The nineteenth century was the first century of independence for Latin American states, and they grappled with the difficult tasks of creating national identities and forming new institutions. They confronted the challenge of escaping Spanish and Indian authoritarian traditions, and of dismantling corporatist legal structures, and their special rights, or fueros, which allowed the church and military to function outside of the rule of civil law. Other corporate rights allowed influential individuals and classes to control state-supported monopolies, and state-run enterprises such as mining, manufacturing and tobacco were protected by mercantilist economic policies.

These relics of a time before "neoliberalism" and open markets were slow to disappear, as they protected powerful entrenched interests. Economic reform was part of the process of modernization that included developing their infrastructure of roads, electricity, water, transportation and intangible infrastructure such as law, capital markets and banks. Their central problem was to create workable systems and generate tax revenue for the newly created central governments.

To this end, they adopted "free market" reforms by opening their economies to foreign investment and trade, privatizing the lands of the ejido and the church, and removing the special rights, or fueros of the military and clergy. These economic reforms were predicated on the success of some basic political reforms, which were as fundamental as changing the way people identified themselves. The identity of the Latin people began a transformation from collectivist - as part of a members of small communities or clients of a local patron - to individualist. It also expanded in scope as people began to see themselves as part of something larger than their locality, and as citizens of the state.

Benito Juárez of Mexico, for example, considered it one of his most fundamental tasks to encourage Mexicans to identify themselves as citizens of the Mexican state, rather than as clients of local caudillos or members of a locality. Latinos had to come to see themselves as members of a larger civil society, rather than as members of disunited racial groups, or antagonistic economic classes. Latin America had to make the individual the political unit of society, and give him or her a reason to form an identity as a member of the state. The liberators took a step in this direction by basing their new political systems on written constitutions, usually providing them with a legislative body and a judiciary. Later in the century, liberal governments went further toward adopting the western model of a political economy, abolishing many restrictions on trade, abolishing slavery, making the state responsible for secular education, and encouraging external trade. Still, these forms were imperfectly imposed in countries dominated by a mix of Spanish and indigenous authoritarianism. Participatory government was undermined by history of racial and class segregation, regional isolation, weakness of central authority, and a tradition of state protection for privileged groups.

A fallacy that frequently follows is that because the liberal political economies followed western models, and were shaped by western investment, that they were "capitalist," or that they allowed "the unfettered pursuit of profit" in a free market environment. This is a critique that follows contemporary thinking: that indigenous and collectivist forms were successful until spoiled by western individualism and capitalism. The interest that nineteenth-century Latin governments had in adopting western forms indicated that they were attracted to these concepts, and that they recognized them as successful features of the American and European economies, but they did not implement them as they conceived them. In fact, there was a general failure of political and economic reforms to escape the authoritarian patron-client traditions of colonial times.

It is not accurate to call the economies of Latin America in the nineteenth century "capitalist," without distinguishing between mercantilist, protectionist, and state-capitalist forms. All the nineteenth-century economies of Latin America restricted free-trade, protected state monopolies, control prices, or failed to regulate local monopolies controlled by caudillos. This kept Latin America from achieving genuine free-market institutions, or developing the legal framework that allows them to function, such as laws protecting property rights and enforcing contracts. These legal rights evolved slowly as liberalism in politics and capitalism in economics gained a foothold in the post-colonial era.

To give an example of how trade functioned in the early years of independence, the British conducted a brisk trade along South America's eastern coast, trading in both European textiles and locally produced agricultural products such as tobacco, yerba mate, sugar and salt. Even in this new frontier, trade was not "free." As one historian describes it, "tariffs were often high. Rates varied with bewildering rapidity. And merchants were subject to arbitrary regulations and arbitrary exactions." Even toward the end of the century, this pattern persisted. Government involvement in private business meant that political influence was extremely important to economic success. Defending property rights, enforcing contracts, obtaining rights to government-controlled monopolies, access to government subsidies or just obtaining a favorable judicial ruling depended on personal political connections.

The significance of political reform to the functioning of an economy and the creation of wealth is not universally appreciated, and was probably less so two hundred years ago. There is an obvious but important point to make before one can make any prescriptive arguments about Latin America, and that is that the economic laws that apply in developed countries also apply in undeveloped (or underdeveloped) countries. In other words, one cannot appeal to relativism in the field of economics as one might in the field of sociology in order to argue that Latin counties represent a special case to which western solutions don't apply.

