1. NS4540 Winter Term 2018 Latin America: Geography and the Colonial Legacy
Beariz and Larrain, Ch 1

2. 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?

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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.

9. Legal Origins III
Corruption itself however does not seem to correlate with economic performance
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.

10. 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

11. 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 is south not profitable due to lack of domestic demand rooted in income inequalities
Factor proportion explanation hard to explain
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

12. 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.

13. 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
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.

14. 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 lgs behand north because under civil law inherited from colonializes property rights protection is weak compared with common law which prevails in US

15. 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

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