2 The Latin American Economies in the 1940s Rosemary Thorp In the 1940s Latin America achieved satisfactory growth, even in per capita terms, and the share of industry in gross domestic product rose from 15 percent in the last five years of the 1930s to 18 percent by the early 1950s. Population growth accelerated, rising from an average of 2.1 percent in the early 1940s to 2.5 percent in the second half of the decade. Rising population was reflected in the growth of major Latin American cities. The global experience of growth and industrial expansion is presented in table 1. In this chapter I explore the conditions that underlay these broad trends, dividing the 1940s into two halves: first, the war years and the economic effects of the war, and second, developments during the late 1940s in conjunction with the reshaping of the international political economy. The discussion focuses chiefly on foreign trade, industrial growth, and the role of the United States, and given the limitations of space, treats these themes only in a global Latin American perspective. I show that in many ways the war years had rather positive economic effects, but for various reasons events in the rest of the decade did not lead to a consolidation of the different positive elements. World War II and the Latin American Economies, 1939–1945 Arthur Lewis has described the period 1913–1939 as "the longest depression " of the world economy. [1] World War I opened the cracks in the existing ― 42 ― Table 1 Latin America: Growth Rates of Real Income and Population; Share of Industry in GDP; Percentage of Urban Population Real Income Population Real Income Per Capita % Industry in GDP % Urban Population 1935–40 4.5 1.9 2.5 15.2 17 1940–45 4.8 2.1 2.7 16.7 20 1945–50 6.8 2.5 4.2 18.0 25 1950–55 4.5 2.7 1.7 18.7 33 Source: United Nations, The Economic Development of Latin America in the Post-War Period . New York: United Nations, 1964, 5, 27. system and exposed shifting structures. By 1918 the old Victorian system centered on London and the gold standard was in disarray, and the new dominance of the United States in trade and capital flows was apparent. With hindsight, we understand that the stability of the old system was based not on gold but an on underlying equilibrium in trade and capital flows, now being disrupted by the entry of new members and shifting relative positions. But at the time, the relevant actors
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2 The Latin American Economies in the 1940s
Rosemary Thorp
In the 1940s Latin America achieved satisfactory growth, even in per capita terms,
and the share of industry in gross domestic product rose from 15 percent in the last
five years of the 1930s to 18 percent by the early 1950s. Population growth
accelerated, rising from an average of 2.1 percent in the early 1940s to 2.5 percent
in the second half of the decade. Rising population was reflected in the growth of
major Latin American cities. The global experience of growth and industrial expansion
is presented in table 1.
In this chapter I explore the conditions that underlay these broad trends,
dividing the 1940s into two halves: first, the war years and the economic effects of
the war, and second, developments during the late 1940s in conjunction with the
reshaping of the international political economy. The discussion focuses chiefly on
foreign trade, industrial growth, and the role of the United States, and given the
limitations of space, treats these themes only in a global Latin American perspective.
I show that in many ways the war years had rather positive economic effects, but for
various reasons events in the rest of the decade did not lead to a consolidation of the
different positive elements.
World War II and the Latin American Economies, 1939–1945
Arthur Lewis has described the period 1913–1939 as "the longest depression " of the
world economy.[1] World War I opened the cracks in the existing
― 42 ―
Table 1 Latin America: Growth Rates of Real Income and Population; Share of Industry in GDP; Percentage of Urban Population
Real Income
Population
Real Income Per Capita % Industry in GDP % Urban Population
1935–40 4.5 1.9 2.5 15.2 17
1940–45 4.8 2.1 2.7 16.7 20
1945–50 6.8 2.5 4.2 18.0 25
1950–55 4.5 2.7 1.7 18.7 33
Source: United Nations, The Economic Development of Latin America in the Post-War Period . New York: United Nations, 1964, 5, 27.
system and exposed shifting structures. By 1918 the old Victorian system
centered on London and the gold standard was in disarray, and the new dominance
of the United States in trade and capital flows was apparent. With hindsight, we
understand that the stability of the old system was based not on gold but an on
underlying equilibrium in trade and capital flows, now being disrupted by the entry
of new members and shifting relative positions. But at the time, the relevant actors
trade, exchange and capital controls, and countercyclical government spending. With
growing urbanization and industrialization, the expansion of state intervention, and
a declining reliance on primary exports, a new structure began to take shape in Latin
America.
