Remembering the Power of One

A 1960s Economic Perspective

by | Jan 14, 2009

Photo of Dulce, a female writer and party activist in Matanzas, Cuba. She sits on s small sofa, with three paintings hanging on the wall behind her, and a checkerboard floor.

Dulce is a writer and party activist in Matanzas, Cuba. Photo by Olisam

In a region with an unfortunate knack for being ignored, forgotten and subverted by world powers, we take another look at the 1960s and from snapshots we offer hope as the first decade of the new millennium draws to a close. We take a look through the lens of Raul Prebisch, former director of the Economic Commission for Latin America (ECLA) and subsequently founding Secretary General of the United Nations Conference on Trade and Development (UNCTAD).

Skeptical and largely critical of capitalism, Prebisch built the framework that evolved into the famous dependency theory, articulating through economic parlance the frustration felt by Latin Americans in the early to mid-20th century. His central premise that the center exploits the periphery won widespread appeal among Latin America’s leaders. Unfortunately, subscribers to Prebisch’s philosophy used not only the solutions he provided to counter the ills of dependency but also adapted his metaphoric theories to suit their political needs. Prebisch’s ideas were incorporated into a counterproductive rhetoric that justified rather than ameliorated lagging regional and national development.

Looking back from 2009, the leadership in Latin America needs to recognize that the exploitation described by Prebisch (and others) is not the only dilemma that has plagued the region over the last few decades. Here we will revisit themes of integration that took shape in the 1960s in Latin America and address selected socio-political issues that will help us to arrive in the current with a renewed vision for the region’s progress.

Interestingly, the popularization of Prebisch’s “inward development” philosophy coincided with parallel military movements that took shape in many Latin American countries during the 1960s. The marked move toward military governance was brought on by frustration with the exact sort of underdevelopment and inequity described by Prebisch. Ironically, relying on military rule and blanket protectionism provided little adaptability and long term growth opportunities and therefore little in the way of solving the problems of dependency and underdevelopment.

We raise two issues here: 1) In describing the subversion of Latin America by center (foreign) nations and prescribing regional integration, Prebisch ignored the center periphery struggle between the more and lesser developed nations in Latin America itself 2) Latin America needed then and needs now the dynamism that comes with responsive and innovative governments that promote absorption of technology and best practices from foreign multinationals.

Taking on the first point, we note with mixed feelings the attempts at developing regional trade blocs such as the Latin America Free Trade Association (LAFTA) which concentrated on nullifying tariffs in the region. Created through the 1960 Treaty of Montevideo, LAFTA was crippled by its lack of policy coordination framework and omission of prerequisites for economic/political integration. Given these deficiencies, one can infer that LAFTA’s founders either ignored or rejected the tiers of its members, assuming all to be capable of benefiting substantially through equal treatment. But, as was the case with LAFTA, sometimes equal treatment doesn’t work with unequal participants. And this was part of the problem for notable attempts at regional integration like LAFTA.

With original signatories Argentina, Brazil, Chile, Ecuador, Mexico, Paraguay, Peru and Uruguay (Bolivia and Venezuela joined the pact in 1966 and 1967 respectively) the LAFTA was based on a gradual elimination of barriers to intra-regional trade over a 12-year period on a product-by-product basis. But “gradual” became “stalled” when it became evident that certain participants were only willing to grant concessions on primary products. This left the sort of industrialization à la regional market development, the prescriptions of Raul Prebisch, clamoring for accessible economies of scale as manufactured goods remained protected even from intra-regional trade.

The reluctance of regional powers Brazil and Argentina to liberalize trade quickly meant that LAFTA was lacking its most suitable leadership while the two regional power players conveniently enjoyed the lion’s share of the agreement’s benefits. Exemplifying the little highlighted intra-regional center-periphery struggle, the Andean Group (AG), created the Cartagena Agreement of 1969 with dissenting LAFTA members, including Bolivia, Colombia, Ecuador, Peru and Venezuela. This presented the first internal rupture to the LAFTA’s push for regional progress. These Andean countries believed LAFTA had guided most of the benefits to the largest member countries (Brazil, Mexico, Argentina) and sought to reorient the trade agreement toward its original goal of equitable development and progress.

Ironically it is exactly this sort of unwillingness to remove barriers on key goods that Brazil is now lobbying against, skillfully representing Latin America, at the grudgingly unsatisfactory Doha Development Round. Brazil has evolved from a protectionist egocentric stance to a leadership position and hopefully will continue to embrace its much needed role in trade negotiations and beyond. But in pointing out past faults of regional power Brazil we must in turn recognize that the need for effective leadership in the development of Latin America extends beyond the region’s borders.

While Latin America was trying to break the chains of dependency and underdevelopment, the United States was trying to stifle the spread of communism and keeping a keen eye southward. Actually, the United States was doing more than keeping a watchful eye on Latin America. It was engaging the region with neatly packaged rhetoric preaching equitable economic development with a concealed agenda toward effectively quarantining the region from the virus that was communism.

Starting with the Alliance for Progress (AFP) in 1961, the United States paved itself a path to further meddle in the business of Latin America all while projecting an image of benevolence. At the top of AFP priorities was the adoption of democratic governance. Incredibly, the 1960s saw thirteen constitutional governments ousted by military dictatorships in Latin America. This was seen as a major failure of the Alliance for Progress which held as one of its principal aims to consolidate reformist civilian rule in the region.

