Latin America in the World Economy

1. Latin America in the World Economy Peterson – Geography - UNO

2. Outline • Colonial Mercantile System • Independence, Neocolonialism, Export Economics • Economic retrenchment in the 20th century • Regional integration 1960 – 1980 • Economic shock and realignment 1980 – 2000 • Regional integration 1990 and beyond • Global markets and global lives

3. Colonial Economy • Privatization of land • Forced labor or labor tribute • Extraction of resources – gold and silver • Sent back to Spain and Portugal • Haciendas and plantations • Production of export crop (coffee, sugar, bananas) • Imperative of European settlers was to make large sums of money • Why else live in the new World unless you are rich?

4. Spanish Imperialism • Imperialism: a policy of extending the rule or authority of an empire or nation over foreign countries, or of acquiring and holding colonies and dependencies. • Also acquisition of personal wealth. Spanish conquistador: “We came here to serve God and the king, and also to get rich.” • Spain and Portugal, like other European countries, believed that the purpose of having foreign empires was to enrich the parent country. • This belief was based on the principles of mercantilism.

5. Mercantilism-1 • Definition: A political and economic policy, evolving with the modern national state. • Seeks to secure a nation's political and economic supremacy in its rivalry with other states. • Purpose is to accumulate wealth in the form of precious metals • by exporting the largest possible quantity of its products • importing as little as possible, thus establishing a favorable balance of trade.

6. Mercantilism-2 • A country’s economic strength depends on increasing the supply of gold by exporting more goods than are imported. • Under mercantilism, foreign lands had two roles: • supply the parent country with raw materials (lumber, cotton, sugar, and precious metals) • serve as a market to sell parent country’s manufactured goods (furniture, clothing, and tools) • Established terms of trade that favored the mother country at the expense of the colony

7. Mercantilism-3 • Inherent belief that the world only contained a fixed amount of wealth • to increase a country’s wealth, one country had to take some wealth from another • In order to maintain a favorable balance of trade, the goods exported must be of greater value than those imported. • Import raw materials / export finished goods • The development of colonies and trading posts played an important role in mercantilism • they were both sources of raw materials and markets for finished goods.

9. Control of Trade • Trade strictly controlled and only allowed with Spain • Limited number of ports that engaged in trade • In Spain, everything went through Cadiz • In the New World, Vera Cruz, Cartagena, Portobelo (present-day Panama), and Havanna • Trade with Buenos Aires went through Lima, Peru – very onerous

10. Pirates and Privateers • Slow, unarmed merchant ships carrying gold and silver were an easy target • Privateers: a private warship authorized by a country's government to attack foreign shipping • part of naval warfare from the 16th to the 19th century • proceeds distributed among the privateer's owners, officers and crew • Spanish implemented convoy system as early as mid-1500s, continued until 1700s • One round-trip to Spain and back each year

11. Independence • In the vacuum, Great Britain assumed the role as the new Imperialist power • Had learned from colonial failures, including that in North America, to rule indirectly • Limit military involvement • Supply loans to foreign governments • Invest in key export activities • Construction of transportation and communications infrastructure

12. British Indirect Rule • Neocolonialism • Behind-the-scenes political control • Threat of military force rather than its actual use • British military rarely used in Latin America • a cost-effective means of imposing British hegemony • In many Latin American nations, US assumes British position by the 1920s

13. 1800s • Latin America still pursuing export of specific commodities – sugar, coffee, tin, nitrates • Formation of “Banana Republics” - term now used to describe any small nation that is controlled by outside interests • Reliance on coffee by many nations: 85% of exports for Guatemala; 79% El Salvador; 65% Nicaragua; 62% Brazil; 52% Venezuela • Economies controlled by boom-bust economic cycles

14. Boom and bust Rubber Trade • Natural rubber extracted from sap of tree native to Brazil • Amazon region experiences a tremendous economic boom • Tree is smuggled to Britain, successfully cultivated • British establish vast rubber plantations in Southeast Asia • Supply increases and price drops. Brazilian rubber barons go bust.