World War II had a major part in shaping the new model by delivering another
severe shock—this time from the supply side, unlike during the depression—to the
old export-led structure. The shock of the early 1940s came on top of those of earlier
periods and intensified the growing conviction, particularly in the larger countries,
that it was unsafe to depend on traditional export-led growth and that new sources
of dynamism within Latin America itself had to act as a substitute. The unusual
feature of the shock represented by World War II, however, which helped to account
for the ambiguities in the subsequent evolution of Latin America, was that it failed to
increase the region's autonomy. Instead, as the struggle began to safeguard supplies
and to develop new sources of vital raw materials, the war marked a major advance
in the influence of the United States in Latin America.
The transition was particularly striking in Mexico. There the transformation of
relations with the United States became so far-reaching that by 1942
Table 2 Latin America: Growth Rates of Real Income and Population; Share of Industry in GDP; Percentage of Urban Population
Argentina Brazil Colombia Mexico U.S. U.K. France
1929 100 100 100 100 100 100 100
1930 96 98 99 96 90 99 97
1931 89 95 98 99 83 94 93
1932 86 99 104 84 72 95 89
1933 90 108 110 98 71 98 93
1934 97 118 117 103 76 104 93
1935 102 121 120 112 83 108 90
1936 103 136 126 121 94 113 91
1937 111 142 128 128 99 117 96
1938 113 148 136 130 94 118 96
1939 117 152 145 140 102 120 100
1940 114 150 148 142 109 132 83
Sources: Latin American countries: Rosemary Thorp, ed., Latin America in the 1930s . London: Macmillan, 1984, Statistical Appendix, Table 4. United States, United
Kingdom, and France: A. Maddison, Phases of Capitalist Development . Oxford and New York: Oxford University Press, 1982, 174–75.
― 45 ―
the Mexican foreign minister described the frontier as "a line that unites rather than
divides us." Remarks like these were almost astonishing in light of the bitter clash
over oil between the two countries only four years earlier. In 1942 an agreement was
reached between the Mexican government and the Export-Import Bank to develop a
steel- and tin-plate-rolling mill in Mexico. A Railroad Mission established by the U.S.
government worked on expanding Mexico's communications infrastructure, and
agreements were reached for the purchase of numerous raw materials.[4] Similarly,
when Brazil joined the Allies, the United States supported attempts to strengthen the
Brazilian industrial base. The Cooke Mission of 1942, for example, was described as
"lay[ing] the foundations of the long range strength of Brazil's whole industrial
economy." During this period the United States also helped to bolster the growing
links between Brazilian industry and the military. In Peru, U.S. funds and exports
assisted in establishing the Corporación Peruana del Santa to produce iron and steel.
There were numerous examples elsewhere of similar trends. Among the larger Latin
American nations, Argentina alone avoided this process of penetration.[5]
Among the striking paradoxes of the war years, and one of the major
consequences of the war itself, was the growing involvement of the United States in
Latin America alongside the expanding role of the Latin American states and the use
of direct controls. Over many parts of Latin America the private sectors were
becoming more closely tied to government in much the same way that in the United
States business leaders were co-opted by the government to plan and to execute a
whole range of new projects.
The Economic Effects of the War on Latin America
The war quickly intensified demand for Latin American primary products, spurring
export revenues, although growth varied over different parts of the region. Some
nations, led by Ecuador, Venezuela, Brazil, Colombia, and some of the Central
American states, experienced annual growth rates of more than 6 percent;
elsewhere, as in Bolivia and Chile, growth was negligible. Even so, on average Latin
America's export revenues rose by more than 4 percent a year at constant prices
(table 3).
The capacity of each country to benefit from the growth of exports varied widely,
because in many cases, particularly as with minerals, price controls or delayed
payments meant that little additional revenue was actually re-
― 46 ―
Table 3 Latin America: Average Annual Growth Rates of Exports, 1940–1945
Argentina 4.0 Honduras 4.6
Bolivia 2.4 Mexico 4.6
Brazil 12.1 Nicaragua 4.3
Chile 1.5 Panama 2.5
Colombia 6.6 Paraguay 20.9
Costa Rica -1.3 Peru 4.5
Ecuador 18.9 Uruguay 5.4
El Salvador 8.1 Venezuela 9.7
Guatemala 12.0
Sources: South America: James W. Wilkie, Statistics and National Policy, Supplement 3. University of California, Los Angeles, 1974. Central America: Victor Bulmer-Thomas, The Political Economy of Central America since 1920 . Cambridge: Cambridge University Press, 1987.