Robert Smetherman in “The Alliance for Progress: Promises Unfulfilled” (American Journal of Economics and Sociology, Vol. 31, No. 1, January 1972, pp. 79-85) pinpoints the lack of pre-program planning and lack of analysis of previous aid programs as root causes of weakness in the AFP with economic progress in certain nations driven more by their own assets than by the Alliance. Smetherman cites Mexico’s tourism, Venezuela’s oil and Chile’s copper as the forces behind their better-than-average growth while hemispheric growth in 1966 was estimated at a disappointing 4.2 percent (especially taking into account a 3 percent birthrate). J. Humberto López (World Bank 2006) goes further noting that Latin America’s GDP per capita relative to other country groupings such as Spain, Western Europe and East Asia saw a sharp decline in the second half of the 1900s. Compound this lackluster performance with the burden of inequality and the picture of Latin American development looks bleak. Since the 1960s Latin America has maintained the highest inequality, next to Sub-Saharan Africa, of any region in the world with a Gini coefficient consistently above 0.5. Gini coefficients measure inequality, with 0 corresponding to perfect equality (everyone having exactly the same income) and 1 corresponding to total inequality. That is, a “1” would mean that one person had all the income and everyone else had nothing.

Dynamic leadership that promotes technological advancement and best practices absorption can help prevent that kind of inequality. These themes, one might argue, should have been the centerpiece in Raul Prebisch’s prescribed panacea for the ills of the dependency that plagued his region. Regardless, Prebisch created what was to become one of the most revered development strategies of the time: Import Substitution Industrialization (ISI). ISI was a logical and well planned response for nations in the periphery that were stuck in a vicious cycle of deteriorating terms of trade.

Terms of trade (TOT) are the price of a country’s exports divided by the price of its imports, and countries in Latin America were plagued by deteriorating TOT. The prices of its agricultural exports were highly susceptible to declines while the opposite was true for the manufactured goods it imported from the center of developed countries. But given that the very foundations of trade-based growth encourage nations to build on their comparative advantages, most Latin American countries intensified production of agriculture goods for export. Latin America’s experiment with ISI turned sour in the 1970’s when accessible regional markets proved too small and monetary and fiscal profligacy began to lose its stimulating effect. Together, these two phenomena ushered in severe external debt and balance of payments crises that would arise in the 1980s.

In his defense, Prebisch’s ideas of modernization, growth of cities and manufacturing with protection for new and infant industries have worked in other countries such as Singapore and China. ISI sought to incubate domestic producers while allowing them to build economies of scale in the region and then when they were ready, to open the curtains to the stage of world trade. But what if they never were quite ready?

This was the issue that plagued ISI and the many nations that adopted its formula. The incubated industries didn’t really want to leave their incubators. They enjoyed the fruits of protection and like children unchallenged by their parents, they preferred the comfort of the status quo. On the world export stage, status quo isn’t a selling point unless you are decorated with renowned brand names like Mercedes and Nike. Latin America didn’t carve its trading niche, thus remaining in a continuum of underperformance despite having a great economist relentlessly working on its behalf in his lab of policy formulation at ECLA and subsequently UNCTAD.

But like taking on the greatest of challenges such as world hunger and poverty, Prebisch endeavored to the highest order of achievements: moving his region toward greater prosperity, the sort of prosperity found in the center. Maybe Prebisch’s lens didn’t have the right focus. Portraying things on a macro scale, Prebisch built the metaphor of center and periphery as well as his revered ISI on a macro scale. Fast forwarding from the 1960s to the 1990s and 2000s, we would see Brazil implement a program called Bolsa Escola, aimed at bolstering the family, from the bottom up. Contrary to Prebisch’s macro focus, the center of this program is the individual and more specifically the young student.

Implementing Bolsa Escola reinvents the economist as a specialist doctor taking a fine scalpel to his ailing patient to remove highly specific and localized problems. This sort of micro-focus in development can be found in the neo-structural framework currently in place in Brazil. At the center of this framework is the belief in the individual realizing his own potential given the right environment.

Such beliefs are central to Amartya Sen’s capabilities theory whereby he adds inspiration to economic theory arguing that individuals simply need the “freedom” to develop, that provided with the chance to develop themselves, individuals will do so. Well, Bolsa Escola is the epitome and application of Sen’s belief, addressing high dropout rates in Brazilian schools by providing income subsidies to families with school-age children based upon each child’s school attendance. The founding rationale of this program came with the realization that, for many in Brazil, a family’s dependence on child-produced supplemental income took precedence over primary education. With increased attendance came the social benefits of reduced violence, reduced fertility and stronger families with greater potential for the future of their children.

While relations in the Americas stand on the edge of evolution, Latin American countries should recognize the benefits of micro level initiatives. And on the macro level, they should learn from the trials of ISI and the ills of dependency that governments must be effective referees ensuring that their vital and budding industries prosper sufficiently on the trade playing field. This means forcing the transfer of technology and knowledge from multinational corporations to local businesses and domestic workers. Raul Prebisch’s aim to define the struggle of Latin American countries in unbalanced trade relationships and to provide a policy solution has laid a groundwork to learn from and build upon. In building upon the work of this great economist, we look with greater knowledge through the micro lens and realize that the future of Latin America remains just where it was in the 1960s: in the hands of the individual.

Winter 2009Volume VIII, Number 2
David Daepp is Associate Portfolio Manager with the Small Grants Programme of the United Nations Office for Project Services (UNOPS) where he is responsible for the Latin America & Caribbean portfolio. He holds a B.A. in Economics from the College of the Holy Cross and an M.A. in Development Economics from Fordham University.

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