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Latin American Exceptionalism: The Politics and Economics of Unfulfilled Potential. Professor Victor Menaldo University of Washington Recent Progress • Democratization • Rule of Law • Economic Growth • Decreasing Inequality and Rising Middle Class Latest Democratizations Argentina Bolivia Brazil Chile Ecuador El Salvado Guatemala 1983 1982 1985 1990 1979 1984 1986 Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Note: Democracy coded as electoral democracy. Source: Cheibub, Gandhi & Vreeland (2009) 1982 2000 1984 1989 1989 1980 1985 130 120 110 100 Index of Real Per Capita Income (1996 = 100) Steady Economic Growth 1996 1998 2000 2002 year 2004 2006 2008 Note: Avg. Real Per Capita Income in 2005 dollars for Latin American countries excluding Central America Source: USDA. Macrostatistics Declining Inequality Taken from the World Bank LAC Regional Flagship (2012). Original report written by Francisco H. G. Ferreira, Luis Felipe López‐ Calva, María Ana Lugo, Julián Messina, Jamele Rigolini, and Renos Vakis. Rising Middle Class Taken from World Bank LAC Regional Flagship (2012). Original report written by Francisco H. G. Ferreira, Luis Felipe López‐Calva, María Ana Lugo, Julián Messina, Jamele Rigolini, and Renos Vakis. Chile • GDP per capita has doubled over past 18 years, fastest sustained expansion in country's history. • Poverty rates have fallen precipitously. • Chileans from humble families attending college. • Chile has attained homeownership rate roughly equal to that of the United States, about 70%. Peru • Country has grown at 7% per year over past few years. • Commodity boom has fed public investment & consumption boom • FDI keeps pouring in & currency strong. Mexico Living standards—infant mortality rates, life expectancy and years of education—have improved greatly. Country is growing again; giving China run for its money with skilled labor. Immigration to USA has been drastically reduced. LATAM exceptionalism: unfulfilled promise • Lower economic development than expected given these countries’ age, resources & proximity to foreign markets. • Serious corruption and challenges to rule of law. • Spending on education, health, social insurance & infrastructure less than expected, given the vast needs. • Lower & more regressive taxes than rest developing world. • Still highest inequality in the world 5,000 10,000 15,000 20,000 25,000 The Caribbean The Pacific (sans Austr. & N.Z.) South Asia South-East Asia East Asia Western Europe/North America Subsaharan Africa Middle East/North Africa Latin America East Europe/post USSR 0 Real GDP Per Capita (2000 International Dollars), 2000-2006 average Average Global Income Levels, by Geograhpic-Cultural Region Source: Haber and Menaldo (2010). Notes: regions defined by Hadenius and Teorell (2005); Latin America includes Cuba and Dominican Rep.; Cyprus included in Western Europe/North America; Mongolia included in East Europe/post USSR What if 2008 Financial Crisis was the norm? This chart is taken from Bordo et al. (2000) We think Greece has it bad today? This chart is taken from Bordo et al. (2000) This chart is taken from Bordo et al. (2000) In 1899, Argentina was wealthier than the USA! Real GDP Per Capita (2000 International Dollars) 2000 4000 6000 8000 10000 12000 Argentina's Long-Run Economic Development 1800 1850 1900 Source: Haber and Menaldo (2010) and Coatsworth (1998). Year Notes: linear interpolation used between 1800 and 1874. 