Note: Figures are based on constant 1970 dollars.
ceived. Thus countries such as Chile, Bolivia, and Peru gained relatively few
benefits from huge increases in export volumes. But even where additional revenues
were available, as in Brazil, Colombia, and Mexico, there was little to spend them on,
and in these countries the reserves grew rapidly (table 4).
Table 8 Latin America: Commodity and Capital Flows, 1925–1929, 1949, and 1950 (Millions of U.S. Dollars)
Exports
(FOB)a
Imports
(FOB)
Investment
Income
(Net)b
Long-term
Capital
(Net)bc
1925–29 (annual average):
United States 990 840 -300 200
Europe 1,460 910 -360 30
Total 2,450 1,750 -660 230
1949:
United States 2,503 2,624 -550 588
Rest of world 2,592 1,845 -47 -104
Total 5,095 4,469 -597 484
1950:
United States 3,090 2,658 -748 194
Rest of world 3,020 1,837 -7 161
Total 6,110 4,495 -755 355
Source: United Nations, Economic Commission for Latin America, Foreign Capital in Latin America . New York: United Nations, 1955.
a Including nonmonetary gold.
b Including reinvested earnings of subsidiaries.
c Including amortization and repurchase of foreign long-term debt and transactions with the International Bank for Reconstruction and Development; excluding
government grants.
― 53 ―
states during the war, from 1945 the United States sought to restrict power in the
region. At the inter-American conference held at Chapultepec, Mexico, in early 1945
the United States demanded a blanket commitment from Latin America to reduce
tariffs and open the gates to foreign capital. The Latin Americans countered with
requests for similar concessions for their exports to the United States. The
Chapultepec meeting failed to reach any final agreement on tariffs, although the Latin
Americans pledged to accept foreign investment but on condition it did not run
"contrary to the fundamental principles of public interest."[11] In Latin America
protectionist sentiments were becoming stronger. As a Mexican entrepreneur later
remarked: "What we need is protection on the model of the United States."[12]
In 1945–1947 the Latin American nations continued to urge the United States
to increase aid as the United States continued to drag its feet. Finally, during the
inter-American conference in Bogotá of 1948, it became clear that the United States
had no intention of offering a Marshall Plan for Latin America. In other international
meetings Latin American protectionist proposals failed, although the Latin Americans
managed to defeat counter-proposals from the United States requiring them to lower
tariffs.[13] Subsequently the Latin Americans secured another victory with the creation
of the United Nations Economic Commission for Latin America (ECLA) in 1948, whose
role was to defend and publicize the region's commitment to industrial development
to escape dependence on unstable and undynamic primary exports.[14]
As we have seen, the first half of the 1940s favored a major shift in the development
of Latin America: industry and trade within Latin America grew, the role of the state
advanced, and the weaknesses of dependence on primary exports were once more
exposed. In comparison the second half of the 1940s marked a step backward, as
the effort to discredit state intervention also weakened the commitment to developing
basic industries. During this period too little was done in Latin America to correct
economic distortions caused by overvalued currencies. Exaggerated fears of the
inflationary consequences of devaluation tended to breed an undue reliance on import
controls, particularly as imports grew rapidly during the early postwar years. Despite
overvaluation, however, exports grew strongly and indeed helped to
― 54 ―
sustain the prevailing exchange rates (see table 9). Bolivia alone remained outside
the process, as international demand for tin fell sharply after the war.
Export growth in Latin America after 1945 was based almost entirely on primary
goods, and once international trade resumed the new manufactures of Brazil, Mexico,
and Argentina were immediately displaced by U.S. and European suppliers. The flood
of imports into Latin America, along with often poorly managed import controls and
protectionism, now slowed down the process of import-substituting industrialization.
Brazil and Chile, the two countries most firmly established on the path toward import
substitution, succeeded in increasing the share of industry in gross domestic product.
