well being of society.

The last of the three categories refers mainly to the Northern hemisphere, where most of the British colonies were settled. These areas were not endowed either with labor supply (substantial native populations) or with soil and climates able to produce crops characterized by major economies of scale. Most of the immigrants coming to these areas devoted their lives to farming activities and small-scale agriculture since climate conditions did not allow for much more. The easy access to cheap land and the absence of economies of scale, made it possible for everyone to become independent farmers. Finally, the lack or limited amount of a contrasting population allowed a more equal society where even ordinary men could set up independent businesses.

Overall, Engerman and Sokoloff research concludes that the contrast in economic development between Latin American and its hemispheric neighbors, date back to colonial times, being the structure of institutions the primary factor to influence their long-term growth. In turn, these institutions were settled and structured according to geographical patterns and initial endowments such as the three divisions made by the two researchers. They also deny the long-known idea that gives credit to the British for their superior inheritance to their colonies.

Similar to these findings, lies research done by Acemoglu, Johnson and Robinson in 2002. They explain Latin America’s fate with a theory named “reversal of fortune”. The main idea is similar to that of Engerman and Sokoloff but they rather refer to the purpose by which various institutions were raised in the New World. In territories that had a vast native population and abundant natural resources, such as Mexico or Peru, Europeans established “extractive institutions” that were mainly controlled by a special elite despite its long-term negative effects on growth. These extractive institutions were built with the main aim of obtaining as much wealth as possible, only to bring it to the motherland (Europe). They had little to no interest in reinvesting those resources in the New World.

In contrast to these settlements, the poor and less densely populated areas (namely North America) were mainly colonized by a vast number of Europeans. This homogeneity of population encouraged the creation of institutions with the main aim of reinvesting the returns in that same land. In the medium to long-term, this constant reinvestment became evident as these colonies progressed much more rapidly than their southern counterparts (de la Escosura, 2007). It is necessary to mention that a vast majority of Europeans coming to British colonies were in seek of a better life, and had no future plans to return to Europe. Therefore, the creation of efficient and productive organizations was crucial for their offspring’s’ future.

Much more research is necessary in order to obtain a more accurate idea of the essential factors that affected economic growth in the American hemisphere; however, it is well noted that the European colonization and the international slave market played a crucial role in its development. Also, the structure by which several institutions were created has embedded certain features and cultural attitudes into Latin American culture. These features have evidently deteriorated the growth of the economies and it is fundamental that societies work on these issues if they ever want to achieve a more rapid economic, social and political growth.


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