15. Boom and bust • Cocoa (central America and Brazil) • Mining – depletion of resources • Guano (Peru) – bird dung high in nitrates • Nitrate mining (Chile) – bust through development of synthetic chemical fertilizer

16. Railroad Development Railroads designed to get goods to ports. Peru

17. 1800s Export Boom in review • Commodity Export Strategy was mostly a failure in developing overall economy • Elites benefitted, as did some regions • Most economies showed negligible economic growth • Living standards actually declined during the century • Strategy did little to encourage local manufacturing and industry

18. Retrenchment in the 1900s • Wars and depression influenced markets • Demand for non-essential items (coffee, cocoa) declined • Wars increased demand for tin, copper, lead, grains, meat – benefitting some nations • Demand declined in all areas during the depression of the 1930s • Wars and depression cut-off supply of industrial goods

19. Move toward Industry, finally • 1914-1980: Period of “inward orientation” • National economic protectionism • “Import substitution industrialization” • Substituting locally manufactured goods for imported products • Use of high tariffs to keep out foreign goods • By 1950s, manufacture of consumer goods blossomed • radios, televisions, refrigerators • Cars – Brazil, Mexico, Argentina • Smaller countries tried, with government subsidies, to manufacture cars - Ecuador’s Andino

20. Government-sponsored industrialization • Individuals did not have capital or were unwilling to invest for fear of nationalization • Governments created state-owned industries, state-owned industrial complexes • Brazil’s Redondo steel • Brazil succeeds, other countries fail • EMBRAER aircraft, military weapons, steels exports • Import substitution strategy worked in the larger countries

21. 1960-1980 • Declining value of exports • 1946: Region accounted for 25% of world exports • 1975: only 8% • Continued inward development • Failed attempts at regional economic integration • Continued borrowing

22. 1980-2000 • Economic shock brought on by • borrowing, bad investments, reliance on a few export commodities for foreign-exchange earnings, financial mismanagement • Inflation • Over 1000% a year in Argentina, Bolivia, Peru • Default on international loans, renegotiation • Lending organization (IMF) impose broad economic reform policies • Privatizing state companies

23. Chile’s success under Pinochet • Concentrating on export market • Increasing agricultural output, especially in export fruit market • 1990’s Chile growing at 7 percent a year, still around 5 percent • Result of neoliberal policies • Increasing income for some, declining income for most -- greater social inequality

24. Argentina’s Failures • Pursued neoliberal policies through 1990s • 20% unemployment throughout the decade • 2002 economic collapse, unemployment up to 50% • Decline in value of currency

25. Regional Summary • Incomes increase for top 20% of population • No policies to increase wealth for bottom 80% • Progressive income taxation as a method of income re-distribution • 45% of Latin Americans live in poverty • 65% of rural population • Exception: Chile – Poverty reduced from 40% to 20% since 1980s

26. MERCOSUR • MERCOSUR • 1991: Argentina, Brazil, Paraguay, and Uruguay • Associate members: Chile, Bolivia • Common system of tariffs, customs union • 2003: Free trade agreement with Andean community • Pushing accord with European Union

27. NAFTA 1992 • Phased implementation for Canada, US, Mexico • Tremendous increase in trade • Manufacturing job losses in US and Canada; increase in Mexico • 1.3 million vehicles produced in Mexico; 1 million go to US and Canada

28. Maquiladoras • Established prior to NAFTA • Eliminated duties on imports if used in manufacture of products for export • Tremendous growth through 2000 • Increased wages in the border region • After 2000, duty free area extended into Mesa Central • Maquiladoras began to decline

29. NAFTA and FTAA • NAFTA as first step • Free Trade Area of the Americas • Much broader free trade area • Combat MERCOSUR • 2004: US and Chile free trade pact • 2005: Central American Free Trade Agreement • CAFTA with Guatemala, Nicaragua, El Salvador, Costa Rica

35. Global Lives • Immigrants as transnational • With telecommunications and Internet • Live between two worlds • Homeland and the new world • Changing both communities

36. Remittances • Sending money back home • 60% of Latin American immigrants send money back home; mostly new immigrants • Most send money monthly • 20% of Mexicans receive remittances • 2004: Immigrants sending $30 billion home • Total foreign aid from developed to developing world is only $52 billion