That said, one cannot simply expect to impose western models on non-western societies and achieve modern-day results. Latin America has been a hybrid society of western and indigenous traditions with unique problems. The solutions to those problems, as Carlos Fuentes might say, deserve uniquely Latin solutions. Unfortunately, the unique "solutions" tried by most Latin governments were not just failures, but formulas for failure in that they failed to address the systemic causes for poverty and instability.

On the back cover of the September/October 1999 issue of Foreign Affairs magazine, there is an advertisement that shows a man in slacks and a white shirt, with his shoes off, reclining in a hammock. He is presumably American, but could be European, and is working on his laptop computer. Apparently, he is considering ways to invest his retirement savings, or some money he has made in the stock market, because the ad is for the services of Zurich American Insurance Companies: "providing worldwide protection in emerging markets."

Zurich American's ad targets the small investor of the twentieth century, but the contemporary theme of foreign investment and domestic risk have antecedents in the nineteenth century. Two hundred years ago, this investor could have been one of many American and British investors who sent their money to developing Latin countries to build factories, railroads and establish banks. Although Zurich American didn't exist then, the insurance industry represents part of the financial infrastructure that we take for granted today, but which has been missing in Latin America for the better part of the last two hundred years. It would not be until the 1880s, for example, that Mexico would have a banking system and banking laws to "provide a new institutional framework conducive to the modernization of financial transactions."

A Zurich American policy would not only have been valuable to the investor of the nineteenth century, it would have been a great benefit to the Latin governments who borrowed in high-risk markets. As many lenders and investors lost money investing in the new Latin nations, especially in the first half of the nineteenth century, they "hedged" their risk by charging exorbitant fees up front. A British loan to the government of the Buenos Aires Province in 1824 was for one million pounds, but the investors skimmed 300,000 pounds off the top in advance interest and commissions. The province of Buenos Aires actually received less than 600,000 pounds of the one million pound face amount of the loan. Foreign loans to the new governments of other countries or provinces were even more expensive. The first long-term loan to Peru, negotiated by San Martín in 1822 was for 1.2 million pounds, with an up-front charge of 75 percent, or 900,000 pounds!

The ability of lenders to exact these fees reflects that foreign lending in Latin America, like foreign trade, was a risky enterprise. Even such famous foreign investments as the Real de Monte mine in Mexico operated for years at a loss before the mining rights were transferred to local entrepreneurs. As Latin America struggled with the transition from a protected and monopolistic economy to one that balanced external trade and well-developed internal markets, foreign investors entered into and abandoned direct investments and purchased government paper on a trial-and-error basis. The result was that foreign enterprise in Latin America often ended in failure. This was particularly true of British entrepreneurs who dominated trade in the early decades after independence. As Tulio Donghi writes in The Cambridge History of Latin America, the British came to Latin America seeking quick profits and new markets for British goods. Instead:

"…they suffered a swift and harsh disappointment: although the bonds of the new states and the shares of the companies organized in London to exploit the mines of various Latin American countries at first rode easily on the crest of the London stock exchange boom of 1823-5, by 1827 every state except Brazil had ceased to pay interest and amortization on its bonds, and only a few Mexican mining companies had avoided bankruptcy… Even Brazil, which had managed to avoid cessation of payments would not for many years again have recourse to external credit."

Lack of foreign investment was only one of many factors that contributed to the boom-and-bust character of Latin America's economic economy during the nineteenth century, but its role has been pivotal in the polemic debate about which of these factors are to blame. Was foreign capital a tool of imperialism, responsible for the exploitation of millions of poor and working-class Latinos, or was it a useful tool for development that was mishandled by inept and self-serving governments? The question is of more than just academic interest, for correctly identifying the reasons for economic failure is part of the process of creating a roadmap to Latin America's future development.

The position that liberal reforms, private enterprise and foreign investment contributed to inequality and dependency is supported by a number of twentieth-century examples, but the more complex reality is that Latin America's development reflects Latin American history. The culprit for her retarded development was the peculiar mix of European and indigenous traditions of political instability, interference in the capital markets for political ends, and the influence of a non-entrepreneurial landed class over economic policy. It was also the persistence of personalism in politics, social and racial stratification, and the conservative and authoritarian traditions of the past. All of this helps explain the absence of democratic and free-market institutions, and the fragility of the economies which depended on them.

These factors were not temporary. They were structural, and have persisted for almost two hundred years since Latin America's wars of independence opened New Spain and Brazil to direct foreign investment. This history lesson is relevant for us, as the same political and cultural conditions that hindered development after independence are barriers to investment and growth today. Throughout the periods of economic and political change in the nineteenth century, some basic conditions have remained the same. The persistence of instability and anti-democratic and anti-capitalist beliefs, privileged access to economic rights and state resources, and barriers to meaningful grassroots capitalism holds clues to the explanation for why Latin America fell behind western countries a century ago, and why Latin America's economic growth has been insufficient to address its poverty in the last few decades.

