Commodity production doesn’t make you poor

I just finished reading Victor Bulmer-Thomas’ The Economic History of Latin America Since Independence, and while I found the whole thing very informative and well-written, the most interesting part to me was his discussion of labor markets during the export-oriented era of economic governance in Latin America that lasted from the middle of the 19th Century until the beginning of the Great Depression. Essentially, labor markets during this era were exceptionally unfree and this played no small part in explaining much of Latin America’s poor economic growth both then and later.

In Latin American history and development classes, this era is often characterized as a time when Latin American governments were operating on the basis of Ricardian trade theory of comparative advantage where countries specialize in whatever they are relatively better at producing (i.e. Britain produces textiles and Portugal wine) and then trade with the other. The idea is that overall more of each good is available and the overall welfare for both is improved. Latin America certainly attempted to follow this line of reasoning, at least as far as trade policy went, and in classes on the region, its failure to achieve significant growth is usually attributed to some combination commodity price volatility and foreign intervention. I think understanding the labor market is crucial to breaking the myth (and one of my biggest pet peeves about how the region is taught) that Latin America is poor because it is a commodity producer.

One of the key assumptions of the Ricardian Model is that labor is free to move between industries within a given country, allowing workers to move into the higher paying industry until both come into equilibrium. In practice in Latin America, however, labor was highly restricted so as to prevent real wages from rising. This meant debt peonage, coerced labor and, in certain countries, outright slavery. This sort of labor market was good for landed elites, who were paying below market wages but still earning world prices on the goods they were producing, but, obviously was bad for most others. Additionally, by artificially holding down wages, it prevented the sort of productivity gains that the relatively small labor market should have spurred as rising real wages increased the relative returns to capital, leading to increased capital accumulation. The end result of this is that Latin America was extremely under-industrialized at the beginning of the 20th Century compared to other countries with similar per capita incomes.

Bulmer-Thomas compares Latin America’s performance throughout the 19th Century to the United State, the European periphery and Canada, Australia and New Zealand. Particularly in the Commonwealth countries, there was a similarly low population, which put upward pressure on wages. However, instead of artificially suppressing wages, these countries invested in capital as higher wages generated higher relative returns to capital, becoming much more efficient and increasingly sophisticated producers. Interestingly, all three are still major commodity producers, yet have first world living standards while Latin America has languished. Meanwhile, the US provides an example of both paths as the northern states focused on capital accumulation while the South, even after the Civil War, relied heavily on share cropping and other forms of coerced labor and remains a dramatically poorer region even today.

It is certainly over simplistic to say that Latin America is poor today because of  distorted labor markets in the 19th Century, but I think it is an important and underreported factor in the divergence of Latin America and first world commodity producers. Commodity price volatility certainly was a major obstacle, but Latin American political economy throughout the era was set up as a rent seeking exercise for the dominant landed class which led to distortionary policies that made the region less productive and less resilient than it could have been.

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