Category Archives: Latin America

Past and Present: Brazil’s Unfulfilled Expectations

Industrial Growth and Structural Change: Brazil in a Long-Run Perspective

by Dante Aldrighi (aldrighi@usp.br) and Renato P. Colistete (rcolistete@usp.br)

Abstract: This paper presents a long-run analysis of industrial growth and structural change in Brazil, from the coffee export economy in the nineteenth century to the present day. We focus on Brazil’s high economic growth in most of the twentieth century and the disruption caused by the collapse of debt-led growth in the early 1980s. We then examine the recent trends in economic growth and structural change, with a sectoral analysis of output, employment and productivity growth. Employing new data and estimates, we identify a sharp break with the earlier period of high output and productivity growth in Brazil’s manufacturing industry before the 1980s. From the 1990s, the relatively successful process of learning and technological advance by manufacturing firms that took place since the early industrialization has lost strength and Brazil’s productivity growth has declined and stagnated.

URL: http://ideas.repec.org/p/spa/wpaper/2013wpecon10.html

Review by Sebastian Fleitas

They are playing soccer here.
There is much samba, much crying and rock’n’roll.
Some days it rains, on others, it shines.
But the thing I want to tell you is that things are really bad*

Chico Buarque, Brazilian musician, 1976

In four months time Brazil will be in everyone’s mind. Love it or hate it, coming June the FIFA World Cup 2014 will be in full swing and held in South America for the second time. According to Goldman Sachs, host nations can typically expect a 54pc increase in medals at the Olympic games. Assuming the relationship holds for football, this further increases the odd for the home team, which more often than not is marked as favourite by pundits across the globe, to win later this year in its home turf. Indeed, we are already hearing about Brazil because of the anti-World Cup protests. Protest which are more likely driven by unfulfilled economic expectations of Brazilians than by their rejection of the tournament.

Brazil occupies the biggest landmass in South America and has often been thought of as a big economic promise. For instance, large GDP growth rates in the late 1960s and early 1970s led people to talk about the “Brazilian miracle”. More recently, in 2009, Brazil was again a sound bite for big economic promise and the financial press coined the term “BRICs” to denominate it plus Russia, India and China as the “bright stars” in an otherwise gloomy world that was facing recession following the financial crisis. Such expectations, both in the past and today, have been fuelled by the idea of Brazil achieving a higher rate of development than others on the back of a big and highly productive manufacturing sector and long standing (and dynamic) agriculture. But Brazil has consistently failed to deliver on expectations. Even more, there is already talk of the “BIITS” to referrer to Brazil, India, Indonesia, Turkey and South Africa, while focusing on their current-account deficits and structural weaknesses (as exposed by the cooling of demand from China and the potential of the Federal Reserve hiking interest rates in the USA). But just as the Brazilian manufacturing industry has fuelled expectations, it has also been a large part of the reason behind these apparent failures.

Patrick Chappatte, Protests in Brazil, New York Times (http://goo.gl/AFevcF)

Patrick Chappatte, Protests in Brazil, New York Times (http://goo.gl/AFevcF)

Dante Aldrighi and Renato Colistete in this paper, circulated by NEP-HIS on 2013-08-31, offer a very detailed long-run description of industrial growth and structural change in Brazil: from the coffee export economy in the nineteenth century to the present day. They examine the recent trends in economic growth and structural change, with a sectoral analysis of output, employment and productivity growth.  Their estimates show that the expansion and diversification of Brazil’s manufacturing industry from the nineteenth century until the late 1970s was a remarkable process. Despite distortions and inefficiencies, the experience of accelerated industrialization provided the country with a diversified and relatively complex industrial structure. In the 1980s and 1990s, the debt crisis and the ensuing macroeconomic imbalances undermined the manufacturing industry’s performance, weakening the incentives to invest and to improve technological capabilities.