Latin America clearly missed a development opportunity that left her people poorer than they might have been if different paths had been chosen by her leaders during the nineteenth century. The degree of that missed opportunity can be seen in the comparative levels of income (using Gross Domestic Product in 1985 dollars) per person in various Latin countries compared with each other and that of the US. A table taken from Stephen Haber's book, How Latin America Fell Behind, shows that the divergence between the wealth of U.S. citizens and their counterparts in Mexico, Brazil and Argentina occurred in the nineteenth century, and not as a result of the expansion of trade in the twentieth century.

Haber's study shows the rate of increase in per capita wealth during 50 to 60-year periods, beginning in 1700. It is interesting that not all Latin countries "fell behind" at once, but at different periods. While the US maintained a rate of per capita growth close to two percent from 1850 to 1989, Mexico's rate of growth was negative from 1800 to 1850 and Brazil's was negative from 1850 to 1913. Argentina's growth was explosive from 1850 to 1913, and anemic from that point on. Since all three countries faced identical international commodity markets and conditions, the wide differences in growth rates can best be explained by internal factors.

One surprising piece of information that emerged early in my research was that the disparity in wealth between Latin America the northern countries is not a legacy of either pre-colonial times or of the twentieth century. This is apparent from Stephen Haber's analysis in his book, written in 1997, in which he concludes that the ratio of per capita incomes in Latin America to those of OECD countries has been "remarkably stable over the past 90 years." The "income gap" between Latin America and the US is primarily a result of a divergence in our respective rates of development during the eighteenth and nineteenth centuries. Haber explains that, "During this earlier period the economies of the North Atlantic underwent a process of structural transformation that produced sustained economic growth. The economies of Latin America did not follow this path, stagnating for most of the period."

Other economic historians support Haber's assertion. Victor Bulmer-Thomas says that in the early nineteenth century, living standards of Latinos were low, "but not much lower than in North America, probably on a par with much of central Europe," and higher than many countries in Asia whose people now have much higher standards of living than Latinos. One can base this comparison on a number of factors, including personal income, life expectancy at birth, caloric consumption per head, and infant mortality. Looking at these different measures of standard of living reinforces the point that economic development is not an abstract concept - it is a measure of real needs and quality of life.

Haber blames the loss of quality of life on economic "stagnation," but this is only a description of what happened; not an analysis of the reasons it occurred. Haber outlines several arguments to explain this stagnation, including the work of other historians with his own. Taken together, their conclusions point to a mix of political, geographical and historical reasons for the "income gap" - none of which coincide with popular conceptions about exploitation and dependency. While dependency theory has been (rightfully) discredited in U.S. universities, it is still dominant in Latin American and Mexican academia. This is unfortunate, as it stands in the way of a better understanding of the causes and solutions to poverty in much of our hemisphere.

In addition to the internal problems cited by the authors in Haber's book one might add two structural features of Latin political economies that were impediments to change throughout the nineteenth century: the land tenure system and the failure to industrialize. The first stratified rural society, and the second made it difficult to escape from a dependence on the agricultural sector. The subsistence economy of the Indian village and landed estate produced a two-tier land tenure system that divided most Latin Americans into land owners and laborers or tenant farmers.

These class divisions and agricultural dependency were institutionalized in the cultures and history of both the indigenous and Iberian traditions. Consequently, Latin America's rural and hierarchical structure in the nineteenth century was a result of both colonial and pre-colonial legacies. The persistence of these forms in the face of industrialization was the result of resistance by both landed aristocracy and the Indian ejido to liberal economic reforms that threatened their traditional ways of living. Although land reform part of the agenda of most liberal reformers, the political or economic reforms achieved in the nineteenth century did not replace the dominance of the large estate - the hacienda or estancia, and the encroachment upon the Indian ejido simply left the Indians in the position of landless laborers.

As Latin America's economies were based in agriculture, unequal distribution of land was the reason for the skewed income distribution which persisted through the twentieth century in Latin countries. In Central America, Mexico, Brazil and Chile the top ten percent of the population today earns between thirty and fifty percent of the country's household income, while the poorest twenty percent earn less than five percent of total household income. Income distribution is somewhat more equitable in the other countries of South America, with Cuba as the stand-out example of "equitable" income distribution. (The top ten percent of wage-earners in the United States actually earn a smaller proportion of total household income - 25 percent - than in any Latin country except Cuba, where they earn 20 percent.) The figures weren't available to me, but I suspect that the US is also unique in that the top ten percent of income earners here account for 60 percent of the country's personal income tax receipts, with the other 90 percent of the taxpayers contributing the remaining 40 percent of the government's tax revenue. We have a more equitable society in part because we have a more equitable tax system.

