“INEQUALITY AND ECONOMIC PERFORMANCE IN
SOUTH AMERICA DURING THE FIRST GLOBALIZATION:
THEORETICAL FRAMEWORK AND STYLIZED FACTS FOR
ARGENTINA, BRAZIL, CHILE AND URUGUAY”
Henry Willebald
Instituto de Economía, Universidad de la República, Uruguay
([email protected])
Department of Economic History and Institutions, Universidad Carlos III, Madrid, Spain
([email protected])
Ago-08
(VERY DRAFT. PLEASE DON’T QUOTE!)
Abstract
The effects of the First Globalization on economic
growth and income distribution in the New World figure
prominently in the recent literature about the economic
history of the late 19th Century and the first decades of
20th Century. This paper attempts to participate in the
debate and contribute with the current analytical and
empirical efforts about the topic. It is mainly conceptual
as it aims to discuss some analytical approaches useful
for understanding the evolution of the economic
performance and inequality in natural resource-abundant
economies of South America (Argentina, Brazil, Chile
and Uruguay) during 1870-1920. Besides, it reviews
some stylized facts of the period to illustrate how the
model works and its predictions about prices, movements
in the income distribution, land frontier expansion,
capital flows and the conditions of the structural change.
Keywords: income inequality, land frontier expansion, productive factor prices, movements of labour
and capital.
JEL Classification Number: F20, N16, N56, O13, O15, O41.
1
Introduction
In the late 20th Century, “globalization” became a topic of increasing academic and practical
interest. Fast integration of markets, increasing levels of social dislocation and increasing
inequality are topics shaping an interesting and challenging debate. Economic History may
contribute to this debate identifying the causes and consequences of the process of strong
market integration of the second part of 19th Century, and evaluating its usefulness in the
understanding of the current process.
The impressive decline of the transport and communication costs between the middle of
the19th Century to the First World War (WWI) and the consequent expansion of long-distance
flows of people (labour), capital and goods had many effects on the world economy and
individual countries. O’Rourke & Williamson (1999) observe that the industrial centre and
the overseas periphery experienced this process in different ways.
The asymmetry arises because price convergence in the commodity markets contributed to
a significant convergence of factor prices and factor-price ratios (in the Heckscher-Ohlin and
Stolper-Samuelson sense). The ratio of wages to land prices declined in many countries in the
Americas, Asia and the Pacific region characterized by high immigration and abundant
natural resources (land). On the other hand, wages tended to increase in relation to the price of
land in the land scarce and emigration countries (especially in Western Europe).
“The key stylized fact that emerges from the globalizing late
nineteenth century is that resource rich, labour scarce countries
underwent rising inequality, and resource-poor, labour abundant
countries underwent falling inequality”. (O’Rourke & Williamson,
1999:176).
The present paper tackles two main shortcomings in order to make historical and long run
comparisons of globalization and inequality: one of them is empirical and the other one is
conceptual.
Firstly, the shortage and fragility of consistent data, even for a single country, is
determinant to obtain acceptable results. Data from diverse sources have often been compiled
to elaborate series such as real wage, land prices, trade (goods and prices), migration, capital
flows and use of the land to search for evidence of international market integration, price
convergence and movements of productive factors in line with the economic theory.
Secondly, in general, the conceptual framework to understand the process has been
concentrated in the neoclassical approach of the theory of international trade and
specialization. This theory is a useful framework to understand many characteristics of the
process, but others are hidden behind the formation of prices.
Recent studies are attending both issues. In the first case, they are trying to improve the
quality and quantity of the data and estimating inequality directly by using information of
income and population of countries and regions. In the second case, the studies emphasize the
relation between economic growth and inequality in pre-industrial economies and some of
them introduce conditions associated with the productivity, technical progress, trade and
structural change.
This paper is part of these efforts to understand the effects of the First Globalization on the
economic growth and income distribution during the last decades of 19th Century and the first
ones of 20th Century. It is mainly conceptual as it aims to discuss some analytical approaches
useful for understanding the evolution of inequality in resource abundant economies during
1870-1920 and review some stylized facts of the period.
2
The outline of the paper is as follows. Section 1 reviews the literature about income
distribution in natural resource abundant economies during the First Globalization,
considering the construction of the data and the conceptual framework used to understand the
process. Section 2 considers different conceptual frameworks that may contribute to the
comprehension of the issue and proposes a model of analysis. Section 3 is tentative or
conjectural and aims to illustrate how the model works by using new empirical data for four
South American countries: Argentina, Brazil, Chile and Uruguay. Section 4 presents the
conclusions, the shortcomings of the analysis and the agenda.
1. First Globalization, performance and inequality: a review of the literature
The integration of the commodity and factor world markets during the first great globalization
boom was one of the more important processes of the world economy in the last two
centuries. Concerning the liberal dismantling of mercantilism and the transport revolution
worked together to generate global markets during the 19th Century.1 The decline in the
transport costs was permanent in the century, but there was an anti-globalization policy
reaction after the 1870s that was not large enough to cause a return to the 1820 levels of
economic isolation. Mass migration remained free by the end of the century (although the
immigrant subsidies disappeared) and global capital markets became steadily more integrated
as European investors believed in important growth prospects overseas.
The studies by Lindert, O’Rourke, Taylor and Williamson on globalization, growth and
inequality set a prolific line of research and debate about a topic that have a great importance
to understand the present time (Lindert & Williamson, 2001; O’Rourke, Taylor &
Williamson, 1996 a, b; O’Rourke & Williamson, 1994, 1999; Taylor & Williamson, 1997;
Williamson, 1995, 1996, 1999, 2000, 2004).
The standard Stolper-Samuelson Model predicts that free trade increases the incomes of
the abundant factor and reduces the incomes of the scarce factor. In a situation where labor
works the land and each economy takes the prices of the commodities as given by world
markets, the movements towards the globalization –through trade and commodity price
convergence– should favour the incomes of the workers (in relation to land-owners) where
labor is abundant and land is scarce and should favour relative incomes of land-owners where
labor is scarce and land is abundant. Considering that the incomes of the workers in laborabundant and land-scarce economies would be lower than the incomes of the workers in
labor-scarce and land-abundant ones, and that the contrary would happen with land owners, a
levelling of world incomes would result from globalization in a pre-industrial environment.
“The inequality-globalization connection in the nineteenth century
can be summarized this way: globalization seems to have had an
inegalitarian effect in (initially) land-abundant countries, a force raising
inequality by rewarding landowners more than workers; and
globalization seems to have had an egalitarian effect in (initially) landscarce countries, especially in those that stuck with free trade and
resisted pleas for protection. These two effects might appear at first
glance to cancel each other out when aggregating up to the Atlantic
economy as a whole. But a longer look tips the scales in favor of net
egalitarian effects when we note that European landlords at the top of
the Atlantic income distribution lost the most while European unskilled
1
Almost ¾ of the commodity price convergence was due to declining in the transport costs and the rest of the
change corresponded to the liberal policy switch (Lindert & Williamson, 2001).
3
workers at the bottom gained the most. A lot of the rest was simply New
World ‘churning’ in the middle.” (Lindert & Williamson, 2001:13).
The impact of mass migration strengthened this evolution. Real wages and living standards
converged in the Atlantic economy from the middle 19th Century to the WWI. The evolution
was driven by the reduction of the wage gap between the New and the Old World. Besides
many European nations, and primarily the poor ones, were catching up with the leaders in
Europe (industrial countries). Migration affected the long-run equilibrium output and wages
through aggregate labor supply, raised wages in the countries with high emigration rates and
dropped them in countries that received immigrants.2
Capital flows meant an anti-convergence force (in the sense of Lucas Paradox) because
they moved towards rich countries, not poor ones, to go in pursuit of abundant natural
resources, young populations and the (potential) abundance of human capital (Clemens &
Williamson, 2004).
Research about inequality trends within countries that participated in the global economy
has offered two kinds of evidence. On the one hand, the trends in the ratio of farm rents per
unit of acre to unskilled wage rate (R/W), an index that may be understood as a measure of
how many days an employee should work to pay the rent of a unit of land. This is an adequate
index of inequality movements in a world where the agricultural sector was large, and where
land was a critical component of total wealth and decisive factor in the income generation. In
other words, it informs us how the landlord at the top of the distribution did in relation to the
unskilled worker (without land) near the bottom. The other inequality evidence from factor
prices uses trends in the ratio of GDP per worker to the unskilled wage rate (Y/W), an index
that informs us how far the recipient of the average income was situated en relation to the
typical unskilled worker near the bottom of the distribution.
It is important to consider two shortcomings of this approach to make historical and long
run comparisons of globalization and inequality.
