On Guano and Dependency Theory

The speaker was a former chief economist of a large Latin American state-owned company, hosting a dinner party in Washington a few weeks ago. He posed the question with only a hint of self-derision.

Some of his guests had held high posts in the past as finance or development ministers or Central Bank officials in their own countries. Others were distinguished Social Sciences scholars currently heading various research projects in well renowned U.S. and European colleges.

Our host’s gentle and mischievous question certainly brightened up what announced itself as a somewhat dull sobremesa (Spanish for “after dinner gossip”) among senior Latin American peers currently playing in the multilateral Major Leagues. But I am sad to say that, though I stayed well into the wee hours of the morning, ready to be enlightened by these wise and experienced men, I just could not gather any relevant clue on the matter. So I went back to my hotel with mixed feelings of frustration and perplexity.

Next morning I was still so intrigued by our host’s baffling question that I decided to write a—short—piece about it that would mark the first anniversary of my column, “Reflections from Latin America.”

As we all know, geography and language merited the coinage, circa 1850, of the expression “Latin America”, referring to those independent nations in which Spanish, Portuguese or French, all languages derived from Latin, is spoken.

There is real meaning to the phrase “Latin America”, far beyond linguistics and a shared colonial past, since, as economic historian Victor Bulmer-Thomas notes, “the factors in common are stronger than those that bind the countries of Africa or Asia or Europe. Furthermore, the membership of the Latin American club has been fairly stable since independence, with relatively few additions or subtractions as a result of border changes, secession or annexation; indeed, the boundaries of Latin American states, although often the course of inter-state conflict and still not entirely settled, have changed much less in the last 150 years than have frontiers in Europe, Africa, and Asia”.1

Our nations were the first modern postcolonial societies ever, and it was here that 19th century notions of political and social liberalism were first tried—to almost no avail—by the local elites, beginning in the 1820s.

Failure of “imported economic ideas”—as they were regarded with contempt by some, as if resorting to more “authentic”, pre-Columbian economies were still possible—did not prevent the universal belief, during most of the 19th century, in a liberal programme that held in store the always-elusive bequest of sustainable export-led economies. It can be said that, in its first encounter with capitalist modernization, Latin America became an outpost of liberal orthodoxy in the 19th century, but a blatantly failed one.

Latin American intellectual historians have too often bypassed economic thinking. It suffices to browse the Cambridge History of Latin America or the Oxford Book of Latin American Essays to appraise how orphaned economic ideas have been in our region. This “economic illiteracy” works as an incentive to eschew rawly factual but nonetheless complex relationships that took place in our region’s material life, thus hindering any comprehensive grasp of what really happened and still goes on.

Paul Gootenberg, a brilliant historian of social and economic ideas, reflecting on the 19th century’s newly born Latin American countries, asserts that “Nineteenth century [Latin American] thinkers could invent nations that barely existed and project constitutions without states; they spun national myths, composed poetic canons, and reified indigenous masses whom they knew nothing about.” Then goes on to ask, “What did Latin Americans imagine about development? What did they imagine as national futures as they bought and bought themselves into global markets?”2

An attempt to answer this question could well envision Latin American early postcolonial history as an economic “culture conflict”. Such is E. Bradford Burns’ approach in The Poverty of Progress: Latin America in the Nineteenth Century, one of the best books I ever read on the subject.

Bradford Burns deems the encounter between these unwitting postcolonial elites and modern capitalist world trade forces as having been as powerful in cause and effects as the conquistadores’ sixteenth century.

Consider: Free-trade individualism fighting rural oligarchies against a a backdrop of permanent bloody civil strife, economic stagnation, and militarism. “The legacy of this postcolonial culture clash,” writes Gootenberg, summing up Bradford Burn’s view, was “modern Latin America’s baneful ‘poverty of progress.’ ” No image can illustrate this ‘poverty of progress’ ideology better than Manuel Pardo’s motto: hagamos ferrocarriles de guano: “Let’s make guano railroads!” Pardo (1834-1878) was the first Peruvian elected civil president. He was assassinated two years after he left office. As to the guano boom, by the early 1880s it was almost completely over.

The region’s export-led experiment that followed independence and lasted until the early 1930s coincided with an era during which the relative advantage enjoyed by primary goods such as guano, coffee, tin or copper—over manufactured ones—steadily decreased. Deep in the 20th century, immediately after WWII, new “inward-looking” slow developments came about that, at best, only peaked when the world economy had already gone into a rapid, sustained growth in international trade.

At the turn of the 20th century, 75 years or so after gaining independence, average per capita income of the larger Latin American economies was 14 percent that of the United States. By 1990, it was 13 percent. By the end of the 20th century, income had grown from 5 to nearly 25 percent of GDP, but the region’s share of world trade fell from 7 to 3 percent. Over half of the exports were still primary products such as coffee, oil, sugar, iron ore and copper. Latin America is perhaps the most volatile region of the planet; its financial structure being extremely vulnerable to external shocks. None of our republics can be classified as truly developed.

But let’s return to my dinner party! My dinner host went on to talk about the “major Latin American undisputable contribution to modern economic thought”. In the face of two-centuries’ worth of poor performance, I think that the only “major Latin American undisputable contribution to modern economic thought” one could vindicate is the regional version of the so-called “dependency theory”.3

Dependency theory emphasizes the disjointedness between the “center” (the developed countries) and the “periphery” (us) and the unequal terms of exchange between the two regions. It is an attractive theory that, quite understandably, became very popular among unwary Third World economists for a many years.

Dependency theory had its roots in postwar protectionist orthodoxies that came to be known as cepalismo, after CEPAL, the Spanish initials of the United Nations Economic Commission for Latin America, whose head was the influential Argentinian economist Raúl Prebisch.

Indeed, Mr. Prebisch’s thought was that the terms of trade and investment in the postwar period favored the industrial nations of the “centre” as against the developing nations of the periphery. Cepalismo recommended stark land reforms and emphasized on economic diversification and import substitution and industrialization.

Among other pitfalls, dependency theory fails to explain why the United States, a peripheral country at the turn of the 19th century, overtook Great Britain’s living standards by way of a productivity revolution based in technological innovation, or how Argentina, another peripheral country, once the perfect model of growth-led strategy, went from success to failure in an astonishingly short period of time and with practically no intervention from “the center”.

Up to the appearance and prevalence of dependency theory in our region during the second half of the 20th century, state intervention in Latin America had been largely a response to market failure in unregulated, imperfect “liberal” environments. Bulmer-Thomas relevantly points out the fact that, “the half century before 1930, which was dominated by liberal ideology, was marked by the modest role of state and by the importance of private foreign investment.” Dependency theory came to legitimize statist policies in most of our countries. The current wave of populism that sweeps the region has resuscitated old tenets of dependency theory that fuel the tirades of local strains of the anti-global movement.

To be fair, one more thing must be said regarding self-serving theories that explain our backwardness by putting the blame on “the center”: we have conceived neither the bulk of current theories of economic growth nor the most ineffectual prescriptions.

If you don’t agree, just read what 1987 Nobel Prize winner Robert M. Solow had to say about the conventional wisdom behind “foreign aid and economic growth.”