One thing the various Latin states had in common was the necessity of integrating their internal markets within inaccessible regions, and tying them to the world economy through exports. As part of this effort they promoted exports of primary agricultural commodities, both among the new states and between Latin America and the industrializing nations of the north. This was perhaps the most ubiquitous and significant element of change in Latin economic models. Where Spanish restrictions on trade had inhibited the growth of a diverse export sector, the opening of trade following independence allowed capital and labor to gravitate to the most productive economic areas, and those areas were in basic commodity production and export. For Latinos, the export of basic commodities was both a source of wealth and a source of foreign exchange with which to pay debts and to purchase imports. Emerging Latin states, hungry for revenue, saw exports as an obvious opportunity for economic growth and tariff revenue. Commodity exports are still the principal revenue-earners more than a century after Latin America became independent.

Both liberals and conservatives recognized that a strong export economy was key to economic growth, but wrongly felt that, as one economic historian put it, "provided the export sector expanded, the rest of the economy would take care of itself." One of the problems with this complacent view is that commodity exports don't stimulate internal markets or development of related industries. The effect that exports have on the development of related industries is called "forward" or "backward" linkages. An example of a commodity with "forward linkages," would be beef production in Argentina, which stimulated the development of a leather industry, the production of salted beef for export, tanning, and the growth of urban centers where these industries located. In contrast, production of nitrates, guano, coffee, base metals and bananas did not provide a stimulus for developing industry or technology, and consequently did not provide new sources for middle-income wages and the development of internal markets.

Concentration of productive activity in the export sector, particularly the basic commodity export sector, did not allocate these productivity gains to other sectors of the economy. This hindered Latin America's progress toward a dynamic mid-sized sector of agricultural producers. In fact, Latin America's economy was primarily rural and agricultural until the twentieth century. It was not until the 1955 that manufacturing overtook agriculture. The lack of linkages to silver production in Mexico, banana and coffee production in Central America or guano production in Peru meant that few domestic industries grew up around those commodity exports. Few industries meant few opportunities for employment, and little opportunity for the rise of an entrepreneur class to fill the gap between laborers and owners.

Export potential by itself did not explain the success or failure to develop economically. Where there was no reinvestment of export revenues, construction of roads and railroads, and development of policies and institutions that encourage entrepreneurship and broad-based creation of wealth, then gains from a robust export sector did not last. Argentina's export sector was so profitable in the mid to late nineteenth century that ranchers and beef processors could attract European workers with wages that were higher than those in Europe. Exports of hides, tallow and beef increased dramatically with the industrial revolution in Europe and the advent of refrigerated steam ships.

Raising cattle in the Pampas was profitable enough that European immigrants, many of whom came as seasonal laborers from Spain and Italy, settled and added a Mediterranean component to Argentina's culture. European immigration rose from 5,000 in 1860 to over 200,000 by 1890 - many of whom were seasonal laborers headed for the Pampas. European immigration was the source of two factors of production - labor and capital - that were chronically short throughout Latin America. Immigrants also bought and developed uncultivated public land from the government, forming a class of small landowners in a country where agriculture had been dominated by a few thousand estancias.

Just as Argentina's export sector provided the opportunity for sustained overall economic growth, the example of Peru shows how such an opportunity can be squandered. Although Peru was an example of the "progressivism" of liberal political and economic policies following independence, it was also an example of the failure of these policies to fulfill their potential. In Peru, more than any other nation, an opportunity to grow and integrate the internal economy from export-sector revenue was available, and was lost through a combination of lack of political unity and the disastrous War of the Pacific with Chile. Peru was blessed with one easily mined commodity on which it built its export economy - guano. Peru exported gold, silver, copper, alpaca and sheep wool, nitrates and several agricultural commodities such as cotton, cacao and quinine bark, but guano was by far the largest export item, and was largely responsible of the 4.5 annual growth in Peru's exports between 1840 and 1852.

Although guano gave Peru the capital needed to rebuild the economy after independence, repay her foreign debts, and capitalize new industries, a succession of Peruvian governments missed these opportunities, and left the country badly in debt when the guano was depleted in the 1870s. Peru is a case study in how export revenue generated internal demand for consumer goods, but did not stimulate diverse industries. Guano production was never the privatized, but was owned and controlled by the state. Its marketing to Europe was handled exclusively by a French merchant named Auguste Dreyfus. The government netted about 60 to 70 percent of total guano sales, which translated into about 400 million pesos between 1840 and 1880. By the 1870s, the income from guano sales constituted eighty percent of the state's revenue.