Firstly, and from an empirical point of view, the scarcity and fragility of consistent data,
even for a single country, is determinant to obtain satisfactory results. Data have often been
compiled from diverse sources –that implicates to assume the difficulties to work with
different methodologies– and have been used to create distinct types of series: real wage rates
(for urban unskilled labourers, habitually in the construction sector), land prices (in rural
zones), trade (the exchange of goods and the international prices of commodities), migration
(distinguishing region of origin and destination) and capital movements (financial and foreign
direct investment).
Secondly, and from a conceptual point of view, the framework to understand the issue has
been focused in the neoclassical approach of the theory of international trade and
specialization. Heckscher-Ohlin-Stolper-Samueslon theory is a useful framework to think and
interpret several features of the process, but others seem to be hidden behind the prices and
their evolutions. Particularly, productivity gains, the possibility to advance towards
unoccupied regions or to transform the specialization of inhabited zones, and the changes in
the economic structure have consequences beyond the considered in the usual approach.
2
Emigration raised real wage 8.6% in the Old World and immigration lowered it 12.4% in the New World. The
process was deeper for those countries that presented the highest migrations. Emigration increased Irish wages
by 32%, Italian by 28% and Norwegian by 10%, and immigration reduced real wages in Argentina, Australia,
Canada and USA by 22%, 15%, 16% and 8%, respectively (Taylor & Williamson, 1997, Table 3.4; O’Rourke &
Williamson 1999, Table 8.1).
4
Recent studies are facing the first point in two ways. On the one hand, they are trying to
improve the quality and quantity of data, elaborating new series (Bértola, 2000; Bértola,
Camou & Porcile, 1999 for Argentina, Brazil and Uruguay; Bohlin & Larsson, 2007, for
Sweden; Greasley & Oxley, 2005, for New Zealand) or considering the evidence in a manner
that is sensitive to the regional diversity (Emery, Inwood & Thille, 2007, for Canada;
Shanahan & Wilson, 2007, for Australia). On the other hand, the new studies are estimating
inequality and poverty in the long run (Prados de la Escosura, 2005, for Latin America) or
directly by using data from population and economic census and assigning income to active
persons depending on economic activity, profession, gender and region (Bértola, Castelnovo,
Reis & Willebald, 2007, for Brazil; Rodriguez, 2007, for Chile; Bértola, Castelnovo,
Rodriguez & Willebald, 2008, for the Southern Cone).
Other scholars are focusing on the second point, as they emphasize the relation between
economic growth and inequality in pre-industrial economies. The basic idea is that the level
of possible inequality depends on the level of per capita income, the subsistence level of the
majority of the population and the size of the elite that may appropriate the eventual surplus
(Lindert, Milanovic & Williamson, 2007). Besides, others works consider the evolution of the
productivity as the central concept, a process that depend on the interaction among technical
progress, changes in the productive structures and modifications in the demand pattern with
expressions in the trajectory of the international trade (Bértola, 2000).
2. Conceptual framework: analytical lines to understand the process
In this section, three analytical lines to discuss the incidence of the First Globalization in the
economic performance of economies with abundant natural resources are revised. They allow
evaluating three central aspects of our topic: the correlation between per capita income level
and inequality in pre-industrial economies; the interaction among globalization, gap
productivity, international trade and structural change; and the relationship among the
changes in relative prices, expansion of land frontier, income distribution, movements of
capital and de-industrialization.
The inequality possibility frontier: a first approach to the issue
An interesting and useful concept to study the income distribution in pre-industrial
societies is the “inequality possibility frontier” (IPF) presented in Lindert, Milanovic &
Williamson (2007).
If we suppose that each society has to distribute the total income in such a way as to
assurance the minimum of subsistence for the poorer classes, the remainder of the income is
the surplus that is shared among the richer classes. When the average income is very low and
slightly above the subsistence minimum, the surplus is small. Under these conditions, the
integrants of the high class will be few (a small “aristocracy”) and the level of inequality will
be low. When income increases, in accordance with economic progress, this restriction on
inequality is lifted, the surplus appreciates and the maximum possible inequality level is
greater (and compatible with the new mean income).
If we chart the locus of the maximum inequality income indicators (Gini Index for
example) in the vertical axis and mean income levels on horizontal axis, we obtain the IPF.
Graph 1 represents the relation assuming a minimum of subsistence equal to $PPP400
according to Maddison’s representation of primitive economies.3
3
The function is: G* = [(1-ε)/(αs)] s (α −1) =[(α – 1)/ α] (1-ε), where G* is the IPF for a certain level of per
capita income (μ) expressed as a multiple (α) of the subsistence minimum (s) (therefore α is the relation between
the average income and the subsistence income). And ε is the proportion of people belonging to a very small
upper class. ε is assumed one-tenth of 1% (ε =0.001).
5
The distance between the
actual inequality and the
maximum feasible inequality
signs how powerful and
extortionary are the elites,
their policies and, en general,
the institutional arrangements
that support their actions. A
measure of this distance is
called “extraction ratio” in
LM&W(2007).
Graph 1
INEQUALITY POSSIBILITY FRONTIER
0.90
0.80
Inequality Income (Gini Index)
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
0
400
800
1,200
1,600
2,000
2,400
2,800
Globalization,
transport
revolution and differentials
of productivity
Temperate regions –North
and South America, South
Africa and Australasia– received the effects of the economic boom associated with the
Industrial Revolution. Industrializing European countries required exploiting the cheap
natural resources of the New World and these regions needed importing capital and labour in
order to expand the capacity to supply resource-based products. The transport revolution was
a central factor to materialize both necessities in the end of the 19th Century (O’Rourke and
Williamson, 1994; O’Rourke, Taylor and Williamson, 1996b). The process drove important
changes in the productive and trade structure of the new settlement economies with
significant consequences in terms of economic growth and income distribution.
Source: Lindert, Milanovic & Williamson (2007):80.
Mean Income ($PPP)
The basic story may be illustrated in Graph 2 (Baldwin, 2006). The diagram represents the
New World (NW) sectors or activities along the horizontal axis, ordered according to their
competitiveness. The NW sectors most competitive are on the left (e.g. wheat, beef, wool)
and the least competitive are on the right (branches of manufacturing no based in natural
resources). What does competitiveness mean in this case? The curve A shows the productivity
of NW activities relative to rest of world, or Old World (OW) to be concrete. The curve is
assumed very high to the left because in these activities NW’s productivity is significantly
higher than the OW’s productivity. These activities are very competitive since they can afford
to set lower prices or produce higher quality for any given wage.
The actual NW/OW wage gap is
marked with the horizontal and
discontinuous
line
and
the
“borderline” activity is marked as
Z’. In this point the wage gap just
equals the productivity gap, so the
NW and the OW are equally
competitive in the sense that the
higher wages of the NW are
exactly offset by its superior labor
productivity. In all sectors where
the NW is more competitive than
Z’ (those to the left of Z’), the NW
activities can out-compete the OW
activities in terms of price and
quality, and the contrary when
Graph 2
FIRST GLOBALIZATION, TRANSPORT REVOLUTION
AND SECTORIAL PRODUCTIVITY
Wage and
Productivity
Gap
A/τ
"Losing"
activities
"Winning"
activities
"A" signs
NW/OW
technology
gap by
activity
Actual
w age gap
Aτ
Source: Baldwin (2006):17.
6
Zx
Z'
Economic
activities ranked by
comparative
ZM advantage (Z)
their productivity disadvantage is offset by the wage gap (right of Z’). However this reasoning
do not take into account one of the central features in the globalization: the trade costs. We
must adjust the productivity gap concept to represent them.
The cost of the NW commodities in the markets of the OW will be higher due trade costs,
so the NW’s productivity border in the OW market is dampened by trade costs. This is shown
by the curve marked as Aτ, where τ is a rate of trade costs. For the NW, the borderline good in
the OW market that includes trade costs is Zx. Trade costs have the same kind of effects on the
competitiveness of the OW’s goods in the NW market, which is shown by the curve A/τ and
the new borderline good is ZM. So we have a segment of non-traded sectors (ZX-ZM segment)
because NW activities will be more competitive than OW activities in the NW market while
the OW activities will be more competitive than NW activities in the OW market.
What happens when trade costs come down? The NW’s borderline competitive sector
shifts to the right, according to the displacement of Aτ until the new curve (the discontinues
and decreasing line), so NW’s production and exports rise in these sectors (“wining” activities
in the diagram) and, consequently, the activities are capable to hire new workers. The OW’s
borderline competitive activity shifts to the left and hence NW’s production in these
previously non-trade sectors gets downsized and replaced by imports (“losing” activities in
the diagram).
These notions offer two kinds of considerations useful to understand some aspects of the
evolution of the natural resource-abundant economies. On the one hand, the globalization
widens the differences between the wage gap and the productivity gap of competitive sectors
(assuming that initially the wage gap does not change) which may open the possibility of
considering modifications in the income distribution. On the other hand, the globalization
creates conditions for de-industrialization (Williamson, 2004). The NW looses activities that
could have developed under the protection of the distance and the impossibility of the primary
activities to transform high productivity in high international competitiveness.