A point of particular importance in the paper by Aldrighi and Colistete is the study of productivity. The authors show that in the last two decades the productivity growth of Brazil’s manufacturing industry has been much lower that that achieved during the earlier period of accelerated industrialization. Moreover, using a shift-share analysis they suggest that before the 1980s productivity gains within industries were a stronger driving force for aggregate productivity growth than shifts of labor to higher productivity activities. However, since the 1980s the role of structural change has become relatively more important to explain productivity growth in Brazil’s manufacture. For the economy as a whole, structural change also revealed to be more important than sectoral productivity growth in the 1990s and 2000s. They conclude that there is evidence that the relatively successful process of learning and technological advance by manufacturing firms that took place since the early industrialization has lost strength as a major source of economic growth in Brazil during the recent decades. Most of productivity growth has now been coming from agricultural activities. They also show that, during most of the period of accelerated industrialization, industrial workers saw their wages, measured in local currency, lagging consistently behind labor productivity, which led to a declining share of wages in the total income of the manufacturing sector. Later, the unit labor costs adjusted by the exchange rate increased, mainly as a result of currency appreciation and lower productivity growth. However, the authors show that labor compensation growth was modest in real terms and had a minor role in increasing unit labor costs.

FIFA World Cup 2014

FIFA World Cup 2014

The paper concludes that the main sources of concern about the performance of the manufacturing sector in Brazil rests in its very low productivity growth and the tendency to currency appreciation, which together affect unit labor costs and competitiveness. They understand that the competitiveness of manufacture might be significantly higher if the costs of inputs and services other than labor (such as capital, taxes, infrastructure, bureaucracy and innovation) were lower or declining. However, they are not optimistic about the prospect of this happening. Some of the factors that they understand have conspired to reduce efficiency and productivity growth are the complex and burdensome tax system that tends to push firms to the informal, low-productivity sector; high and unstable real interest rates; a relatively low-skilled workforce; and expenditures on R&D below the levels attained in the most dynamic developing countries, which limits the technological spillovers that might benefit the whole economy. They also state that innovation activities have been negatively affected by uncertainty and the inability to make long-horizon investment plans, increased by low and volatile public investments and economic growth rates. All these factors explain why Brazil’s investment rates remain much lower than those prevailing in most developing countries. As a consequence, the authors think that it is unlikely that Brazil’s manufacturing sector’s low productivity growth is being offset by appropriate incentives or reductions in the costs of key components that affect competitiveness in the long run.

In my opinion, the authors’ description and conclusions clearly point out the need to go beyond description and embrace new lines of research that address the specific causes of the low productivity in Brazil. These new venues of research will lead to a better understanding of the Brazilian situation and will provide a better understanding of the policy instruments that could enhance Brazil’s development. This agenda would be very beneficial for other countries in Latin and South America too, which face similar problems. Focusing on the behavior of the productivity and from a microeconomic perspective.

I would like to very briefly mention here two recent lines of research that may shed light on the causes of low productivity. The first line is related to the productivity via labor supply. Productivity seems to be affected by the poor performance of Latin American students at school. In a recent paper, Hanushek and Woessmann (2012) find that in growth regressions, the positive growth effect of educational achievement fully accounts for the poor growth performance of Latin American countries. In addition, they find through a development accounting analysis that, once educational achievement is included, human capital can account for between half and two thirds of the income differences between Latin America and the rest of the world. More efforts than those already in place (see among others Carvalho Filho and Colistete, 2010; Colistete, 2013) are necessary to better understand the links between the development of education in the region and its impact on productivity in Brazil and the region as a whole.

