PROFMEX-Consorcio Mundial para la Investigación sobre México

Mexico and the World
Vol. 7, No 1 (Winter 2002)
http://www.profmex.org/mexicoandtheworld/volume7/1winter02/Trade_and_Income_Gap.html

Trade and Income Gap

By Cafemundo

One of the most damning and convincing arguments against globalization is that despite the potential it offers for economic growth, it does not work for the poor. Certainly anyone who is familiar with the living conditions in Latin America, particularly rural Latin America, cannot help but be unimpressed with the impact that globalization has had on the lives of the rural campesino and indigenous groups. The fact that poverty is still the norm in rural Latin America, globalization seems to be an unfulfilled promise for much of this region. Consequently critics of both globalization and the institutions that are associated with it (the WTO and the IMF) usually base their criticism on the unfairness of the system.

The spotty record of U.S. involvement in Latin America’s internal affairs only adds to the suspicion that globalization is rigged to benefit the wealthy, and to further disadvantage the poor. This feeds a collective guilty conscience to which North Americans seems particularly susceptible. As author Stephen Haber put it in his 1997 book that challenges some of the assumptions behind this collective guilt:

Their really was a confluence of interests between Latin American bourgeoisies, foreign capital, the U.S. government, and Latin American militaries. It is therefore easy to understand how many scholars then read this alliance back into the historical record and posited that it was responsible for the persistence of Latin American underdevelopment. [1]

As an example of the persistence of this view, in an August, 2002 article in the New York Times Magazine, Tina Rosenberg characterized the WTO as an institution controlled by agribusiness interests, pharmaceutical and financial-service industries in both the U.S. and Europe. In the title of her article, she states that globalization has “failed the world’s poor,” and goes on to recommend host-country governments impose trade barriers to protect indigenous industry. She also advocates more “equitable” rules on trade that would spread the benefits of globalization more evenly. [2]This sounds like mild medicine, compared with some of the more radical anti-trade (or anti-U.S. positions on world trade.)

What impressed me with Rosenberg’s article is that she departs from dependency theorists, who hold that trade itself impoverishes developing countries. Instead, she says that globalization has failed the poorest countries because it has failed to produce growth where it is needed most – not because it creates poverty. To say that globalization has failed to promote growth where it is most needed is not the same as to say that globalization is a tool of the rich designed to exploit the poor. This is a very important distinction. While critical of the system, Rosenberg distanced herself from the popular (populist?) opinion that globalization creates poverty.

Recognizing that the system of trade is not in itself responsible for poverty in the developing world is an important first step to achieving some agreement among the critics and advocates of globalization. Ms. Rosenberg recognizes that trade engenders growth, and growth is a prerequisite for lifting the rural masses out of poverty. Even as she debates the proposition that globalization should (and can) be turned back, her debate turns on issues of fairness and distribution of the benefits of trade. This invites a discussion of how internal factors, such as host-country politics, the rule of law, infrastructure, and lack of education do create poverty.

I will return to these themes in a later editorial, but here would like to establish some groundwork regarding the effect of globalization on the world’s poor. Specifically, I want to address the assumption held by many that the process of globalization itself has made Latin America’s poor poorer while enriching the societies of the U.S. and Europe. This is probably the most fundamental piece of groundwork upon which to begin – an assessment of whether or not Latin America is really falling behind the U.S., and if so if globalization is the culprit.

This is a very basic point of departure for the debate on globalization, and one that is rarely addressed directly by globalization’s critics. Nowhere have I seen the assumption that trade policies favor the wealthy and impoverish the poor either challenged or proven. Instead, it is assumed that there is a growing inequality between the U.S. and Latin America, and this point is the point of departure for moral arguments against consumerism, U.S. protectionism, and the policies of the WTO and the IMF. Actually, the gap that exists between the U.S. and Latin America is not the product of twentieth century globalization. In fact, it’s not a twentieth century phenomenon at all, but rather a result of the U.S. economy attracting foreign investment, industrializing and subsequently booming in the late nineteenth and early twentieth centuries. The U.S. did “gap” away from Latin America, but this was a reflection of U.S. economic success that did not derive from unequal terms of trade. While the U.S. gapped away from Latin America, it also gapped away from England and other developed countries.