The New World and the effects of globalization: a model
The economies of the New World participated actively in the expansion of the world
capitalism through the exploitation of abundant natural resources that allow maintaining an
export-oriented growth during the First Globalization period.
In every cases the stimulus to development came from expanding markets in the world
economy –usually expressed as rising prices– that led to an extension of the land frontier
internally, accompanied by considerable inflows of capital and labor immigration (not only
from outside the country but also from other regions within the political borders). The new
sectors or activities related to the production of primary exports generated additional demands
for capital and labor that were satisfied partially by foreign sources. Thus international and
inter-regional factor mobility were part of the story.
Findlay & Lundahl (1994, 2001) present a simple model that captures the structural pattern
of the process to integrate the vision of “vent-for-surplus” and “staples” theories (Chambers
and Gordon, 1966; Innis, 1930, 1940; Myint, 1958; Smith, 1976; Southey, 1978; Watkins,
1963; Wellstead, 2007) and to characterize the endogenous land frontier as a central issue.4
The core of the formalization is the so-called Ricardo-Viner “specific factors” model,
which was itself influenced by works of Jones (1971) in the staples theory tradition. The
technology is represented by the constant returns to scale production function for Primary
4
In a recent article, Harley (2007) arguments about the importance to incorporate a frontier centred perspective
in the analysis of the First Globalization.
7
Products (A) and Manufactures (M):
A=A(N, LA)
(1)
M=M(KM, LM)
(2)
Where:
N: input of natural resources specific to A (“land”).
KM: input of capital to M.
Li: input of labor to sector i, with i=A, M.
L= LA + LM
(3)
KM is assumed as a perfectly elastic supply in the long run at interest rate ρ, which is
determined by domestic time preference. KM consists of an accumulated stock of M (a good
that can be either consumed or invested). N is determined by an endogenous frontier and may
be increased by incurring in a rising marginal cost in terms of capital:
KA = φ (Ν)
(4)
With φ’(N) > 0 and φ’’(N) > 0. φ’(N) is the marginal cost of “clearing” a unit of land.
φ (Ν) is a convex function of the amount of land that is cleared.
If we adopt M as the numeraire we have:
p= PA / PM: the relative price of A.
w= W / PM: the real wage.
We can write the production function for M in intensive form:
m=m(k)
(2)’
And the condition of maximization is: m’(k)= ρ
(5)
Where k* that satisfied (5) also determines the equilibrium real wage:
w* = m(k*) - m’(k*) k*
(6)
That is, the retribution to each unit of labour in the M sector is the difference between the
product generated in the activity (equivalent to the income) and the capital cost (in intensive
terms). The latter is the multiplication between the price of the capital (its marginal
productivity) and the amount of capital applied to the production.
Analogously, we can write the production function for A in intensive form:
a=a(n)
(1)’
Where:
a: output per worker in the A sector.
n: land per worker in the A sector.
a’(n): marginal productivity of land; with a’(n) > 0 and a’’ (n) < 0.
Assuming perfect competition and free mobility between sectors for labor:
w* = pa - p[a’(n) .n] = p[a-a’(n) n]
(7)
That is, the retribution to each unit of labour in the A sector (the same that M) must be
equal to the difference between the value of the product generated in the sector and the cost of
the land (in intensive terms). The last is the multiplication between the rent of the land (the
8
value of the marginal productivity) and the amount of land utilized in the activity. To each
value of p corresponds a unique value of n and therefore a unique value of marginal
productivity of land a’(n).
How is the extension of the frontier (and the amount of land) determined? In the long run,
the rate of return on clearing land (relation between the marginal income and the marginal
cost on clearing land) must be equal to the rate of interest (the opportunity cost):
[p a’(n)] / φ’(N) = ρ∗
(8)
According to (7), a rise in p leads to a fall in n to restore the level of wage w*, and it
follows a rise in the numerator of (8) since the marginal physical productivity of a unit of land
a’(n) rises in response to the increasing in p (a’’ (n) < 0). As φ’’(N) > 0, there must be a rise
in N to hold the equilibrium in (8). We have proved that:
N = N (p) and N’(p) > 0
(9)
That is, the extension of the frontier is an increasing function of p.5
Since to each p corresponds a unique n(p) and N(p) it follows that it also determines a
unique LA and therefore A. Since N’(p)>0 and n’(p)<0 from (7) it follows that LA and N are
increasing functions of p:
A = A(p); A’(p) >0
(10)
Where (10) represents the supply curve of A.
From (3) the value of LA corresponds to a unique value of LM as well.
Since k* is determined uniquely by (5) we know KM and hence M as well. We obtain:
M = M (1/p); M’ (1/p)>0
(11)
Where (11) represents the supply curve of M (a positively sloped curve that depend on its
own relative price; the reciprocal of p).
Assuming that consumers have identical and homothetic indifference curves we may
define demand functions:
AD = AD (p, Y)
(12)
δ AD / δ p < 0; δ AD / δ Y > 0
MD = MD (1/p, Y)
(13)
δ MD / δ (1/p) < 0; δ MD / δ Y > 0
Where Y is the national income and may be expressed:
Y ≡ w (LA + LM ) + ρ ΚΜ + q N
(14)
With q ≡ p a’(n): rental per unit of land. 6
(15)
Y is a representation of the functional income distribution of the economy.
From (10) and (12) we may determine the full general equilibrium of the closed economy:
EA (p) = A(p) – AD (p); E’A (p) >0
(16)
The equilibrium corresponds to the value p* of p that satisfied: EA = 0
(17)
5
The increasing in p would create the economic incentives to expand the quantity of land incorporated in the
production.
6
The rental per unit of land is equal to the value of the marginal productivity of land.
9
The endogenous expansion of the frontier and income distribution
We can now imagine that the economy is being opened to the rest of the world. The impact
may be represented by a rise in the relative price of primary products from p* to a higher
level p̂ (the shifts to the right of Aτ curve and to the left of A/τ curve in Graph 2). Initially, the
economy is considered “small” so the price is determined by the conditions of the world
market.
Since p rises, basically the economy moves up the excess supply function (16) and the
effects are summarised bellow, with the asterisk denoting the closed economy value and the
circumflex accent denoting the free trade equilibrium after the opening to trade.
Nˆ > N*
Lˆ A > LA*
Aˆ > A*
qˆ > q*
Lˆ M < LM*
Kˆ M < KM*
Mˆ < M*
The rise in p increases LA and reduces LM and therefore A increases and M falls. According
to (15) the increase in p and LA raises the rental per unit of land (q), and this leads to the
increase in the numerator of (8) and so the rate of return on the extension of the frontier. To
compose the equilibrium N has to increase to raise the marginal cost of a unit of land [φ’(N)]
relative to the rental.
The additional land pulls even more labour out of manufacturing and into primary
activities. The interest rate (ρ∗) and wage rate (w*) remain constant so the capital-labor ratio
in M do not change (k*), hence the stock of capital (KM) must reduce proportionally to LM (the
New World loses manufacturing activities as in the Graph 2).
What happens with the functional income distribution? Since w, ρ and L remain
unchanged, KM decreases and q and N increase, it is clear that exists a new distributive
pattern. It is characterized by a higher share on the national income of earnings derived from
the tenure of land and a smaller share of the earnings derived from labour and capital
ownership. Considering that land owners are a minimal proportion of the population (a small
“aristocracy”, represented by ε in Graph 1) the last changes in the income distribution mean a
worsening in terms of inequality.
What happens if the increase in LA is so large and the initial LM so small, that the former
goes over the latter? The demand for labor will exceed the available supply at the wage w*
and an inflow of foreign labor will be required even if the economy is to be completely
specialized on primary activities (or in the case the exhaustion of the frontier). In this case,
any inflow of labor beyond this level will leave the output of A unchanged (A*) and only will
serve to increase LM, KM and M in the same proportions. The fast extension of the frontier
requires an influx of labour, which was the situation of the most of the economies of the New
World with abundant natural resources.
The endogenous expansion of the frontier and the capital movements
The opening of the economies of the New World in the 19th Century meant considerable
inflows of capitals that drove down the interest rate. How can we represent this process?
10
Following Findlay & Lundahl (1994, 2001), we assume a fall in the real interest rate from
the level ρ corresponding to a closed economy to ρ~ corresponding to open economy.7 From
(5) we note that a lower interest rate corresponds with a higher value of the capital-labor ratio
~
~ ). Since p remains unchanged,
in manufactures ( k ) and, from (6), with a higher real wage ( w
from (7) we see that the rise in w must increase the marginal physical productivity of labour
in A or equivalently the land-labor ratio must rise in the sector.
What happen with our “crucial” condition (8)?