The way the state invested that revenue indicates where Peru missed an opportunity for diversification and modernization, just as Mexico would miss a similar opportunity from oil exports one hundred years later. More than half of the guano revenue was used to either expand the state bureaucracy or the military, with 20 percent going towards railway construction, about ten percent going to foreign investors and bondholders, and seven percent devoted to reducing the tax burden on the poor.

Guano revenues did make it possible for the state to pursue a program of manumission in which over 25,000 slaves were freed. Slave owners on the coast received over 7.6 million pesos from the government, which not only freed slave laborers to enter other industries, but converted a physical asset (the slaves) to a liquid asset (cash) for plantation owners. They replaced the lost slave labor with imported Chinese labor, but still wages rose during the guano period at a rate of about three percent per year. The accompanying increase in internal demand resulted in greater demand for imported goods and rising prices - a consequence of Peruvian industry's failure to respond to stronger local markets by creating more and diverse goods.

Heraclio Bonilla lists the reasons for this as a lack of available capacity to expand production, the absence of an entrepreneurial class after import competition destroyed the artisan sector, and the failure to create a legal or institutional framework that would support new industries. Worse, the guano revenues encouraged the Peruvian government to issue new debt, which simply consolidated previous debt that had been in default. Again, there is a nineteenth-century parallel to a twentieth-century problem in that Peru did what Argentina and Mexico would do one hundred years later: fail to use the "boom" in commodity exports to reduce their levels of national debt. Yet, one historian's perspective on the Peruvian crisis suggests that the "debt crisis" of the 1980s could only have been avoided if the Mexican and Brazilian governments had undertaken radical program to change their economies. That was something that would have been politically impossible until the economic crisis forced it upon the Miguel de la Madrid administration of Mexico in 1984.

Peru's unpaid debt to British banks and financiers created after independence was not forgiven, but continued to accumulate interest into the 1840s, when guano revenues made it possible to service the loans again. This encouraged foreign and local investors to press their claims against the government, and all debts were consolidated in 1849. As guano revenue declined, the state used its creditworthiness to borrow more, and by 1872 had outstanding debt of around 35 million pounds, which became unserviceable, and led to second default that year.

Although an increase in wages created an increased demand for local foodstuffs and beef, highland agriculture was not as significantly affected, and the industries which sprang up in Lima to produce beer, biscuits, butter and processed foods were mostly started by immigrants with their own savings. As Bonilla notes, the "colonial character of the Peruvian economy" and the lack of a well-financed Peruvian class of entrepreneurs meant that the opportunity to create and diversify regional markets was missed. The degree of change that would have been required was too great, as it would have implied remaking the self-sufficient Indian communities into market-oriented landowners - changing the patron-client relationships between hacienda and plantation owners and their laborers, and creating a set of laws and institutions which would have allowed the liberal model to function. In retrospect, this was an unrealistic task, both politically and culturally, for any Latin state to accomplish in a few decades.

Since primary product exports seldom fostered parallel development in the domestic sector, Latinos regarded them as a source of dependency on the actions of foreign buyers. Though they were also an important source of investment capital, it may be accurate to say that it was only their insufficiency that was responsible for their unpopularity among workers and intellectuals. In any case, the inability of commodity exports to either stabilize economic growth or distribute it equitably resulted in the popularization of a theory that explains Latin America's economic failures as a result of unequal terms of trade.

The mixed results Latin countries had with export-driven growth invites a review of "dependency theory". It's adherents in Latin America are called dependentistas, and their position is roughly that Latin Americans were placed in a position of dependency on foreign merchants and bankers due to factors outside of their own control. At the core of dependency theory is the premise that over time the value of primary-commodity exports will decline relative to the value of manufactured products and luxury items imported by non-industrialized countries. The result is an unequal exchange, with deteriorating terms of trade for the suppliers of labor and natural resources. The resulting theory of exploitation, as Stephen Haber writes, has become academic orthodoxy, dominating not just economics, but "historical, political, and sociological writing about Latin America."

Dependency theory, as articulated by Bradford Burns in The Poverty of Progress, is an application of Marxist class analysis to international trade theory. In the preface of Burns' book, he

Exports and Dependency Theory

Growth and the Export Sector

Land Tenure and Economic Stratification

The Role and the Risks of Foreign Investment