Table 9 Latin America: Annual Growth Rate of Exports and Per Capita GDP, 1940–1950
Exports
Per Capita GDP
1940–45
Per Capita GDP
1945–50
Argentina 5.0 1.2 1.6
Bolivia -1.2 - 0.0
Brazil 8.1 0.3 3.3
Chile 2.2 2.4 1.0
Colombia 17.5 0.4 1.8
Costa Rica 30.1 - 4.2
Dom. Rep. - - 5.3
Ecuador 17.0 1.5 6.9
E1 Salvador 21.7 - 6.7
Guatemala 16.1 - -0.9
Haiti - - -0.5
Honduras 22.4 0.8 1.7
Mexico 11.7 4.6 3.0
Nicaragua 16.8 - 4.1
Panama 29.8 - -2.5
Paraguay 3.1 -0.1 0.0
Peru 8.8 - 2.4
Uruguay 10.7 1.3 4.1
Venezuela 23.1 2.6 6.9
Sources: Exports: James W. Wilkie, Statistics and National Policy, Supplement 3. University of California, Los Angeles, 1974. GDP: United Nations, Comisión
Económica para América Latina, Series históricas del crecimiento de América Latina. Santiago de Chile: CEPAL, 1978; and Victor Bulmer-Thomas, The Political
Economy of Central America since 1920 . Cambridge: Cambridge University Press, 1987.
Note: Figures are compound growth rates, based on constant 1970 dollars.
― 55 ―
Colombia also increased industry's share, but there industry was beginning from an
exceptionally low base. Among the small countries El Salvador alone achieved an
increase in industry's share of gross domestic product. Overall, the figures for share
of industry in gross domestic product over 1940–1950 show either stagnation,
declining rates of industrial expansion, or even actual reductions (see table 10). The
general trend was downward from the perhaps artificial levels of industrial
development achieved during the war.
Meanwhile despite overvalued currencies and the abundance of imports,
inflation was typically increasing, even though by this point inflation abroad was
declining. Albert Hirschman, in his classic study of inflation in Chile during 1939–
1952, argued that inflation became the preferred escape valve for social tensions. In
his view several of the following conditions prevailed: "fiscal deficits, monetization of
balance of payments surpluses, massive wage
Table 10 Latin America: Industry as a Percentage of GDP, 1940–1955
1940 1945 1950 1955
Argentina 23 27 24 25
Bolivia — — 12 15
Brazil 15 20 21 23
Chile 18 22 23 23
Colombia 8 12 14 15
Costa Rica 13 12 11 12
Dom. Rep. — — 12 13
Ecuador 16 — 16 15
El Salvador 10 12 13 14
Guatemala 7 13 11 11
Haiti — — 8 8
Honduras 7 12 9 12
Mexico 17 21 19 19
Nicaragua 11 12 11 12
Panama — 7 8 10
Paraguay 14 18 16 16
Peru — 14 14 15
Uruguay 17 21 20 23
Venezuela 14 16 11 13
Source: United Nations, Comisión Económica para América Latina, Series históricas del crecimiento de América Latina . Santiago de Chile: CEPAL, 1978.
― 56 ―
and salary increases,... bank credit expansion, war-induced international price
booms, [and] Central Bank credit to state sponsored development agencies."[15] One
of the common elements of this period was the near absence of significant anti-
inflation measures.
In addition to Chile, the countries that suffered the highest rates of inflation
were Argentina, Bolivia after the revolution of 1952, and Paraguay. Other countries
experienced more moderate inflation that was nevertheless higher than in previous
decades. In Argentina inflation was fed by Perón's failed attempts to reverse his
damaging relative prices policies that had initially discriminated against farmers and
ranchers. In Paraguay stagnation and an isolated, closed economy allowed fiscal
deficits to precipitate inflation. In Bolivia the revolutionary government encountered
a depleted tin sector, international recession, and imperative political demands. The
countries that managed to avoid inflation, such as Venezuela, Ecuador, Peru, and
most of the Central American states, were those in which exports were rising rapidly
and currencies were overvalued. Only Colombia achieved a coherent anti-inflation
policy, while in Mexico the rapid expansion of agricultural production played a major
part in keeping food prices stable.
At least during the 1940s the falling rate of industrial expansion, along with the
growth of inflation, did not prevent overall growth. A large majority of nations, both
large and small, experienced high per capita growth. The two countries that displayed
the weakest export growth, Bolivia and Paraguay, were the most conspicuous cases