Picture of the city of Sao Paulo, Brazil http://goo.gl/uTni0a

Picture of the city of Sao Paulo, Brazil http://goo.gl/uTni0a

The second line I would like to mention is related with the productivity of firms in Brazil (and Latin America), especially managerial abilities and their impact on productivity. Managerial abilities were for long time considered in the residual of the productivity or production function equations and no consistent efforts to measure managerial abilities had been carried out. Recently, Nicholas Bloom and John Van Reenen with different coauthors have been working on surveys, based on interviews to firms, to determine management practices scores**. They have conducted interviews to more than 10,000 firms in 20 countries in the period 2004-2010. They have used this data to publish several papers on the issue that are worth looking at. Their general conclusions are that management practices scores in manufacturing vary significantly across countries and are strongly linked to the level of development. In particular, the average management practices score appears in the place 18th in the ranking only above China and India and below countries like Mexico, Chile, Argentina and Greece. The methodology the authors use for these surveys is not easy to replicate for other periods. However, this type of study provides a good insight to causes of low productivity that are often forgotten in Latin American countries and in our historical explanations and that, when measured, show our relative backwardness.

To sum up, Colistete and Aldrighi do a great job describing the evolution of the manufacturing industry in Brazil in the long run. They show how, even with very important problems, Brazil’s period of import substitution generated increases in productivity and structural change. They also document the problems that Brazil has had since the early 1980s in terms of growth and productivity. Fortunately, in all aspects besides football (ie soccer in the US), samba and rock and roll, the Brazil we have now is not the Brazil that Chico Buarque described in 1976. Among other examples, income inequality in a country that has one of the worst income distributions in the world has been improving consistently during the last few years. However, the challenges of productivity remain. Focusing in understanding the causal relationships between microeconomic factors (e.g. education achievement or managerial abilities) and productivity could help to a better understand the historical evolution of economic development and to design better policies oriented to overcome these problems.

Footnotes

*Aqui na terra tão jogando futebol, Tem muito samba, muito choro e rock’n’roll,  Uns dias chove, noutros dias bate o sol, Mas o que eu quero é lhe dizer que a coisa aqui tá preta.

** Check Nicholas Bloom website at Stanford University (http://www.stanford.edu/~nbloom/)

References

Hanushek, A. and Woessmann, L (2012): Schooling, educational achievement, and the Latin American growth puzzle, Journal of Development Economics 99 (2012) 497–512

Carvalho Filho, I and Colistete, R (2010): Education Performance: Was It All Determined 100 Years Ago? Evidence From Sao Paulo, Brazil, MPRA working paper

Colistete (2013): A Política do Atraso Educacional: Visões e Conflitos sobre a Instrução Pública em São Paulo entre 1851 e 1892, Departamento de Economia, FEA-USP, working paper

So, who was lightning the bulb in Latin America?

Foreign Electricity Companies in Argentina and Brazil: The Case of American and Foreign Power (1926 – 1965)
[Original title: Companhias estrangeiras de eletricidade na Argentina e no Brasil: o caso da American & Foreign Power (1926-1965]

By Alexandre Macchione Saes (alexandre.saes@usp.br), Universidade de São Paulo – FEA/USP and Norma S. Lanciotti (nlanciot@unr.edu.ar), Universidad Nacional de Rosario – CONICET

URL: http://econpapers.repec.org/paper/spawpaper/2013wpecon14.htm

Abstract

The article analyses the evolution, strategies and position of American & Foreign Power subsidiaries in electric power sector in Argentina and Brazil from their entry in the mid-1920s to their nationalisation. We compare the economic performance and entry strategies followed by the American holding in different host economies. We also examine the relations between the American electricity firms and the Governments of both countries, focusing on the debates and policies that explain American & Foreign Power’s withdrawal from Argentina and Brazil in 1959-1965. Finally, the article reviews the role of foreign direct investment in the development of electric power sector in both countries. The study is based upon the Annual Reports and Proceedings of American & Foreign Power (1923-1963) and other corporate reports, Government statistics and official Reports from Argentina, Brazil and the United States.

Review by Beatriz Rodríguez-Satizábal

This paper was circulated by NEP-HIS on 2013-11-02. Its topic deals with the popular subject of energy provision. Indeed, there has been no shortage of turning points in the history of the energy markets around the world. Since the development of the electricity in the late nineteenth century, energy markets have been a constant cause for debate. The discussion ranges from technical and engineering issues (such as heated debates around Nikola Telsa and Thomas Alva Edison), to the adoption of common standards, to questions as to who will provide the service, to a wider debate on government policies such as pricing and, more recently, on how to become “greener” (see for example the debate on UK gas and electricity providers).

