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Economic Development(s) In Latin America Colonial economy Mercantile system Mercantilism is an economic system ….. Amassing wealth for Spain by a positive balance of trade. Mercantile strategies : Quinto Real (Royal Fifth) Colonies in Americas could not produce anything that would compete with Spanish markets. Set the colonies up for failure. When Spain fell, the colonies were crippled. They had been cut off from technologic improvements going on in Europe; they had no independent trade system among themselves that did not involve Spain. Independence What led to Independence? 1. More and more criollos; fewer peninsulares 2. Hundreds of Rebellions Colonialism had lasted 300 years; more and more resistance e.g. Tupac Amaru II, Peru , 1781 3. Slave revolt in Haiti (1791-1804)resulted in abolition of slavery. Haitian Republic became first independent black nation in the world. 4. Enlightenment : progress and liberty US and French Revolutions 5. Napoleonic occupation of Spain and Portugal Spain losing monopoly on colonies to British, Dutch, French Independence Stars of Independence Simón Bolivar Father Hidalgo Jose Morelos José de san Martín Policarpa Sabarrieta Most nations became independent 18101825 (Belize 1981) Post-Independence Began as movements for liberty for all. Colonial legacy: elitism, authoritarianism, militarism violent class warfare Semi-dependent economies Elite still ruled Upheld by caudillos (military strongmen) Dictatorships have roots in caudillismo Exceptions: Cuba, Puerto Rico, Costa Rica, Brazil Conservative and liberal Ruling criollo elite classes strictly divided: Conservative : Strong centralized government Centered in capitals Upheld political/economic power of Catholic Church and old land-owning elite Believed in power of military Liberal : Representative government Power to the masses State and provincial centers of power Separation of church and state Free markets Modern/Liberal Period Late 1800s-early 1900s Strong Coffee (Brazil, Venezuela, Colombia, Costa Rica, Nicaragua) Cacao (Venezuela, Ecuador) Silver (Mexico) Guano (Peru, Chile) Meat, wool (Argentina) Sugar (Cuba) Oil (Venezuela) Whole export economies to global North nations reliant on 1 or 2 crops “Boom or bust” economy, dependent on world market Modern/Liberal Period Other Important changes Some technologies from Industrial Revolution coming to Americas Jump-started mineral industry & large scale agriculture Bonds (loans) from outside nations To be used for importing their manufactured goods Foreign investment (US, UK, France, Germany) For infrastructure to aid exporting Huge inequalities in land tenure Hinterlands undeveloped Buying up large tracts of land Population growth In cities Immigration LA pop. returned to pre-Conquest levels (60 million by 1900) Fall of liberal period Depression and WW II No more demand for things like bananas, coffee, chocolate Prices for exports dropped by 2/3 War disrupted ties to Europe For imports and foreign capital Drop in foreign exchange, so LA countries could not buy imports After war, Europe preoccupied with reconstruction ISI Import Substitution Industrialization (ISI) (40s,50s, 60s) Reduce foreign dependency nations put money into developing domestic industrial sector Instead of importing manufactured goods (But still needed to import parts, equipment) Protected by import quotas, tariffs on foreign goods Nationalize basic industries: public utilities, rail, air, mines, etc. ISI Brazil, Argentina, Mexico ISI successful because they had high populations, resources and markets Mexico and Brazil were producing GM, Ford, Volswagen and Fiat cars But took loans from private banks Led to debt crisis later Fall of ISI Effects of ISI 1. Isolation from foreign investment and technologies poor quality products 2. No market for products poor class could not afford no middle class wealthy bought foreign, high quality goods 3. Uneven development Gov’t-imposed low prices on food crops while cost to produce food grew Small-scale farmers forced out of business 4. Flight to cities for employment ISI focused on major cities “overurbanization” Fall of ISI “Overurbanization” no jobs, led to development of “informal sector” and large shanty towns 5. Still reliant on outside assistance! Need to continue to import parts, equipment ; led to increased need for imports, rather than decreased 6. Outside investors turned away from LA forced reliance on WB and IMF for loans; huge foreign debts 7. Social unrest led to rise of military dictatorships 8. Hyperinflation OPEC oil price hike OPEC oil price rise 1973, 1979 price hikes US, UK economies stagnated because they import oil OPEC nations began to put their earnings in major banks in US, UK Those banks invested in LA and Caribbean nations, at low interest rates Who needed the money to buy oil 1980s Reagan (US) and Thatcher (UK) decided to increase those interest rates, to help their own economies Led to enormous economic crisis in Latin America Debt crisis Foreign debt cycle Foreign lenders need quick