Furthermore, Latin America has been growing during the twentieth century, and has roughly maintained its economic position relative to the U.S. Most Latin American countries are not becoming poorer, as many suppose. Latin American poverty pre-dates globalization, and has been more a matter of the gap between population growth and economic growth, rather than of the gap between industrial and peripheral economies. I did not enter into this analysis with the purpose of letting globalization’s villains off the hook, and certainly both the IMF and the WTO could mend their policies to help promote third-world growth. Still, it should make one think twice before placing the blame for world poverty on the usual suspects.

The evidence for the proposition that the inequality between “rich” and “poor” countries pre-dates the advent of twentieth-century globalization is documented in several books and studies (available in your library but seldom assigned as reading). I found a series of articles on this subject in a collection of essays edited by Stephen Haber, called How Latin America Fell Behind. In the introduction, Haber gives the best critique of dependency theory that I have read. Here are a couple of excerpts from that critique:

1. Dependency theory rests on the idea that the terms of trade between rich and poor countries are rigged to favor the wealthy. Accordingly, “free trade” will never benefit the poor, as the nature of the trade relationship itself is inequitable.

- Haber points out that trade has benefited many Latin American countries, and that the wealthiest countries are the ones with the largest trade sectors. Autarkic, isolated economies tend to belong to the poorest countries. Furthermore, the terms of trade improved for Latin America during long periods of time, even during the era of export liberalism. Haber summarizes: “The weight of the evidence points to the conclusion that there has been no secular deterioration in Latin America’s terms of trade, but rather there have been cyclical swings with no discernable long-term trend.”[3]

2. The idea that Latin American elites were prostrate before the power of international corporations is used to explain why trade has not led to more in-country development. The idea is that those in power were co-opted or overcome by international forces richer and more powerful than local governments.

- Haber counters by showing that Latin American governments were actually quite willing to regulate the activities of foreign corporations and investors, and channeled those activities toward their own goals of internal development. Haber addresses the late-nineteenth century, but in my own studies of Mexico in the 1980s and 1990s, I found a similar pattern. Haber does make allowances for the very poor countries, noting that, “Dependency thinking about foreign capital and national sovereignty might have had a good deal of accuracy in regard to the smaller countries of Latin America, such as Honduras, Guatemala, or Cuba, but held limited explanatory power for the larger countries of the region…”[4]

3. The period of export liberalism, by which Haber means roughly the late nineteenth century through the 1920s, did not enrich the United States through a process of pillage-through-trade. Rather it enriched both the commodity exporting countries of Latin America and the U.S. as well.

- Haber notes: “Contrary to what dependency theory would suggest, the expansion of incomes created by the late-nineteenth century “export boom” coupled with the integration of markets made possible by the construction of foreign-owned railroads and the protection of activist states gave rise to a sustained period of industrial growth." He goes on to say that most of the new industry in Latin America was both financed and owned by people within the host country.

To add support to Haber’s conclusions, I want to discuss one more study on the subject of Latin American inequality and its origins. I found this one at the end of a statistical abstract on Latin America, done by the editors of the abstract itself. Michael Ray and James Wilkie conducted a study, in the Statistical Abstract of Latin America published by the University of California at Los Angeles. It is available in the reference sections of most libraries. Using historical data adjusted for inflation and exchange rate differences, Ray and Wilkie found that the U.S. not only gapped ahead of Latin America in the nineteenth century, but gapped ahead of most of Europe as well. The disparity in wealth between the U.S. and underdeveloped countries was, as Haber suggested, a phenomenon of nineteenth century capitalism and not of 20th century globalization.