Kilowatt

In the developing countries, the debate on energy has been tied to the relation between the foreign direct investment, the efficient provision of electricity, and nationalization policies (topics that, by the way, were picked up from a business history perspective in William J. Hausman, Peter Hertner & Mira Wilkins “Global Electrification” (2008, CUP). The question on the relation between foreign companies investing in such countries and the debate on the effects of imperialism is also latent in recent research (see for example the work of Marcelo Bucheli, Stephanie Decker, or Niall Ferguson). In this line of work, the paper by Macchione Saes and Lanciotti further explores the intricate relationship between a foreign company and its host countries but, at the same time, offers a contribution to the literature on Latin American foreign investment during the second half of the twentieth century.

According to Alexandre Macchione and Norma Lanciotti, the arrival of the American and Foreign Power Co in Brazil and Argentina marked the start of an expansion of US direct investment in those countries, while seeking new consumer markets during the 1920s (p. 2). However, it is important to notice that the company arrived to the region more than 20 years after the first electricity companies had established. Therefore, the case of American and Foreign Power Co offers an example of the aggressive expansion of an electricity company that only few years after its arrival suffered the effects of the crisis of 1929 and later on, had to deal with centralization and nationalization policies.

AlexandreNorma

The aim of the paper is to analyse the evolution, strategies, and position of the American and Foreign Power Company in both countries between 1926 and 1965. Divided in four sections, including an introduction and the concluding remarks, it presents first the greater attention that US companies gave to Latin America after the First World War, looking mainly to the evolution of the company in the US market and the subsidiaries in Brazil and Argentina. Then, the paper discusses the shift of the regulation and describes the complex relation between the state and the company. As a result, the main sections widely discuss the investment strategies which focus was in improving the service while achieving higher returns.

Three important issues emerge from this paper, namely:

1) The US investment was dominated by a few large holding companies that controlled the utilities supply in various countries. The localization in South America answers to both the search of economies of scale through new consumer markets and the need to diversify investment (p. 3). In order to keep growing in the local markets, the electricity companies acquired small and medium concessions keeping their organizational structure. Clearly, this served to the purpose of increasing returns, but there is no mention of the effects of this choice in the need for improving the service. In other words, how efficient the company became as a result of greater scale.

2) The effects of the Great Depression were greater than expected for the directors of the company. As explained by Macchione and Lanciotti, their main concern was that currency devaluation would damage the sustainability and profitability of their investments (p. 13), but they did not expect the shifted in the regulation that followed in the 1930s and 1940s. The link between government policy and business strategy is then questioned by the authors and the company strategies are evaluated. Small differences between the two countries are noticed, opening space for a future discussion on how foreign companies deal with diverse economic and political contexts, including an analysis of their role as regulators.

American and Foreign

3) One of the main factors for the company’s decision to withdraw from the region was the expropriation lead by the Latin American governments since the late 1950s (p.22). But to what extent expropriations responded to the inefficiency of the company? Macchione and Lanciotti explained that the low quality of the service added to the fluctuation of the long-term revenues and, in some cases, led to the confiscation of assets by the local national government. These arguments, of course, are not to minimise political and nationalistic ideas driving the confiscation of assets in Latin America during the twentieth century.

In summary, the paper Macchione and Lanciotti offers a case study that brings together elements from Latin American economic history that deserve more attention. These include the role of state, the interaction between businesses and regulators, foreign direct investment, and the relative efficiency of domestic acquisitions by foreign companies in the long-term. This paper is an important contribution to understand from the company perspective the links between strategy and government policies.

