Download Latin American Exceptionalism

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
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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.
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