On the Explanations of How Latin America Fell Behind

Between Conquest and Independence: Real Wages and Demographic Change in Spanish America, 1530-1820

By Leticia Arroyo Abad (larroyoabad@middlebury.edu), Elwyn A.R. Davies, Jan Luiten van Zanden (jvz@iisg.nl)

URL: http://d.repec.org/n?u=RePEc:ucg:wpaper:0020&r=his

Abstract

On the basis of a newly constructed dataset, this paper presents long-term series of the price levels, nominal wages, and real wages in Spanish Latin America – more specifically in Mexico, Peru, Bolivia, Colombia, Chile, and Argentina – between ca. 1530 and ca. 1820. It synthesizes the work of scholars who have collected and published data on individual cities and periods, and presents comparable indices of real wages and prices in the colonial period that give a reasonable guide to trends in the long run. We show that wages and prices were on average much higher than in Western Europe or in Asia, a reflection of the low value of silver that must have had consequences for competitiveness of the Latin American economies. Labour scarcity was the second salient feature of Spanish Latin America and resulted in real wages much above subsistence and in some cases (Mexico, Bolivia, and Argentina) comparable to levels in Northwestern Europe. For Mexico, this was caused by the dramatic decline of the population after the Conquest. For Bolivia, the driving force was the boom in silver mining in Potosi that created a huge demand for labour. In the case of Argentina, low population density was a pre-colonial feature. Perhaps due to a different pattern of depopulation, the real wages of other regions (Peru, Colombia, Chile) were much lower, and only increased above subsistence during the first half of the 18th century. These results are consistent with independent evidence on biological standards of living and with estimates of GDP per capita at the beginning of the 19th century.

Review by: Beatriz Rodríguez-Satizábal

This paper was distributed in the NEP-HIS report issued on January 25th, 2012. In it the authors contribute to the debate on how Latin America fell behind the developed world during the early twentieth century while presenting an alternative explanation to the widely spread argument that underperformance had its roots in the Colonial period (see for example Engerman and Sokoloff, 2005; Prados de la Escosura, 2009; Coathsworth, 2005; Acemoglu, Johnson, and Robinson, 2001; among others).

To support their idea Arroyo, Davies, and van Zanden offer a new integrated long-term data series of price levels, nominal wages, and real wages in Mexico, Peru, Bolivia, Chile, Colombia, and Argentina (silver and gold mining centres) for the years between the Conquest (16th century) and the Independence (19th century). The data emerges mainly from other studies which were published during the last 50 years.

The chief empirical aim of Arroy and colleagues is measuring real wages as welfare ratios while following the methodology developed by Allen (2001) and then compare their estimates with those for Western European countries. In order to estimate the welfare ratio, they first constructed a series based on the annual wage income of an unskilled worker (mostly in mining and construction) and then an estimate the value of a basket of goods for a family of four, focusing on the cheapest staples (maize, beans, and meat for Mexico, Peru, Bolivia, and Colombia; wheat and meat for Argentina and Chile).

As a result, their basic hypothesis that the Latin American region had similar conditions with the European developed countries is revealed. More specifically, they argue that although living in colonial Latin America was costly –prices were high throughout the region when compared with Europe-, nominal wages were also high and the real wages reacted to the decline in population following the same patterns as Europe after the Black Death. Therefore, they conclude that the “Latin American price experience was far from unique in historical perspective. The long-term evolution of prices was similar to the one experienced in Western Europe (…) The wage data suggests that in long-term wages responded to market conditions rather than the coercive colonial institutions” (pp. 29 – 30). The reason for this, they argue, is related to the nature of the Latin American economy: an economy where the markets affected prices and wages rather than a feudal one dominated by non-market institutions.

This paper offers a new approach to one of the fundamental questions regarding Latin American development: why did Latin-Americans countries fell behind despite the fact that during the 18th and 19th century wages were more attractive for Europeans in South America than in North America? Was the Spaniard rule the cause? Arroyo and colleagues point towards the effect of variables such as the labour demand, the monetary incentives as part of the labour relationship, and the market conditions that were not only marked by the institutions created for the exploitation of labour in an economy based on the extraction of natural resources. Moreover, the efforts by the authors to produce a new data series suggests that the assumption made by Angus Maddison in “The world economy: a millennial perspective” regarding estimates of the GDP per capita could be way off the mark because, according to Arroyo and her colleagues, the effect of the changing indigenous population did not have a great effect on real wages.

This paper encourages a new analysis of the long-term development of Latin America. Although there is an emphasis on regional analysis, the paper does show differences in estimates between countries within the region. This is again a departure from “classic” or “canonical” works on Latin America, all of which have a tendency to assume heterogeneous developments across geographies.

The analysis by Arroyo and colleagues shows that although countries were dominated by the same metropolitan power (namely the Spanish crown), individual territories observed different paths in wages and population growth. This could result in a new orientation for future development and inequality debates. More so as significant gaps are emerging between two groups of countries in the region namely, the largest economies classified in the literature as LA6 (Brazil, Chile, Argentina, Mexico, Colombia, and Peru) and the rest of the countries (labelled as LA13). This substantial gap between them has been suggested by the work of Astorga, Berges and Fitzgerald (2005).

Furthermore, in terms of the future economic development, those Latin American countries that are catalogued within the BRICs (Brasil, Russia, India, and China) or the CIVETs (Colombia, Indonesia, Vietnam, Egypt, and Turkey) will need new explanations over the reasons why they are becoming part of the developed world in the twenty first century.

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