This article is part of ourEconomy's 'Decolonising the economy' series.
With the demise of the import substitution industrialization scheme – which sought to replace foreign imports with domestic production - since the mid-seventies, Latin America has been looking for a development path to close the gap with the industrialized world. From the right, the path is clear: liberalization of goods and finance will eventually get us there. However, the results have been disappointing, to say the least. Today, with a renewed offensive of the neoliberal right in the region –with Bolsonaro, Duque, Macri, and Piñera- the lack of a coherent economic program from the progressive side is striking.
The first step in overcoming mainstream development economics continues to be the very prescient statement by Dependency theorists: capitalism is based on asymmetric relations that generate “development” and “underdevelopment” as opposed poles in different parts of the world. In other words, Latin American underdevelopment is not a serious case of bad luck, but the necessary flip side of the coin of other countries´ development.
Only with that recognition does the status quo become a negative prospect for the region: things must change, structures must be transformed, and economic as well as political interventions are needed.
However, this does not mean to do just anything. Over the years, we have learned that underdevelopment cannot be overcome simply through the introduction of a bunch of economic policies such as those proposed by standard development theories (for example, liberalizing international trade, incentivizing Foreign Direct Investment or looking for some autonomous development articulated by the state). These policies fail to understand underdevelopment and only reinforce the state of things.
So, what shall we do?
Primary production and ground rent
To fully grasp the realities of Latin American economies, we must start with their current role in the International Division of Labor (IDL) as worldwide suppliers of agrarian and mineral commodities – like wheat, soybeans, copper, iron and petroleum. That place allows or restricts certain development paths.
The region plays this role because of the higher labor productivity in the production of natural resources in Latin America given by natural conditions (fertility, rain patterns, temperature, etc.) not reproducible by human labor –or only replicable at higher costs. In other words, the region is extremely competitive in primary products due to its absolute advantages like its climate.
Following Ricardo and Marx, since their conditions of production are not reproducible, the price of primary commodities is set by the worst producer needed to satisfy the demand. For example, if society demands ten bushels of wheat, and we have one land that produces six bushes and another that produces four, then the latter would be the price setter. In that case, the producer with higher productivity –hence lower costs –obtains an extraordinary profit because the price is the same for everyone.
This is where ground rent comes in. Landowners have the property rights to those lands, so they are the ones who appropriate that extraordinary profit through the competition by businesses to rent them. This ground rent can then be redistributed for other purposes.
When the state manages, through different means, to appropriate a portion of the ground rent from the pockets of landowners, the inflow of ground rent allows the countries of the region to invest the money to pursue growth strategies. However, this extraordinary source of surplus is particularly volatile due to changes in international prices and climate conditions, which explains the characteristic feature of natural resource-based economies: unstable growth.
Competition, low wages, and underdevelopment
Due to intense competition in the world market, only some companies can continue growing, investing and innovating while others tend to lag behind. In this heterogeneous landscape, small capitals - those that face lower productivity levels and rates of profit - will eventually disappear. The economies of underdeveloped countries are built up essentially of small capitals that cannot sustain international competition.
However, small capitals can survive if they receive compensations for their higher costs from one of the following extraordinary sources of surplus: 1) buying labor force below its value (ie paying low wages), 2) foreign debt and 3) ground rent.
The first one is the most common feature of underdevelopment: low wages and precarious forms of employment that push workers and their families into poverty. Those wages provide “competitiveness” to the capitals that employ them. The second one, foreign debt, allows governments to increase spending which could be used to lower costs for capitals and cheapen imports and investments. Finally, as we stated, ground rent can be appropriated by governments and redistributed to other sectors through investment projects and industrial policies.
Looking for a way forward
Redistribution of ground rent was the key piece of the import substitution industrialization scheme (1930s-1970s) when the biggest Latin American economies promoted manufacturing sectors focusing on the domestic market. But since they were fairly small, when primary prices collapsed in the 1970s, businesses couldn’t take stand the heat and the economy nosedived into recession.
Moreover, when the global economy started to change in the seventies, with globalization and the emergence of the South-East Asian countries manufacturing exports, Latin American economies faced productivity gaps too big to compensate with ground rent alone. The region tried to overcome this limitation by borrowing abroad –which resulted in the Mexico debt crisis of 1982. Since then, as its role in the International Division of Labour has not changed, Latin America only experienced relevant economic growth in times of high primary commodity prices or debt, but with worsening labor conditions (falling real wages, precarious working conditions, etc), and going into crisis when prices fell or foreigners stopped lending.
Sadly, on top of the economic difficulties of the region, the right has been pushing policies to further condemn Latin America to its role as a supplier of commodities: deindustrialization, financial liberalization, labor market reforms, bilateral investment agreements and just-in for Argentina and Brazil, the “MERCOSUR-EU” trade agreement.
Instead, the region needs to pursue industrial policy funded by ground rent aimed at erasing the international productivity gap. Even if it sounds easy, it’s not. It entails both economic and political difficulties.
The key economic issue is how to appropriate ground rent without discouraging primary production and exports of those commodities. In energy and mining, public ownership of the companies is a fairly good model, like CODELCO, YPF, PETROBRAS, etc. But in agrarian commodities, should we think about National Boards to manage foreign trade?
Another issue concerns how to manage the extreme economic fluctuations in the region. Should Latin American countries build sovereign funds to manage those flows of rent, As Chile has done with CODELCO’s revenues, or Norway or the Arabic states have done?
And finally, where should we invest? Which sectors or companies? For this, we need to retool the State with economic planning capabilities and a regional development strategy to achieve the scale needed in today’s world.
In political terms, it implies to strongly tax the rich, especially the landowners, something that has been problematic even for the developed world. Also, we need to tax –or replace – the multinational companies that control primary exports. Imposing this sort of measure requires political power not very common, especially in democratic countries.
But the first step is always to recognize reality: underdevelopment, the need for active state intervention, political progressiveness, and new ideas. Maybe in these times of neoliberal advance, following Eduardo Galeano, utopias are needed to progress.
These issues and others will be up for discussion at the Young Scholars Initiative's Workshop on development planning: Latin American insights and theories.