If N maintains constant left-hand side of (8) will fall in proportion to p a’(n); that is, in
proportion to the value of marginal productivity of land in A or, in short, according to the
rental per unit of land q. If q falls less than proportionally to ρ will be necessary an increase in
N to raise φ’(N) to recover the equilibrium. That is, if the rental per unit of land falls less than
proportionally to the real interest rate will be convenient to extend the frontier until the rate of
return on clearing land makes equal to the interest rate.
It is possible that the rise in the land-labor ratio (n) in sector A drives to a fall in LA and an
increase in LM. Since KM is higher in sector M (because k is higher too) the manufacturing
production grows. Which is the effect in primary production? It is ambiguous because even if
N increases, LA falls and may result in a lower output. If the increase in the land compensates
the fall in the labor we may wait a raise in A and consequently a general expansion. In this
scenario the decline in the interest rate leads a raise in M, associated with the deepening of
capital, and an increase in A related to the extension of the frontier.
What happens with the functional income distribution? Since w rises and L remains
constant the workers would initially improve their share on the national income, but the
changes in the capital and the rental components are ambiguous. In the first case, since ρ falls
and KM rises we have two opposite effects. In the second case, the modification in the rental
component depends on the specific characterization of the relations of the system.
A general view of the framework
According to the IPF approach, pre-industrial economies present a relation between
income and inequality which depends on the development of the economy, the level of
subsistence and the power of the elite. The difference between the maximum level and the
current level of inequality represents the capacity of the elite to create the institutional and
political conditions to enforce its socio-economic interests and extortive actions.
During the First Globalization, the exploitation of abundant natural resources allowed to
the economies of the New World to participate in the “global” market on the basis of an
export-oriented growth. In every cases the incentives to development came from the
expansion of world markets, a process characterized by increases in the trade of goods and
considerable inflows of capital and labor.
Technical progress –especially in communications and transports–, the differences in terms
of sectorial productivities and the evolution of the terms of trade reinforced the specialization
in primary production in the New World and in manufacturing activities in the Old World.
The reaction of the natural resource-abundant economies was the extension of the land
frontier, a process that was accompanied by important international and domestic movements
of labour. The growth of the economies included relevant modifications in the functional
income distribution that meant an increasing inequality that improved the position of the top
classes (the owners of land) and worsened that of the bottom ones (unqualified workers).
7
We will ignore the effects in the balance of payments and the ownership of financial resources.
11
International capital inflows drove anti-convergence forces, economic growth in the New
World and effects on the income distribution that depend on the magnitudes of the
movements of the variables. The economic growth may present a general sectorial expansion
with increasing product in primary and manufacturing production, although it depends on the
features of the system.
3. Some stylized facts
We present some stylized facts of the evolution of some economies of South America during
the First Globalization to illustrate the implications and predictions of our conceptual
framework. We work with new and recent evidence on the economic performance and income
distribution in Argentina, Brazil, Chile and Uruguay for the period 1870-1920,8 and different
data from diverse sources that represent the process.
Considering the main objectives of the paper, we will concentrate on evaluating evidence
on four main aspects. Did income inequality rise in the natural resource-abundant economies
during the First Globalization? Did the frontier expand during the period according to the
development of certain productive activities? Did globalization consolidate a primary
productive structure that meant de-industrialization? Could capital movements moderate the
last effect?
A view of the South American countries: economic performance during the First
Globalization
Argentina and Uruguay were relatively empty regions in the mid-19th Century. The
expansion of foreign trade during the second half of the century meant strong incentives for
economic growth based on staples exports. Argentina exported wool, hides and salted meat in
the 1870s, wheat, corn and linseed around the turn of the century and frozen meat later
(Rapoport, 2007; Vitelli, 1999). Uruguay drove a similar evolution although the cereal
exports were less important (Millot & Bertino, 1991, 1996). The land frontier was
continuously expanding during the period and, in this process, a distributive patter of land
with high levels on inequality was consolidated.
The expansion was complemented by massive immigration from southern Europe,
encouraged by the attractive economic conditions and the own necessity of landowners and
governments in populating the wilderness, to transform unproductive regions in zones
incorporated into the world capitalism. The trajectory among the different staples needed the
incorporation of a mass of population that was impossible to achieve with the aid only of the
domestic people (the natural growth of the population). Besides both countries received
substantial inflow of capital from Europe, especially from Britain, that resulted appropriated
for the development of infrastructure (railways, ports, roads) and activities that made easier
the transport and trade of primary resources.
Brazil is a country with a continental size (5th in the world) with an area of about 8.5
million km2. Usually, the Brazilian economy is described as a number of islands, with its
main regions having closer links with international markets than with other regions of the
country. The agriculture of coffee has been mainly limited to the Southeast, migrating from
the neighbourhood of Rio de Janeiro along the Paraiba valley in the direction of São Paulo
after the middle 19th Century. Minas Gerais became an important producer in the turn of the
century. Sugar cane production and cotton agriculture were concentrated in the Northeast
until the 1930s and rubber was produced in the Amazon region. The South presented weak
8
The data was elaborated by the Income Distribution in Historical Perspective – Uruguay Group (IDHP-UG),
directed by Prof. Luis Bértola.
12
links with the core coffee economy and traditionally produced hides, skins and jerked beef,
and later on timber and matte (Abreu & Bevilaqua, 1996).
For Brazil as a whole European immigration was less significant than in Argentina. In
1889-1928, the foreign born averaged little more than 5% of the population and peaked at
6.2% in 1900. In Argentina, the average was around 25% per cent and the peak around 30%
in 1914. But the regional differences were enormous. São Paulo concentrated a high
proportion of immigrants with values that were well above those of Argentina. Between 1884
and 1913, there were 2.7 million immigrants, of whom nearly half were Italian, 0.7 million
Portuguese, and 0.4 million Spanish (Maddison, 2004).
Chile is historically identified with the mineral production. From 1870 to the WWI the
Chilean economic growth was characterized by the boom of the sodium nitrate (the “Chile
saltpetre”), a production that substituted the cooper, which had been the principal staple
export in the middle 19th Century. Traditionally, the nitrate production has been understood as
an enclave activity, where the industry presented weak links with the rest of the economy, the
production depended on foreign capitals and the fiscal incomes were wasted by a small elite
(Frank, 1969; Denoon, 1983).
However other visions consider that the mineral production meant an important impulse
for Chilean economy, because it generated commercial and productive linkages, expanded the
domestic market, made possible the growth of public services (Cariola & Sunkel, 1982) and
financed the industrial development before 1930s (Pinto & Ortega, 1990).
The debate is not closed but it is clear that the specialization of the economy in mineral
production was the dominant feature during decades and this shaped the productive structure,
the trade and the relations of the political and economic power.
Increase in relative price
Williamson (2000) reports
that the relation between the
prices of agricultural and
manufactured goods rose
more in the land abundant
periphery than in the land
scarce center (Table 1).
While the ratio increased
20.5% in land scarce Europe
and 14.4% in land scarce East
Asia from the early 1870s to
WWI, it raised 22.2% in the
New
World
(including
Argentina and Uruguay) and
27.2% for the Third World
(without
Argentina
and
Uruguay).
Table 1
GLOBAL CHANGES IN ARGRICULTURAL/MANUFACTURED
PRICES RATIO
In percet
Region
Land Abundant New World
With Argentina and Uruguay
Without Argentina and Uruguay
Land Abundant Third World
With Argentina and Uruguay
Without Argentina and Uruguay
Average Land Abundant Countries
Land Scarce Third World
Land Scarce Countries
Average Land Scarce Countries
Early 1870s
to WWI
Early 1890s
to WWI
22.2
-0.2
30.2
17.7
40.5
27.2
24.2
31.6
22.9
27.0
14.4
20.5
19.7
22.7
9.0
12.0
Source: Williamson (2000): 39, Table 2.
There isn’t disposable data for Brazil and Chile but the evolution of the term of trade may
be considered as an adequate proxy because all countries were exporters of primary products
during the First Globalization –animal (as Argentina and Uruguay), vegetal (as Argentina and
Brazil) and mineral products (Chile)– and importers of manufactured ones (Graph 3).
13
Graph 3
TERMS OF TRADE
1870-1930, 1911=100
BRAZIL
ARGENTINA
150
180
130
160
110
140
120
90
100
70
80
50
1870 1877 1884 1891 1898 1905 1912 1919 1926
60
1870 1876 1882 1888 1894 1900 1906 1912 1918 1924 1930
CHILE
URUGUAY
250
170
210
150
130
170
110
130
90
90
70
50
1870 1877 1884 1891 1898 1905 1912 1919 1926
50
1870 1876 1882 1888 1894 1900 1906 1912 1918 1924 1930
Source: Williamson (2001).
The evolutions were different into the group, but since the last third of the 19th Century all
economies received the incentives associated with the improvements in the terms of trade
(earlier for Brazil and Uruguay than Argentina and Chile). They were capable to participate in
the international markets with staple exports that found the dynamic demand of the industrial
centre. This was one of the more evident impacts of the globalization in primary producer
economies and natural resource-abundant countries.