Ray and Wilkie challenge the premise that twentieth-century trade relationships are creating a growing disparity between the “rich” and “poor” countries. They address this directly in the introduction to their study:

For decades it has been an accepted “fact” that rich countries are getting richer and poor ones poorer. While academics, politicians, and international policymakers have believed and promoted this idea, few have sought to examine its factual basis… Latin America’s GDP/C (GDP per capita) for the entire century (through 1994) improved in relative terms during the first eighty years, but… (then) declined slightly. Although this is a slight overall decrease, it is hardly a “widening gap…” Latin American GDP/C as a percentage of the U.S. figure has alternately increased and decreased, yet has remained in a fairly constant range relative to the United States over the course of the twentieth century.[5]

In a study of six world regions versus the United States, Ray and Wilkie found that the U.S came from behind or from a near-parity position in the nineteenth century to surpass all regions but one - Asia - by 1992. The Asia group, consisting of 11 countries, maintained a lead over the U.S. in economic growth until the period from the mid-1930s to 1950 when the U.S. jumped ahead. Since 1950, however, the Asia group far surpassed the U.S. in both growth rate and absolute Gross Domestic Product.[6] Anti-trade theorists might take note that Asia’s phenomenal economic expansion has been largely export-driven. Advocates of protectionism might further note that these Asian markets benefited from government protection policies for only a limited period of time. Furthermore, these policies had the deliberate aim of making domestic industry internationally competitive. It was an export-oriented strategy from the start.

While Latin America has narrowed the gap with the U.S. during the twentieth century, the continued incidence of poverty begs some explanation. In their concluding remarks, Ray and Wilkie note that Latin America was hurt by population growth: “The effect of population growth thus reduces the impact of apparent gains in overall economic growth rates.”[7] May that lesson be heard by those groups in the U.S. who keep insisting that the world is not overpopulated (and hence there is no need for family planning services as part of our international aid efforts!). Ray and Wilkie comment in their report that it is unfortunate that the Bush administration does not recognize the importance of providing family planning resources as part of international aid. A reduction in family size could go a long way toward alleviating the stark poverty of rural Latin America. Ray and Wilkie note that, “Were it not for the surge in population in Latin America, the region’s GDP/C would be double the current figure in each (statistical) series.” (8)

The Statistical Abstract of Latin America provides some evidence that poverty and lack of family planning are correlated. Most of the poorest countries in Latin America are also those countries with the lowest rate of contraceptive use. Ecuador, Guatemala, Haiti, Honduras and Nicaragua, for example all have low rates of contraceptive use, and by implication low rates of family planning. The range lies between 43 percent of the population that do not use any contraceptive method in Ecuador to an astounding 82 percent in Haiti.(9)

This was not intended as a research project, but rather as the second in a series of short editorial/research written to challenge some of the prevailing misconceptions about Latin America. In particular, I want to challenge the assumptions behind dependency theory, which is still being taught in U.S. and Latin universities, despite the fact that it is a flawed and discredited theory. To the extent that these misconceptions spill over into the dialog about U.S. relations with its Latin neighbors, they have the potential to do harm. Bad ideas about reality are the seeds of bad public policy. By sharing some of the research that I encountered during my graduate study, I hope to contribute to the debate over globalization in a meaningful way. In my future editorials, I will continue to develop themes and arguments about globalization, development and poverty that I feel have been overlooked in the rush to reach emotionally satisfying answers to these complex problems. In the next editorial, I will review some of the political history of Latin American countries, and the effect of political instability on growth.

[1] Stephen Haber, Introduction to How Latin America Fell Behind: Essays on the Economic Histories of Brazil and Mexico, 1800 – 1914, Stephen Haber, ed. (Stanford: Stanford University Press, 1997) 10
2 Tina Rosenberg, “The Free Trade Fix,” New York Times Magazine (August 18, 2002) 28
3 Haber, 12
4 Haber, 12
5 Michael Ray and James Wilkie, Statistical Abstract of Latin America, Volume 37, James Wilkie, ed. (Los Angeles: University of California) 1059
6 Ray and Wilkie, Table B25, 1064
7 Ibid, 1065
8 Ibid, 1067
9 Ibid, 175