“If they couldn’t guarantee the property rights of the land they gave away, how could they possibly sell it?”. Land Privatization and Property Rights in the Nineteenth Century Neo-Europes

The Political Economy of Land Privatization in Argentina and Australia, 1810-1850: A Puzzle

Alan Dye (adye@barnard.edu), Barnard College, Columbia University

Sumner La Croix (lacroix@hawaii.edu), University of Hawai’i-Mānoa

URL: http://d.repec.org/n?u=RePEc:hai:wpaper:201207&r=his

Abstract: This paper compares public land privatization in New South Wales and the Province of Buenos Aires,in the early nineteenth century. Both claimed frontier lands as public lands for raising revenue. New South Wales failed to enforce its claim. Property rights originated as de facto squatters’ claims, which government subsequently accommodated and enforced as de jure property rights. In Buenos Aires, by contrast, original transfers of public lands were specified de jure by government. The paper develops a model that explains these differences as a consequence of violence and the relative cost of enforcement of government claims to public land.

Review by Manuel Bautista Gonzalez

The U.S. economy has racked up an enviable record of two centuries of sustained economic growth —an achievement, it has often been asserted, that was predicated on the establishment of institutions guaranteeing the security of property rights. My aim in this article has been to qualify this assertion by reminding scholars that economic development also requires that societies be able flexibly to reallocate property rights in response to new technological and other developments. If such reallocations could always occur smoothly—either through market transactions or a consensus effort on the part of society to capture the resulting gains in efficiency—there would be nothing mysterious about this qualification. As I have shown, however, reallocations in the United States have often been involuntary, and losers have not always received adequate (or any) compensation. Owners whose property has been taken from them have routinely charged that property rights are in fact not secure, but aside from some relatively brief episodes when broader protest movements have taken up their cause, these kinds of complaints have never become general. Hence the mystery. Despite the many involuntary reallocations of property that have occurred repeatedly since the formation of the republic, Americans still strongly believe that their property rights are secure and they act in their economic lives accordingly. – Lamoreaux (2011), emphasis added.

This paper was first distributed by NEP-HIS on 2012-05-15. The paper reviewed in this post was a more recent version from January 4, 2013, made available by the authors.

Alan Dye

Alan Dye

Sumner La Croix

Sumner La Croix

Dye and La Croix’s paper is an illuminating exploration of the history of land property rights in the province of Buenos Aires (Argentina) and the colony of New South Wales (Australia) in the first half of the nineteenth century. Whereas Australian squatters acquired de facto claims over lands outside the official settlement areas defined by colonial authorities and some of them managed to transform their claims into de jure property rights, porteño landholders often relied on the will of the authorities of the nascent republic to enforce de jure property rights, with mixed results. Why did authorities honor or not existing claims over land when governments stood to lose revenues from their sale or lease?

In their answer, the authors refute the presentist bias of popular institutionalist and factor-endowment accounts: contrary to the belief, developed countries have not always had a better record of securing and enforcing property rights over land than developing countries. Why?

Continue reading

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.

Multinational Strategies and Developing Countries in Historical Perspective

By: Geoffrey Jones (Harvard Business School, Entrepreneurial Management Unit)
URL: http://d.repec.org/n?u=RePEc:hbs:wpaper:10-076&r=his

This working paper offers a longitudinal and descriptive analysis of the strategies of multinationals from developed countries in developing countries. The central argument is that strategies were shaped by the trade-off between opportunity and risk. Three broad environmental factors determined the trade-off. The first was the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second was the market and resources of the host country. The third factor was competition from local firms. The impact of these factors on corporate strategies is explored, as shown in Fig. 1, during the three eras in the modern history of globalization from the nineteenth century until the present day. The performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats.

International Business and the study of Multinational Corporations is perceived as one of the areas where business historians have made significant contributions. Indeed, the late John Dunning, one of the major contributors to the area, was supportive of using longitudinal and multi-sourced approach to better understand the motivations to pursue foreign owned, value adding activities by firms (or groups of firms). Geoff Jones has also made important contributions to the area as well as documenting the role of entrepreneurs in Latin America. This piece is interesting and welcomed as a way to bring both strands together, although more could be done to portray the issue from the view point of host economies.