Worsening of the income distribution
Was the impact of the globalization a movement that get worse the income distribution in
the natural resource-abundant economies? The new evidence confirms the previous one in the
sense that “within labor-scarce countries, opening up to international trade and to
international factor movements raised inequality, a powerful effect before 1914 where
immigration was massive.” (Lindert & Williamson, 2001: 1-2).
Prados (2005) provides an heuristic exercise in which available Gini coefficients (for the
second half of the 20th Century) are projected backwards with the “inequality ratios” to
present a conjectural view of long-run inequality trends for Latin American countries (Graph
4).9 With the exception of Brazil –that presented a significant increasing in the inequality after
WWI– the rest of the countries showed a worsening of the income distribution.
The recent –and even provisional– data provided by IDHP-UG shed new light on this
9
Gini coefficients projected backwards with inequality indices constructed as the ratio between unskilled wage
indices and GDP per worker with 1913=1 (Prados, 2005: 25).
14
matter. Table 2 presents the inequality indices –generalized entropy indices, GE(0) and
GE(1), and the Gini Index– of Argentina, Brazil, Chile and Uruguay for c.a. 1870 and 1920.
All indices show that the income distribution would have worsened from the 1870s to the
second decade of 20th Century.
Graph 4
Considering the evolution of
INEQUALITY INDICES
the Gini Indices, Argentina and
Gini coefficients projected backwards with
Uruguay presented a similar
"inequality ratios" / 1850-1913
70
trajectory (from around 0.50 to
0.56-0.57), the inequality rose
60
in Chile beginning from high
50
levels (0.59 to 0.64) and Brazil
40
evidenced
the
deepest
worsening of the group (an
30
impressive
increase
from
20
almost 0,40 to 0,60).
Argentina
Brazil
Chile
Uruguay
10
The IPF approach of
0
LM&W(2007) offers an initial
1850
1860
1870
1880
1890
1900
1913
view of the process. Graph 5
Source: Prados (2005):39.
shows the theoretical curve and
the Gini indices estimated. The
indices of Brazil report a situation where the inequality caught the maximum levels according
to the mean income in the 1870s,
Table 2
and this condition persisted while
INEQUALITY INDICES
the economy evidenced low
ARGENTINA, BRAZIL, CHILE AND URUGUAY
Entropy and Gini indices - c.a. 1870 and 1920
growth rates.10 Argentina and
Argentina
Brazil
Chile
Uruguay
Uruguay present a different
GE(0)
distributive pattern. The low
1870
0.51
0.26
0.71
0.42
levels of inequality of the 19th
1920
0.65
0.72
0.89
0.62
Century showed an important gap
GE(1)
with the IPF and the distance
1870
0.48
0.25
0.64
0.40
continued been significant after
1920
0.59
0.65
0.78
0.57
the
WWI,
although
with
Gini
dissimilar
evolutions.
The
1870
0.52
0.39
0.59
0.48
extraction ratio fell in Argentina
1920
0.57
0.60
0.64
0.56
(from 0,75 to 0,65) and grew in
Source: Bértola et al (2008):22.
Uruguay (0,59 to 0,66) showing a
reduction of the disparity between both indicators. Finally Chile constituted an intermediate
situation with a gap between the actual and the maximum level that resulted decreasing but
maintaining in high levels. Therefore initially we may identify two regimes. One of them
characterized by a distributive pattern that persisted in the time with low equity –Brazil and
Chile– and, the other, by a distributive pattern that registered changes and seems “to
converge” in equity terms (Argentina and Uruguay).
Two hypotheses immediately emerge because the institutional and productive features are
different between both groups of countries. In the first case, both economies presented highly
concentrated ownership regimes and, one of them –Brazil–, extensive modalities of forced
labor (specially in the coffee production until 1888, the main exporter good of the economy).
The economic structure was based in “plantations” (Brazil) and mineral production (Chile)
10
Per capita GDP of Brazil grew 35% between 1870 and 1920, a growth rate higher that the Uruguay’s one
(23%), but significantly lower than the Argentina and Chile’s ones (165% and 115%, respectively).
15
that, in general, are associated with adverse conditions of equity and growth in relation to
economies specialized in cropland and livestock production (Auty, 2001; Isham, Woolcock,
Pritchett
&
Busby,
2003;
Woolcock, Pritchett and Isham,
Graph 5
INEQUALITY POSSIBILITIES FRONTIER
2001)
Theoretical Curve and Gini Indices estimated
The Lorenz Curves show a
more complete view of the
changes (Graph 6). The expansion
in the inequality from 1870 to
1920 did not implicate “breaks” in
the distribution, but changes that
increased the distance between the
top and the bottom of the
distribution. The distance between
the income of the 10th decile in
relation to the 1st decile multiply
by 3.6 in Argentina, 5.8 in Brazil,
1.7 in Chile and 5.4 in Uruguay
from the 1870s to the 1920s.
1.0
CHILE
0.9
0.8
Gini Index
1920
0.7
1870
1920
0.6
BRAZIL
0.5
1920
1870
1920
0.4
1870
0.3
URUGUAY
0.2
1870
ARGENTINA
0.1
0.0
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
Source: LM&W(2007):80; Bértola et al (2008):22
Graph 6
LORENZ CURVES: ARGENTINA, BRAZIL, CHILE AND URUGUAY
1870 and 1920
BRAZIL
1.0
0.9
0.9
0.8
0.8
0.7
0.7
% of Income
% of Income
ARGENTINA
1.0
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0.0
0.0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
% of Population
% of Population
CHILE
URUGUAY
1.0
0.9
0.9
0.8
0.8
0.7
0.7
% of Income
% of Income
1.0
0.6
0.5
0.4
0.6
0.5
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0.0
0.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
1.0
% of Population
1870 figures.
% of Population
1920 figures.
Source: Bértola et al (2008): 24 (Appendix Table 1).
16
3,600
Income per capita
4,000
Expansion of the land frontier
The modifications in the distributive pattern were accompanied by the extension of the
frontier, the settlement of population in “new” regions and movements into inhabited zones.
In this sense, the concept of frontier expansion includes two possibilities. On the one hand,
the traditional idea of exploitation of “new resources” that led to increase economic growth
and, on the other hand, the “land conversion” associated with the introduction of new and
relevant productions in regions where already existed economic activities (Barbier, 2003:16).
Figure 1 represents the land frontier expansion comparing the population density by large
regions of Brazil (Center-West, North, North-East, South, South-East), Chile (North, Center,
South), Argentina (North-West, North-East, Cuyo, Pampa, Patagonia) and Uruguay. The
references in the map distinguish three groups of regions depending on the population
density: less than 2 inhabitant by km2 (clear grey), between 2 and 4 inhabitant by km2 (grey)
and more than 4 (dark grey).
Figure 1
POPULATION DENSITY BY LARGE REGIONS (1870)
17
Figure 1 (Cont.)
POPULATION DENSITY BY LARGE REGIONS (1920)
The relation between the localization of new economic activities and the settlement and
movements of the population is clear.
In Argentina, the development of the staple production was localized in the Pampa, a
region particularly appropriate for livestock and crops production due the conditions of the
climate and the soils. Uruguay presented a comparable evolution and the population density
of both regions in 1920 reflects these similarities in the productive pattern (Table 3).
In Brazil is evident the coastal development of the economy but it is important to attend
the dynamic of the process because the South and South-East regions presented the quickest
growth in the indicator. In the first case, the population density was multiplied by 4 –probably
associated with behaviour similar to the settler economies as the Pampa and Uruguay– and, in
the second case, by more than 3 –reflecting the boom of the coffee production.
18
Table 3
POPULATION DENSITY BY REGIONS
Inhabitants/km²
1870
1920
ARGENTINA AND URUGUAY
North-West
North-East
0.7
0.5
2.0
2.0
1870
1920
BRAZIL
Center-West
0.2
0.5
1870
1920
CHILE
North
0.8
1.7
Cuyo
0.5
1.8
Pampa
1.3
7.9
Patagonia
0.0
0.2
North
0.1
0.4
North-East
3.1
6.6
South
1.3
5.3
South-East
4.0
12.8
Center
14.2
22.0
South
1.1
3.3
Uruguay
1.9
7.8
Regions include several provinces and states. See Appendix for details.
Sources:
Argentina: Gerchunoff y Llach (2003); Gerchunoff (personal communication); Maddison (2001).
Brazil:Census of Population (1872, 1920).
Chile:Cariola & Sunkel (1982): 118 (Cuadro 2) and 125 (Cuadro 7).
Uruguay: Maddison (2001) based in Bértola (1998).