return on investment Influx of foreign capital leads to short-term economic growth for borrowers Inflation Leads to devaluing of currency Leads to reduced purchasing power overseas Borrow more money to make scheduled payments on loans All dependent on vigor of foreign markets which wax and wane In many cases, foreign debts exceeded exports 1982 Mexico devalued peso; domino effect influx of foreign capital period of accelerated growth borrowing recession reduced purchasing power inflation currency devaluation Vicious cycle of foreign aid / debt Lost Decade The “Lost Decade”: 1980s US raised interest rates on loans to finance defense spending World recession decreased export demand for LA products : no capital coming in! Hyperinflation Currency devaluation led to low purchasing power E.g. 1986: cost of a hamburger in La Paz = 3 million pesos neoliberalism International Monetary Fund (IMF) was brought on board to manage the crisis. Emergency recue package to bail out LA countries who could not pay loans Extended loan period under conditions …about the IMF….. Neoliberalism Neoliberalism Bretton Woods, New Hampshire 1944 Meeting of corporate executives, economists, politicians, bankers to finance reconstruction of postWW II Europe Established centralized global economic system: World Bank International Monetary Fund (IMF) Purpose was to create global economic cooperation (among wealthy nations); nations were hurting each other by imposing tariffs System of fixed exchange rates with US dollar as reserve currency IMF oversaw global monetary policy WB was development bank giving loans to member countries for development projects Neoliberalism World Bank Charter “to assist in the reconstruction and development of territories of member nations by facilitating the investment of capital for productive purposes”. (Member governments put up capital. This money could be borrowed against at favorable rates in international financial markets, then loaned for development projects). Neoliberalism membership Countries must be members of IMF before becoming members of WB. Number of votes a country receives is based on how much capital the country gives to the IMF. Wealthy countries have more votes. Roles of IMF and WB changed greatly over time Cold War: WB loans were used to suit US geopolitical interests in LA After 1982, WB and IMF got heavily involved in LA economies. Neoliberalism IMF in Latin America during Lost Decade (1980s) Implement again neoliberal (free trade) policies Overhaul of LA economies New Loans “IMF Conditionality” (strings attached to loans): STRUCTURAL ADJUSTMENT PROGRAMS Neoliberalism Structural Adjustment Programs (SAP) Reoriented national economies to focus on debt repayment and opening markets. Cut public spending (health care, education) Privatize Promote exports Eliminate government subsidies (food, fuel, transport) Currency devaluation Liberalize foreign trade and investment Neoliberalism External Debt Nations become unable to make scheduled debt payments. Economic downturns in developed world means inability to loan as much money. Default on loans; renegotiate terms of loan Accrue enormous and increasing debt. Neoliberalism Debt Crisis Extreme cases, 1989 country Debt as % GDP Ecuador 104.3 Guyana 402.9 Jamaica 108.9 Nicaragua 842.1 Panama 115.7 Neoliberalism Effects of SAP in 1980s: Decreased Per capita income decreased by 10% Increased poverty and unemployment Local businesses could not compete Cheap imports (corn, rice, etc) Elimination wages of subsidies on food, fuel, transport Price of food increased, (US still subsidized its own agriculture) Imports decreased Transferred wealth out of the region (>$200 billion) Disproportionate burden on poor 1980: 27% of LA living in poverty 1990: 33% 10 million children malnourished Many countries spending more on debt service than on education Still in debt! Between 1980-2000, LA and Caribbean: Paid $1.65 trillion in debt service Owed $191 billion in 1981 Owed $750 billion in 2000 There has been inflation decreases in some countries as a result of neoliberal strategies The overwhelming conclusion is that neoliberal strategies have failed in LA Extreme cases, inflation country 1971-1980 1981-1990 Aver. Annual Growth of Consumer Price Indexes (%) Argentina 141.5 437.7 Bolivia 19.6 220.0 Brazil 35.6 337.0 Mexico 16.6 65.2 Nicaragua 19.6 618.9 Peru 30.3 332.0 Strategy for devalued currency Create a new currency E.g. Brazil: 1942-1967 Cruzeiro antigo 1967-1986 cruzeiro novo = 1000 Cruzeiros antigo 1986-1989 cruzado = 1000 cruzeiros (novos) 1989 – 1990 cruzado novo = 1000 cruzados 1990-1993 cruzeiro = cruzado novo 1993-1994 cruzeiro real = 1000 cruzeiros. 1994-now Real = 2750 cruzeiros reals (to equal US dollar at the time) Reduces zeros but does not change inflation Total external debt as % of GDP (2003) 1970 1989 2003 2009 7.5 77.8 112.2 % 38.2 Costa Rica 13.8 80.5 21.5 27.4 Guyana 402.9 202.1 46.1 37.9 19.5 Argentina Haiti 10 Brazil 8 26.9 47.8 12.6 Jamaica 10.3 108.9 69.6 53.1 Considerable progress by many countries in lowering national debt by 2009