NS4540 Winter Term 2019 Latin America: Geography and the Colonial Legacy Beariz and Larrain, Ch 1

Overview I Difficult to understand current day Latin American economies and debates over policy without a sense of history Need to discover why the per capita income in Latin America today is just 20% of that in the U.S. Various explanations Is greater proximity to the equator and easy access to seacoast an important determinant of north-south income differences in the Americas? Is the civil law legacy in former Iberian colonies key to our understanding of underdevelopment in South America?

Overview II Other explanations of the North-South income gap Is inherited institutional legacy an impediment to faster economic development in South America Do the hundred precolonial languages – still spoken in the region – have a negative impact in terms of promoting poverty, income inequality, and social unrest

Geographical Explanations I A growing literature contends that slow economic growth during critical periods and consequent underdevelopment can be attributed to geographical factors. Latin America ranks second after sub-Saharan Africa in terms of proportion of land located in the tropics. Disadvantages of tropics Agriculture often does not have predictable water from defrosting and low exposure from sun Land-locked countries in tropics at disadvantage because sea- route transport cheapest form of transport Incidence of tropical diseases – malaria, yellow fever and cholera – cause low productivity

Geographical Explanations II Also Technological diffusion for agriculture and health-related technology from north to tropics difficult – need to do much more context specific research in the south When large estate owners have access to technology and smaller farms do not – dualistic agriculture develops Summing up, geography hypothesis claims that Low soil fertility low productivity High disease burden Limited scope for taking advantage of lucrative trade of primary commodities due to adverse geographic conditions in tropics, and Obstacles to technology transfer from the north All contribute to Latin America lagging behind North America

Geographical Explanations III Most likely geography only part of the explanation of North-South income gaps Much could be overcome with investments in Infrastructure Health Education Real question is why the scope and scale of such investments has been so low in middle-income Latin America

Legal Origins I One approach to North-South income differences in the Americas stresses legal origins. Common law countries in North America offer better shareholder protection than civil law countries in Latin America. Civil or Napoleonic law does not protect investor’s adequately Civil law can be highly politicized – increased risk of expropriation by the state Common law shaped by parliamentary democracy Main objective to limit the power of the state

Legal Origins II Better and extended property rights protection conducive to Good governance Stabilizing democracy Higher institutional quality and Higher growth of per capita income Problem lack of data make it hard to assess the merits of the two legal systems Other factors such as corruption might be cause of much economic backwardness Studies show that FDI negatively correlated with corruption.

Legal Origins III Another complicating factor – common law and civil law have both, at times, been better in protecting Latin America property rights Weak property rights protection in Latin America is a twentieth- century phenomenon, not a nineteenth-century civil law phenomenon Depression in 1930s – increased hostility toward FDI Common/civil law divide not all that clear-cut Different immigrant flows have influenced institutional quality Whether further consolidation of democratic institutions in 21st Latin America can improve property rights is an open question.

Factor Endowments I Another approach is to link north-south income differences to differences in initial factor endowments. Soils and climates in the south more suitable for crops that require slaves and American Indians on a large scale Sugar production vs wheat Large scale plantation agriculture led to high-income inequalities between Small elite of individuals from European descent who owned large plots of land and labor and Vast majority of slaves and native indigenous populations In contrast soil and climate conditions in north led to mixed farming centered on grains and livestock Scale economies limited with grains and livestock

Factor Endowments II Lack of scale economies led ground for More democratic political institutions A relatively larger middle class Larger domestic markets and Pursuit of more growth oriented policies relative to plantation agriculture of the south R&D in south not profitable due to lack of domestic demand rooted in income inequalities Factor proportion explanation hard to explain things like Differences between Dominican Republic and Haiti Rapid growth in southern US where incomes have converged with the northern states after the Civil War in 1861 Lag in development of Argentina, Uruguay and Chile – Similar factor endowments with North

Institutional Legacy While geography and factor endowments find interesting patterns do not establish causality Empirical work of Acemoglu, Johnson and Robinson show Institutional colonial legacies in 17th century cause institutions (of private property and extractive) to persist up to today Divergent contemporary economic performances persist via these different institutions to the current day High per-capita GDP corresponds with institutions of private property and Low per-capita GDP with extractive institutions – institutions where a small group of individuals controls country’s profitable resources and exploits the rest.

Ethnolinguistic Fragmentation Relative to U.S. Canada Latin America was heavily populated by native indigenous populations that speak hundreds of dialects Hypothesis that in ethnically heterogenous societies, groups that come to power often Expropriate ethnic losers Limit democratic freedom and Deliver public goods of poor quality which in turn hinders growth and economic development. Research finds little proof of this thesis Some evidence that Catholicism has negative impact on governance and economic performance, but many exceptions.

Summary I Economists have focused on the colonial period because many feel during this period the economic source of economic backwardness of Latin America relative to the US can be pinpointed Main conclusions Adverse geography might be a contributing factor to Latin America’s relative underdeveloped The legal origins hypothesis suggests Latin America lags behand north because under civil law inherited from colonializes property rights protection is weak compared with common law which prevails in US

Summary II Latin America is blessed with natural resources the exploitation of which relied on slave and Indian labor left an income inequality legacy Independence increased the scope for trade with other nations, but increased border disputes lowered the scope for intraregional trade and economic growth The institutional approach to underdevelopment suggests that Extractive institutions were enacted by the colonizers, and Such institutions persist today May explain Latin America’s low per-capita relative to North America

Summary III Further research needed in order to understand the role of cultural legacies and their impact on Trust Institutions and Economic growth