Chile presented a different demographic pattern because the population was historically
concentrated in de “núcleo central” (Santiago) and showed high urbanization rates. The
frontier expansion seems more important to the South than to the North and, probably, this
evolution is not independent on the “special” circumstances of the northern expansion. The
last was associated with an armed conflict between Chile, on one side, and Peru and Bolivia,
on the other, that ended with the incorporation of those lands with their rich nitrate deposits
(the “Guerra del Pacífico”, 1879-1884). Probably, the initial unstable political conditions
related with the conflict and the climatic and geographic conditions of a desert zone were
little attractive for population settlement. Besides, in the cases of mineral producer
economies, the “frontier” extends vertically downwards rather than been horizontally
extensive as in the case of livestock and agriculture (Findlay and Lundahl, 1999: 26).
Consolidation of the primary export structure
What happened with the productive structure of the economies with abundant natural
resources during the First Globalization? The economies consolidated the primary-exporter
structure after 1870s and this was the predominant configuration, at least, until the 1930s.
Argentina
Table 4
EXPORTS CLASSIFIED BY PRODUCTS: ARGENTINA AND URUGUAY
and
Uruguay
Shares on total exports – Averages – Current Value Prices
showed a firm
Argentina
Uruguay
specialization in
Livestock Agriculture
Others
Livestock Agriculture
Others
livestock
and
products
products
products
products
products
products
1870-1874
96.8%
0.0%
3.2%
81.3%
0.0%
18.7%
crops products
1875-1879
95.3%
2.8%
1.9%
78.6%
0.0%
21.4%
with an average
1880-1884
89.2%
6.5%
4.3%
83.6%
0.0%
16.4%
1885-1889
80.4%
16.7%
2.9%
80.1%
0.0%
19.9%
share in their
1890-1894
66.5%
28.8%
4.7%
76.4%
0.0%
23.6%
exports between
1895-1899
64.2%
31.1%
4.7%
82.6%
0.0%
17.4%
1900-1904
48.8%
46.5%
4.7%
81.6%
0.0%
18.4%
1870 and the
1905-1909
39.2%
57.6%
3.3%
83.1%
0.0%
16.9%
WWI of 96%
1910-1914
45.1%
50.7%
4.2%
86.0%
3.0%
11.0%
and
82%,
Livestock and agriculture products include goods with very low manufacture. See Appendix.
respectively.
Source: Rapaport (2007); Moraes (2001).
Argentina
evidenced important changes into the agriculture sector, with an increasing share of
agriculture products (cereal production) in contrast with a decreasing share of livestock goods
19
(an evolution closely related with the land frontier expansion). On the contrary, Uruguay
maintained a stable specialization in the last ones (Table 4).
The exporter structure of Brazil was absolutely dominated by products from the agriculture
(Table 5) and only four of them represented 82% of the total exports in 1870-1919 (and only
one product, the coffee,
almost 60%). Besides,
Table 5
EXPORTS CLASSIFIED BY PRODUCTS: BRAZIL
Brazil had consolidated
Shares on total exports – Averages – Current Value Prices
its world leadership in the
Coffee
Sugar
Cotton
Rubber
Others
production and export of
1850-59
48.7%
21.3%
6.3%
2.2%
21.5%
coffee and rubber from
1860-69
45.9%
12.3%
17.7%
3.1%
21.0%
the turn of the Century.
1870-79
56.3%
11.8%
9.7%
5.5%
16.7%
1880-89
60.5%
10.6%
4.4%
7.6%
16.9%
Finally,
Chile
1890-99
65.4%
6.1%
2.5%
14.2%
11.8%
presented an exporter
1900-09
53.1%
1.5%
2.3%
25.6%
17.5%
1910-19
52.1%
2.4%
1.7%
16.4%
27.4%
structure
based
on
mineral production (Table
Source: Abreu & Bevilaqua (1996):9
6). The share of mineral
exports on the total exports was increasing passing from almost 60% in the 1870s to 90% in
the beginning of the Century. The nitrates were the dominant goods and Chile got the world
leadership in the international market until was displaced by the synthetic products.
Evidence of the consolidation of an exporter structure based in natural resources may be
understood as the result of the specialization induced by the gap productivity between the
New and the Old World and
Table 6
the impact of the reduction in
EXPORTS CLASSIFIED BY PRODUCTS: CHILE
Shares on total exports – Averages – Current Value Prices
the transport costs (in the
Baldwin sense). The high
Mineral
Agricultural Manufacturing
Others
productivity
of
primary
62.6%
23.4%
0.0%
14.1%
1850-59
activities
can
be
transformed
1860-69
67.7%
27.1%
0.0%
5.1%
1870-79
59.4%
36.2%
0.8%
3.6%
in
international
1880-89
83.2%
13.0%
3.8%
0.0%
competitiveness
with the
1890-99
84.7%
12.2%
3.1%
0.0%
1900-09
90.0%
8.0%
2.0%
0.0%
technical progress but, in
1910-19
84.9%
11.6%
3.6%
0.0%
contraposition,
the
New
World
lost
sectors.
Several
Source: Braun, Braun, Briones & Díaz (1995):167-168, Table 5.7
manufacturing and handicrafts
activities (or agricultural in the Chilean case) gave up being competitive and were substituted
by imported goods.
Capital
movements,
decline of interest rate
and…
deindustrialization?
Very little of the
European
foreign
investment just prior to
WWI went to poor, capitalscarce and labour-abundant
countries. About two-thirds
of
British
foreign
investment went to the
labour-scarce New World
Table 7
EUROPEAN FOREING INVESTMENT BY GREAT REGIONS
Shares on total - 1913-1914
Destination
Eastern Europe
Western Europe
Europe (not specified)
Total Europe
Latin America
North America and Australasia
Other New World (not specified)
Total New World
Asia and Africa
Total
Britain
France
Germany
3.6
1.7
0.5
5.8
20.1
44.8
2.8
67.7
26.5
100.0
35.5
14.9
3.3
53.8
13.3
4.4
0.0
17.7
28.4
100.0
27.7
12.7
5.1
45.5
16.2
15.7
2.1
34.0
20.5
100.0
Source: Clemens & Williamson (2004): 305, taken from O'Rourke and Williamson (1999):229.
20
where only a tenth of the
world’s population lived. Only
about a quarter of it went to
labour-abundant Asia and
Africa where almost two-thirds
of the world’s population lived
(Table 7).
Table 8
FOREIGN INVESTMENT PER CAPITA AND AS A PERCENTAGE OF GDP
Latin American countries ca 1913
Per Capita (1900 US dollars)
FI
Argentina
Brazil
Chile
Colombia
Cuba
Guatemala
Honduras
Mexico
Paraguay
Peru
Uruguay
Venezuela
266
62
119
10
175
62
50
92
35
40
172
17
Loans
and RR
216
44
67
7
83
58
36
49
21
25
138
13
OFDI
50
18
52
4
93
4
13
43
15
15
35
4
As Percentage of GDP
FI
Loans
OFDI
and RR
248
201
47
270
189
81
205
115
90
27
17
10
138
65
73
166
154
12
156
114
42
186
100
86
86
50
36
119
74
45
162
129
33
93
68
25
The preferred destinations
were Latin America (20%),
North America and Australasia
(45%) and, in the first case,
Argentina, Brazil, Chile and
Uruguay
were
places
particularly
attractive
for
foreign
international
FI: Foreing Investment; RR: Railroads; OFDI: Other Foreing Direct Investment.
investment (Table 8). In per
Source: Twomey(1998): 6, Table 4.
capita terms, Argentina, Chile
and Uruguay were ranked in
the first four places and, in relation
to the GDP, Argentina, Brazil and
Graph 7
BRITISH CAPITAL EXPORTS CLASSIFIED BY RECEPTOR
Chile were in the top-3 of the
5 year accumulated data, ₤000, Index 1865-1879=100 (log)
ranking.
10000
Considering only the British
Argentina
Brazil
capital exports to our four
1000
countries, the increasing trend of
the flows was not uniform and the
100
symptoms
of
overborrowing,
sudden stops, defaults and crises
have been evident from the
10
beginning of 19th Century. The
investment flows were large during
1
some periods but they were always
1865- 1870- 1875- 1880- 18851869 1874
1879
1884 1889
volatile. The 1870s and 1890s
Source: Stone (1999), Tables 3, 7, 14 and 22.
crisis mark two breaks in the trend
and two weaves of different
amplitude in the foreign investment (Graph 7).
Chile
18901894
Uruguay
18951899
19001904
19051909
19101914
“A new investment boom began in the 1880s, bigger than before, as
the global depression receded and economic activity, and especially
trade, recovered […] After an intervening global depression in the
1890s, and a particularly nasty financial and macroeconomic crisis
centered on the River Plate, this investment boom was to resume with
even greater vigor from 1900 to 1914, at least for the nations lucky
enough to have access to the market […] It was soon quite clear that the
regional distribution of the investment was to favour only a few
countries, namely those that prospered the most in the new trade boom.
In the 1880s capital inflows to the region were concentrated in just 5
countries: 37 percent in Argentina, 17 percent in Mexico, 14 percent in
Brazil, 7 percent in Chile and 5 percent in Uruguay”.(Taylor, 2003:10).