1950 2000 A big challenge is corruption Notes: Transparency International’s 2012 Corruption Perceptions Index. Source: Screenshot taken by Julia Knight: http://foreignpolicyblogs.com/2012/12/08/in‐case‐you‐ missed‐it‐transparency‐international‐corruption‐perceptions‐index/ 6 S.E. Asia Avg. 2 4 S.S.Afr. Avg 0 Taxes on Income, Profits & Capital % GDP 8 Progressivity of Taxation in 2005 PRY BOL URYDOMGTM ECU CRI HND SLV PER MEX NIC COL VEN BRA CHL Notes: Income, Profits & Capital as defined by IMF GFSY. Source: Albertus and Menaldo (2013). Income Inequality Source: UN Human Development Report Ha lo iti m bi a B So ol i ut h via Af r Ec ica ua do Br r Ho az nd il Ni ura ca s ra gu a Ma C da hile ga s Pa car na m Me a x Rw ico an d K a Ph en ilip ya pi Th nes Si er aila nd ra Le on C. e A. Ni R. ge ria I n In do dia ne si U. a S. A Is . ra el U. Ire K. lan Po d la nd Ita ly Sp a G in Sw re itz ece er la Ca nd na N o da rw Sw ay e Ge den rm an y Co Income Share of the Top Ten Percent 50 45 30 25 Haiti Brazil Mexico 40 35 U.S.A. Canada 20 15 10 5 0 Source: World Bank, World Development Indicators (data refer to most recent year available) LATAM Exceptionalism is Very Puzzling! Consider a natural experiment • Areas conquered by Spaniards populated by more sophisticated, wealthier civilizations. • LATAM colonies wealthier & more important than North American ones. • LATAM countries just as old as USA. YET THERE WAS A NOTABLE REVERSAL OF FORTUNE After colonialism, North America surpassed LATAM and became much wealthier and influential. Much of LATAM got stuck in neutral. Some LATAM countries went in reverse. Real GDP Per Capita (2000 International Dollars) 0 10000 20000 30000 40000 We became rich, steadily and then explosively! The United States Long-Run Economic Development 1800 1850 1900 Year Source: Haber and Menaldo (2010) 1950 2000 So did our neighbors to the north Real GDP Per Capita (2000 International Dollars) 0 10000 20000 30000 Canada's Long-Run Economic Development 1870 1895 1920 1945 1970 Year Source: Haber and Menaldo (2010) 1995 As did other “settler colonies” Real GDP Per Capita (2000 International Dollars) 5000 10000 15000 20000 25000 30000 Australia's Long-Run Economic Development 1900 1920 1940 1960 1980 Year Source: Haber and Menaldo (2010) 2000 Comparing growth records 2500 2000 1500 1000 500 100 Real Per Capita Income (PPP) Index, 1800 = 100 Cumulative Growth of Real Per Capita Income, United States versus Latin America 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 Year Argentina Chile United States Brazil Mexico Source: Haber and Menaldo (2010) and Coatsworth (1998). Notes: linear interpolation used for Latin American countries to fill in missing values during the nineteenth century. 2000 10,000 20,000 30,000 40,000 Variation in Income Levels across Latin America and versus "Settler Colonies" L AU S C AN U SA G H C AR R Y I R Source: Haber and Menaldo (2010) U C H N D BO L N IC G TM PE R EC U SL V PR Y C U B C O L D O M VE N BR A M EX PA N 0 Real GDP Per Capita (2000 International Dollars), 2000-2006 average Steady growth culminated in pronounced income differences What explains Latin American Exceptionalism? Some popular explanations 1. LATAM countries cursed by abundant natural resources 2. LATAM dependency on the vagaries of international capitalism 3. Protestant Work Ethic versus Catholicism 4. British Cultural Legacy versus Spanish Legacy 5. NA had brilliant founding fathers while LATAM suffered from inept, myopic leaders These explanations are all wrong! 1. United States, Canada, and Australia have greater resource wealth than LATAM 2. LATAM countries have been historically more protectionist and isolated than North America 3. British colonies in Africa have not fared better than French or Portuguese colonies 4. I don’t disagree that we had brilliant founding fathers, but they had Simon Bolivar, Miguel Hidalgo and O’Higgins. What explains differences between North America and Latin America? • Differences in soils, climates & native pop. densities • Differences in political & economic institutions • Differences in distribution of wealth/income/knowledge • Differences in policies that reinforced these institutions & distribution of wealth, income & knowledge The North American Model 1. Temperate climate & fertile soils + diffuse & small native populations 2. Colonial strategy based on European settlements and economy based on grains at small scale 3. Colonial institutions favored equality & middle class 4. Postcolonial institutions centered on democracy & federalism 5. Public policies reinforced equality & democracy The Latin American Model 1. Tropical soils & climates or inheritance of