How Latin America Fell Behind
Comparative essays on why Brazil and Mexico diverged from the United States.
Summary
Stephen Haber edited this collection of essays on the economic histories of Brazil and Mexico between roughly 1800 and 1914, drawn from a Stanford conference. The contributors apply the methods of new institutional economic history, asking how property rights, contract enforcement and access to credit shaped investment decisions. The comparative frame is the United States, and the question is why two large, resource-rich economies with similar starting conditions in 1800 diverged so sharply from North America over the following century.
The answers offered reject dependency theory, which attributes Latin American underdevelopment to exploitation by industrial economies through terms of trade and foreign investment. Contributors including Haber, John Coatsworth, Nathaniel Leff and Carlos Marichal argue instead that political instability after independence destroyed the fiscal capacity of the new states, that governments then financed themselves by granting monopoly privileges, and that the resulting concentration of banking and manufacturing limited entry and growth. Haber's own work on textile manufacturing shows how the small number of firms with access to credit shaped industrial structure in both countries.
The volume is academic, quantitative in places, and assumes the reader knows the outline of nineteenth-century Latin American political history. It is now one contribution among many; the later literature by Engerman and Sokoloff on factor endowments and by Acemoglu, Johnson and Robinson on colonial institutions covers overlapping ground and reaches partly different conclusions. Its value for a general reader lies in the specific mechanism it identifies linking weak states to concentrated private economies.
Key takeaways 7
- Latin America's divergence from North America began after independence, not during the colonial period, and political instability was the immediate cause.
- Governments unable to tax reliably sold monopoly rights instead, which concentrated banking and industry in a few hands.
- Insecure property rights raised the required return on investment, so capital went to activities with short payback periods.
- Dependency theory fails empirically because the periods of heaviest foreign investment coincide with the periods of fastest growth.
- Access to credit, rather than technology or entrepreneurship, determined which firms could enter manufacturing in Mexico and Brazil.
- Firms tied to the government by financial privileges lobbied to prevent the institutional reforms that would have widened credit access.
- Comparative colonial legacies matter less than what the successor states did with fiscal and legal institutions after 1820.
Who should read it
Investors and analysts working on emerging markets who want the institutional explanation for long-run divergence tested against two specific national histories.
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Where it sits in the reference 2
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