21
The evolutions were similar into the group but the composition of the capitals was
different and shows the main features of the productive structures. Graph 8 represents the
evolution of the British capital exports to our four countries classified by (broad) industrial
composition: Government (Gov), Railways & Utilities (R&U), and Economic activities (Eco.
Act.). 11
Graph 8
BRITISH CAPITAL EXPORTS CLASSIFIED BY INDUSTRIAL COMPOSITION
10 year accumulated data, 1874-1914, share on total by main destinations
100%
ARGENTINA
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
1874 1878 1882 1886 1890 1894 1898 1902 1906 1910 1914
0%
1874 1879 1884 1889 1894 1899 1904 1909 1914
100%
BRAZIL
CHILE
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
1874 1879 1884 1889 1894 1899 1904 1909 1914
URUGUAY
0%
1874 1878 1882 1886 1890 1894 1898 1902 1906 1910 1914
Source: Stone (1999), Tables 3, 7, 14 and 22.
In the average of the period, the share of the government on the total capitals was almost
the same in Argentina and Uruguay (31%) and the capitals directed to the construction of
infrastructure and public services were absolutely predominant. The latter constituted
activities that were essential to the international trade of commodities such as wool, crops and
beef and determinant to the international competitiveness of both economies (Table 9).
The share of the government was almost the same in Chile and Brazil (46%-47%) and the
relevance of railroads and utilities was significantly lower than Argentina and Uruguay. On
the contrary, the relative importance of the capitals directed to economic activities was higher
showing the foreign interest in mineral production and plantations.
11
The classification includes the following categories: i) Government: colonial, provincial and municipal
government securities of the Empire and the securities of independent national government; ii) Railways &
Utilities: railways, electric lighting and power, tramways and omnibus companies, telegraphs and telephones,
canals and docks, gas and waterworks companies; iii) Economic activities: financial companies (banks and
discount; financial, land and investment; financial trusts; insurances), raw materials (gold, nitrates, tea, coffee
and rubber) and industrial and miscellaneous (breweries and distillers, commercial and industrial companies and
iron, coal and steel).
22
Table 9
BRITISH CAPITAL EXPORTS CLASSIFIED BY RECEPTOR
10 year accumulated data ₤000 current prices - Share on total (%)
Brazil
Argentina
1865-1874
1875-1884
1885-1894
1895-1904
1905-1914
Average 1/
Gov.
66.5%
44.2%
33.0%
17.0%
9.7%
31.5%
R&U
26.6%
41.1%
57.2%
77.1%
76.9%
58.5%
Eco. Act.
6.9%
14.7%
9.7%
5.9%
13.3%
10.0%
Gov.
59.9%
41.1%
43.5%
54.8%
44.3%
47.1%
R&U
21.8%
48.7%
49.7%
29.8%
42.5%
40.0%
Eco. Act.
18.3%
10.2%
6.8%
15.5%
13.2%
12.9%
1865-1874
1875-1884
1885-1894
1895-1904
1905-1914
Gov.
87.1%
49.4%
28.0%
35.4%
53.7%
Chile
R&U
10.5%
38.5%
32.5%
14.2%
26.6%
Eco. Act.
2.4%
12.1%
39.5%
50.3%
19.8%
Gov.
32.7%
52.5%
38.5%
48.0%
12.7%
Uruguay
R&U
65.4%
44.4%
60.7%
49.6%
62.6%
Eco. Act.
1.9%
3.1%
0.8%
2.4%
24.7%
Average 1/
45.5%
25.6%
28.9%
30.7%
64.1%
5.2%
1/ Calculated according to 10-year accumulated data for all years (see Graph 8).
Source: Stone (1999), Tables 3, 7, 14 and 22.
According
to
the
conventional theory the
flows of capitals to the New
World would lead to a fall
in the financing cost and
would generate pressures to
reduce the interest rates.
The data about interest
rates during the 19th
Century en Latin America
is scarce but some partial
information indicates a
decreasing
trend.
The
yields of the government
bonds in Argentina and
Brazil (Graph 9) and the
active
interest
rate
(commercial
banking
operations) of Chile (Graph
10) show decreasing trends
but with important breaks
that correspond to crisis
periods.12
What happened with the
manufacturing production in
this scenario with the
reduction in the interest rate
and the (probable) deepening
of capital ratio in the
manufacturing?
The traditional wisdom is
12
Graph 9
ARGENTINA AND BRAZIL: YIELDS ON
GOVERNMENT BONDS
In percent
14
12
Argentina
Brazil
10
8
6
4
1880
1883
1886
1889
1892
1895
1898
1901
1904
1907
1910
1913
Source: Flandreau & Zumer (2004): 125, Table DB.16
Graph 10
CHILE: COMMERCIAL BANK INTEREST RATE
In percent - Active interest rate
12
10
8
6
Chile
4
1865 1869 1873 1877 1881 1885 1889 1893 1897 1901 1905 1909 1913
Source: Braun, Braun, Briones & Díaz (1995):86-87, Table 3.3.
Data for Uruguay are available for short and irregular periods and would sign a similar evolution.
23
that by WWI there was not much industry to speak in Argentina (Ferrer, 1963), Uruguay
(CIDE, 1965; Faroppa, 1965; Instituto de Economía, 1969), Chile (Veliz, 1963) and Brazil
(Furtado, 1959, 1961). In these views the industrialization process was a product of the 1930s
and the result of new industrial policy and protectionism, reinforced by weakened competition
from the industrial countries. In this sense, industrialization was connected with anti-global
forces.
However this wisdom has been questioned by many scholars. In Argentina and Uruguay,
an import-substitution process was working already before WWI and positive growth rates of
manufacturing production were obtained in the face of increasing and diversifying demand
and linkages to primary production (Cortés Conde, 1983; Vitelli, 1999, for Argentina; and
Jacob, 1981, 1988; Bértola, 1993, 2000, for Uruguay). In Chile the nitrate mining and
agricultural production created the necessary conditions of demand (expansion of the
markets) and supply (generating inputs) to stimulate an incipient manufacturing activity since
19th Century (Cariola & Sunkel, 1985; Pinto & Ortega, 1990). In Brazil the coffee production
drove a dynamic demand of consume (foodstuff and textiles), chemicals and metallic goods
and allowed to obtain financial resources to invest in manufacturing (Catão, 1992; Cardoso de
Mello & Tavares, 1985). In a similar direction, other scholars identify certain regional
dynamics which manufacturing constituted an activity with an increasing importance
(Suzigan, 1986; Silva & Szmrecsányi, 1996).
Do the last considerations mean that we may speak about an industrialization process
before WWI? The point is that while the industrial sector remained small in absolute terms by
1913, a beginning had been made and would constitute the forces to encourage the subsequent
development. However the economic structure of the economies was based in primary
production and the domestic and international conditions would have confirmed this
evolution. According to our framework, it is probable that the impact of globalization was
stronger through the commodity channel than the capital one and consequently the effects of
de-industrialization (or non-industrialization) would have been predominant. The weak
evidence about a definitive reduction in the financial cost and the composition of the foreign
capitals support this conjecture.
Conclusions, shortcomings and agenda
The aim of the paper is to contribute with the debate about the effects of the First
Globalization on the economic growth and income distribution during the last decades of 19th
Century and the first ones of 20th Century. The paper is mainly conceptual and attempts to
discuss some useful analytical approaches for understanding the evolution of inequality in
natural resource-abundant economies and consider some stylized facts of the period.
Initially we review the literature about income distribution in natural resource-abundant
economies during the First Globalization, considering the construction of the data, the
conceptual framework, the shortcomings of the approaches and the new studies that attempt to
improve the understanding of the process.
Then we consider different conceptual frames that may contribute to the comprehension of
the topic and propose a model of analysis. The framework includes three theoretical lines.
First, we present the concept of the IPF and the consideration of the distance between the
actual inequality level and the maximum admissible (according to the development of the
economy). Second, we point out graphically the effects of the globalization in terms of
changes in the economic structure of the countries according to the productivity gap between
the New and the Old World. Third, we consider a model that explains several of the main
facts of land abundant economies during de First Globalization and stresses three central
aspects: the worsening of the income distribution, the frontier expansion and the conformation
24
of the productive and trade structure (contrasting the ideas about de-industrialization with
those associated with the structural change).
Finally, we illustrate the before considerations with the evolution showed by four
economies of South America –Argentina, Brazil, Chile and Uruguay– and the use of new
evidence about income distribution and economic performance.
The increasing of the price of primary goods in relation to manufactured ones induced a
worsening of the income distribution, although the movements into the group were different.