mining centered economy + dense native populations/slave trade 2. Colonial strategy based on plantation agriculture & mining. Mercenaries impressed servants/slaves 3. Colonial institutions favored small elite of European heritage. Created vast differences in wealth/knowledge/opportunity 4. Postcolonial institutions centered on oligarchy 5. Policies reinforced inequality & oligarchy % Agricultural Land as Family Farms 20 40 60 80 Relationship btwn Land Suitable Wheat & Family Farms (1888) NOR CAN USA DEU CHNCHE AUT HUN GRC JPN HTI ITA CRI DOM 0 BRA -4 SLV THA GTM COL VEN NIC SWE FRA ROM NLD BEL TURPRT ESP IRNECUHND PRY DNK RUS URY GBR ARG BOL PER CHL MEX -2 0 2 log(Soil Suitable for Wheat/Soil Suitable for Sugar) 4 Predicted Values of % Agricultural Land as Family Farms Sources: Family Farms is from Vanhanen (2003); Wheat to Soil Ratio (Menaldo 2013). See that paper for the methods and sources used. Income Gini Coefficient in 2005 30 40 50 60 70 Relationship btwn Family Farms in 1888 & Distribution Income Today BRA PRY COL MEX CHL GTM HND NIC CRI SLV ECU PER BOL VEN DOM IRN ARG GBR URY TUR THA USA ITA GRC PRT ROM FRA ESP BEL CHN DNK JPN RUS DEU CHE CAN NOR NLD SWE AUT 20 HUN 0 20 40 60 % Agricultural Land as Family Farms 80 Predicted Values of Income Gini Coefficient in 2005 Sources: Income Gini is from the SIDD Dataset); Family Farms is from Vanhanen (2003). 1 Relationship btwn Land Suitable Wheat & State Capacity 2007 FIN NZL ICRG Quality of Institutions Index .2 .4 .6 .8 NOR SGP CYP CHL DNK SWE NLD AUT CAN AUS DEU IRLCHE GBR USA BEL JPN ISR FRA ESP PRT KOR SVN MYS IND KWT BWA OMN ARE QAT SAU JOR VNM BHR TZA CUB NAM IDN GMB TTO UGA CRI PHL IRN ZMB MNG EGY GUY LKA JAM ECU PER PAN NIC BOL MDG LBN PAK GHA BGD GIN GNB BRA CMR COL SLV THA SEN BFA AGO LBY PNG HND AZE MOZ DOM GTM MMR GAB COG YEM LBR NGASDN MLI SLE TGO VEN PRYNER CIV HTI KAZ MWI ARM ZWE SYR URY ZAF MDA ROM DZA BGR BLRUKR RUS ALB PRK KEN IRQ SOM 0 ZAR HRV CZE POLHUN GRC SVK MAR EST LVA ITA TUN TUR LTU CHN MEX ARG -4 -2 0 2 log(Soil Suitable for Wheat/Soil Suitable for Sugar) Predicted Values of ICRG Quality of Institutions Index Sources: ICRG and Menaldo (2013). 4 1 Relationship btwn Family Farms 1888 & State Capacity 2007 DNK SWE AUT ICRG Quality of Institutions Index .2 .4 .6 .8 NLD GBR CHL CAN NOR DEU CHE BEL ESP PRT USA FRA JPN HUN GRC ITATUR MEXARG IRN CRI PER ECU URY BOL NIC COL BRA THA SLV HND DOM GTM CHN ROM RUS VEN PRY 0 HTI 0 20 40 60 % Agricultural Land as Family Farms Predicted Values of ICRG Quality of Institutions Index 80 11 Relationship btwn Family Farms in 1888 and Per Capita Income in 2005 USA log(Per Capita Income) 7 8 9 10 GBR ESP ITA BEL NLD FRA PRT CHL DNK SWE JPN AUT CHE DEU NOR CAN GRC HUN ARG URY MEX BRA VEN COL PRY PER DOM IRN ECU GTM NIC CRI THA RUS TUR ROM CHN SLV BOL HND 6 HTI 0 20 40 60 % Agricultural Land as Family Farms Predicted Values of log(Per Capita Income) Source for Per Capita Income: Haber & Menaldo (2011). 80 Postcolonial institutions & policies North America North America • Extended the suffrage widely. Taxed and spent. • Strengthened federalism & autonomy of local governments. • Embraced market based development, promoted middle class & built safety net. North America: Taxes & Education 1) Progressive taxation at state and local level Property and wealth taxes; income taxes. 2) Provision of public education Tied to local property taxes; increasingly expanded and improved.; eventually included state universities year Source: NBER; OECD Fiscal Statistics 2000 1990 1980 1970 1960 1950 1940 1930 1920 1910 1900 1890 1880 1870 1860 1850 1840 1830 1820 1810 1800 0 Income Taxes as % GDP 5 10 15 United States’ FEDERAL income taxation North America 1. Open immigration and generous land grants to small farmers with secure titles 2. Investment in Public Works 3. Low barriers to market entry & incentives for innovation: e.g., patent laws 4. Liberal bank charter policy with healthy competition between local level banks. Costs to Transport One Ton in the United States (Cents per Mile) 1815 Mode of Transportation Land 30 ¢ 1/3¢ or more 6¢ 1860 Road 15¢ or more Railroad 2¢ or more River •River Raft downstream •Boat upstream •Steam boat 1/3¢ or more Canal 1¢ or more Great Lakes 1/10¢ 1/2¢ or less Water 1¢ or less Ocean Source: George Rogers Taylor, The Transportation Revolution (New York: Holt, Rinehart, 1962) Appendix A, Table 2 Postcolonial institutions & policies Latin America Latin America • LATAM experienced authoritarianism, inequality & political instability • LATAM became centralized • LATAM countries embarked on crony capitalism to benefit politicians, bankers, and a small cadre of industrialists and unions. 