Initially we may identify two regimes. One of them characterized by a distributive pattern that
persisted in the time –Brazil and Chile– and which the elite maintained large possibilities of
extraction. The other characterized by a distributive pattern that registered changes
–Argentina and Uruguay– while the income per capita expanded, with an evolution that
reduced the distance between both economies (in a some kind of convergence in inequality
terms). The movements in the inequality levels seemed to be dominated by the widened of the
distance between the top and the bottom classes rather than breaks in the distribution.
The frontier expansion was associated with the movements and localization of the
productive activities that conformed the export-led growth. The group of economies
consolidated a primary exporter structure that persisted in the time based in animal products
(as Argentina and Uruguay), crops and plantations (as Argentina and Brazil) and mineral
products (as Chile).
The four countries were important recipients of foreign capitals during the First
Globalization (especially British capital exports). The capital flows presented two
characteristics that shaped the incidence on the economic activity: they were voluminous
during some periods and showed high volatility. The diverse composition of the capitals
according to the industrial destination shows the different economic structures. In Chile and
Brazil the share of capital which objective was economic activities was higher than in
Argentina and Uruguay, where the railroads and public services presented the greater
importance.
The capital flows were accompanied by the reduction in the financing cost in a trend that
showed breaks and sudden increases. The deepening of capital ratios in the industrial
activities may have encouraged the development of certain manufacturing branches. The
review about the “early industry” issue evidences movements in that direction although the
evolution was far from an industrialization process.
The aim of the analysis has been the exploration of some conceptual frameworks and
recent evidence to generate hypothesis and lines of researching. In this sense, certain
shortcomings of the analysis are obvious.
In relation with the framework we may emphasise three important items.
•
The IPF approach is suitable for pre-industrial economies but its appropriateness in our
cases decreases in the time (especially in the turn of the century).
•
Considering our group of countries as “small” economies is a correct issue in the begging
of the period but the conditions changed in the time. Both Brazil and Chile achieved the
world leadership in production and export of commodities (coffee and rubber in the first
case and nitrates in the second). Thus to consider the price as determined by the
conditions of the world market is a relevant restriction of our framework.
•
The introduction of considerations about inequality considering only the functional
income distribution may hide important effects of the movements of the distribution on
economic performance.
25
In relation with the evidence we may emphasise three important items.
•
Comparing only two moments in the income distribution pattern (1870 vs. 1920) hides the
dynamic of the process and forces to maintain the conclusions as provisional.
•
The consideration of the evolution of the population density as a measure of the frontier
expansion without to insolate other effects is a simplification than may induce errors in
the interpretation.
•
The scarce data about interest rates impede to advance in the analysis about the impact of
foreign capital flows and the deepening of capital ratios in the different productive
activities.
In relation with the framework our next steps will attempt to advance in two directions:
•
Considering the market power of the economies in the determination of the international
prices and introducing aspects to reflect the differences in natural resource endowments.
Findlay & Lundahl (1994, 1999) introduces some useful elements to advance in this line
of research.
•
Introducing the possibility that the changes in the income distribution affect the economic
performance in the Engel Law sense. Thus, the usual assumption on unitary income
elasticity of demand for all goods would give place to non-homothetic preferences (Mani
& Hwang, 2004; Mani, 2000; Zweimüller, 2000).
In relation with the evidence our next steps will attempt to advance in two directions:
•
Improving the characterization of the natural resource endowments and the economic
structure of the countries and introducing diverse aspects of Economic Geography to
understand the localization of people and productive activities.
•
Relating the natural resource endowments with the economic performance –in the sense of
the “curse” and “blessing” hypothesis– and the changes in the income distributive pattern
of the economies during the First Globalization.
Appendix: references and data
Population density by regions
REGIONS
• North-West: Jujuy, Salta, La
Rioja, Tucumán, Catamarca and
Santiago del Estero.
• North-East: Formosa, Chaco,
Misiones and Corrientes.
• Cuyo: San Juan, San Luis and
Mendoza.
• Pampa: Córdoba, Santa Fé,
Buenos Aires, La Pampa and Entre
Ríos.
• Patagonia:
Neuquén,
Río
Negro, Chubut, Santa Cruz and
Tierra del Fuego.
• Center-West: Goiás, Mato
Grosso do Sul and Mato Grosso.
• North:
Acre,
Amapá,
POPULATION
Argentina
Available data for the total of the
country and provinces for 1885 and
1920 in Gerchunoff y Llach (2003)
and personal communication with
the authors. Total population for
1870 was obtained according to the
growth rate of total population
from 1870 to 1890 (Maddison,
2001). Population of the provinces
for 1870 is estimated assuming
identical provincial shares of 1885.
Brazil
Data elaborated by Income
Distribution
in
Historical
Perspective – Uruguay Group
26
AREA
Corresponding to the actual area of
the provinces excluded territories
in dispute.
Corresponding to the actual area of
the states.
Amazonas,
Pará,
Rondônia,
Roraima and Tocantins.
• North-East: Alagoas, Bahia,
Ceará,
Maranhão,
Paraiba,
Pernambuco, Piauí, Río Grande do
Norte and Sergipe.
• South: Paraná, Santa Catarina
and Río Grande do Sul.
• South-East: Espírito Santo,
Minas Gerais, Río de Janeiro y São
Paulo (included Distrito Federal).
• North: Arica, Antofagasta,
Atacama, Coquimbo, Parinacota
and Tarapacá.
• Center: Libertador General
Bernardo O'Higgins, Maule and
Valparaíso.
• South: Aisén del General
Carlos
Ibáñez
del
Campo,
Araucanía, Biobío, Los Lagos, Los
Ríos and Magallanes y de la
Antártica Chilena.
All country.
(IDHP-UG) based in Census of
Population (1872 and 1920).
Chile
Cariola & Sunkel (1982): 118
(Cuadro 2).
Uruguay
Maddison (2001) based in Bértola
(1998).
Corresponding to the actual area of
the states. Cariola & Sunkel
(1982): 125 (Cuadro 7).
Corresponding to the actual area of
the country.
BÉRTOLA, Luis (1998): El PBI uruguayo 1870-1936 y otras estimaciones. CSIC-Facultad de Ciencias
Sociales. Montevideo.
BRAZIL-DIRETORIA GERAL DE ESTADISTICA (1920): Recenseamento do Brazil. Realizado em 1 de
setembro de 1920. Rio de Janeiro.
BRAZIL-DIRETORIA GERAL DE ESTADISTICA (1872): Recenseamento do Imperio do Brazil a que se
procedeu no dia 1 de agosto de 1872. Rio de Janeiro.
CARIOLA, Carmen y SUNKEL, Osvaldo (1982): La historia económica de Chile entre 1830 y 1930: dos
ensayos y una bibliografía. Ed. Cultura Hispánica, Instituto de Cooperación Iberoamericana, Madrid.
GERCHUNOFF, Pablo y LLACH, Lucas (2003): El ciclo de la ilusión y el desencanto. Un siglo de políticas
económicas argentinas. Ariel Sociedad Económica.
MADDISON, Angus (2001): A Millenial Perspective. Development Centre Studies, Organization for
Economic Cooperation and Development.
Exports classified by products
Argentina
Brazil
Chile
RAPOPORT, Mario y colab. (2007): Historia económica, política y social de la Argentina
(1880-2003). Emecé Ed.: 78 (Cuadro 1.23) according to Comité Nacional de Geografía (1942).
1871-1914: the source classifies the exports in “Productos Ganaderos”, “Productos Agrícolas”
and “Otros” (“Livestock products”, “Agriculture products” and “Other”).
ABREU, Marcelo and BEVILAQUA, Afonso (1996): “Brazil as an export economy, 18801930”. Texto para Discussão, Pontifícia Universidade Católica do Rio de Janeiro: 9, Table 2.1
(Edited by E. Cárdenas, J.A. Ocampo and R. Thorp in: An Economic History of TwentiethCentury Latin America, Vol. 1, 32-54. Oxford: Palgrave, 2000).
BRAUN, Juan, BRAUN, Matías, BRIONES, Ignacio y DÍAZ, José (2000): “Economía Chilena
1810-1995: Estadísticas históricas”. Documento de Trabajo Nº 187, Pontificia Universidad
Católica de Chile, Santiago: 167-168, Table 5.7.
27
Uruguay
MORAES, María Inés (2001): Las determinantes tecnológicas e institucionales del desempeño
ganadero en el largo plazo, 1870-1970. Tesis de Maestría en Historia Económica, Facultad de
Ciencias Sociales, Universidad de la República, Montevideo:100; according to Millot & Bertino
(1996) and Finch (1980).
“Agriculture products”: grain; “Livestock products”: meat, leather, wool and cattle.
Information no available to annual series but average data for different periods.
1870-1874: 1872-75 / 1875-1879: 1877-1880 / 1880-1884: 1881-1885 / 1885-1889: 1886-1890 /
1890-1894: 1891-1895 / 1895-1899: 1896-1900 / 1900-1904: 1901-1905 / 1905-1909: 19061910 / 1910-1914: 1911-1915
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