40% 30% 20% 10% 0 Percent of Time as Democracy since Independence Limited Experience with Democracy MEX PRY NIC SLV BOL PER CUB HND BRA ECU DOM VEN GTM ARG PAN COL CRI CHL URY Note: Democracy coded as electoral democracy. Source: Cheibub, Gandhi & Vreeland (2009); Boix & Rosato (2001) Latin America: Regressive taxation and no taxes collected at state and local level: excise taxes on consumption goods & fiscal monopolies. The wealthy provided private education to their own children and higher education was targeted to a narrow elite. 0 Primary School Enrollment Per Capita in 1900 500 1,000 1,500 By 1900, LATAM had fallen way behind the education race VEN BOL DOM BRA PER SLV COL Source: Banks' Cross‐National Time‐Series Data Archive NIC PRY ECU GTM MEX CHL HND CRI ARG URY CAN USA Latin America Failed to Adopt Progressive Taxation or Provide Safety Net Sources: Income Taxation data for Latin American countries from native treasury sources (Menaldo 2008), OXLAD Dataset (2008) &Government Finance Statistics Yearbook (various years). GDP data is from OXLAD 2008). Income Taxation as share of GDP data for the EU 15 is from OECD Factbook (2007). Latin America 1. Constrained immigration and land grants only to very large landholders 2. Limited investment in public works 3. High market barriers to entry & low incentives for innovation 4. Restricted bank charter policy with credit allocated on political grounds. LATAM transportation costs over 30 times greater than within USA! Circa 1842, costs of moving a ton of goods from Latin American countries’ major ports to their capitals (pounds sterling): Lima, Peru: 1 Santiago, Chile: 2.4 New Granada: 45 Mexico City: 13.8 Quito, Ecuador: 15 Sucre, Bolivia: 19.3 Caracas, Venezuela: 4.3 Source: Brading (1969: 243‐4). Dictator Porfirio Diaz, 1876‐1911 Percent of non‐government loans made to banks’ own boards of directors: Banamex 1886 to 1901 100% Mercantil de Veracruz 1898‐1906 86% Banco Coahuila, 1908 72% Banco Durango, 1908 51% Mercantil de Monterrey, 1908 31% Banco Nuevo León, 1908 29% Source: Haber (2012) Explanation for LATAM Exceptionalism 1. Factor Endowments: wheat vs. sugar 2. Colonial Strategies: settlers vs. mercenaries 3. Political‐economic institutions: democrats & federalists vs. oligarchs & centralists 4. Distribution of Wealth/Income: equality vs. inequality 5. Policies reinforced distribution of political‐ economic power: inclusive/efficiency vs. exclusive/distortive Cause for Hope? Democracy Argentina Bolivia Brazil Chile Ecuador El Salvado Guatemala 1983 1982 1985 1990 1979 1984 1986 Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Note: Democracy coded as electoral democracy. Source: Cheibub, Gandhi & Vreeland (2009) 1982 2000 1984 1989 1989 1980 1985 Reforms • • • • • Rule of Law Decentralization Prudential banking regulation Clamp down on tax evasion Cut down on wasteful government spending and target spending towards poor & education Accomplishments • • • • • • • Political & civil liberties More secure property rights & access to credit Prudent fiscal & monetary policy Much lower debt & inflation Higher levels of trade & FDI Less sensitive to global business cycle Better education for more people Increasingly decoupled from USA business cycle: skilled labor force Taken from World Bank LAC Regional Flagship (2012). Original report written by Francisco H. G. Ferreira, Luis Felipe López‐Calva, María Ana Lugo, Julián Messina, Jamele Rigolini, and Renos Vakis. Sao Paolo: Financial Capital of South America