Economic Development

views updated May 23 2018

Economic Development

Economic development refers both to increases in human productivity and to improvements in physical and psychological well-being or welfare. The productivity of national and regional economies, and of the global economy, is usually measured by dividing an estimate of the total output of goods and services, such as gross domestic product (GDP), by the total population of the relevant area. The same GDP per capita, however, may be achieved in economies with vastly different characteristics. Some may be rich in natural resources, whereas others rely more on skills and technology. Some economies depend on external trade and capital flows, whereas others enjoy deep internal markets and high rates of domestic investment. In some countries the distribution of economic output is highly concentrated; others achieve greater equality. In some places productivity advance has depleted resources or damaged the environment; in others the use of renewable resources and ecology-friendly technologies has limited the impact. Thus, although GDP per capita may be convenient for measuring and comparing the productivity of economies, it does not capture many other important dimensions of economic activity.

Human well-being or welfare depends critically on productivity, but the relationship is not straightforward. Productivity advance has coincided with stagnation or even decline in welfare indicators for some populations over extended periods of time (e.g., during the Industrial Revolution in most countries). The measures commonly employed by economists to gauge human well-being refer only to physical welfare. Such measures include life expectancy, average height or body-mass (the ratio of height to weight), or poverty rates (that show the percentage of the population lacking one or more of the basic necessities of life). Poverty rates are usually higher in societies where wealth and income are concentrated in fewer hands. There is no simple and straightforward relationship between physical and psychological well-being; human populations have proved to be resilient even in the face of severe physical deprivation. Economists generally assume that people who are materially better off are likely to enjoy life more.

GDP per capita, 2001 (in 1990 Geary-Khamis international dollars)
Country/RegionGDP per capitaPercent USA
Source: Maddison (2003).
Costa Rica6,12622
Dominican Republic3,65113
El Salvador2,71310
United States27,948100
ASIA (excluding Japan)3,25612
Table 1

At the beginning of the twenty-first century, most of the Latin American economies suffered from low levels of productivity and physical welfare relative to the advanced economies. Table 1 compares the GDP per capita of the twenty Latin American countries with those of the wealthier developed nations, including the United States, Western European countries, and Japan. It also compares Latin America to the even poorer nations of Africa and Asia. The figures in the table adjust the GDP estimates produced by each country to take into account differences in the purchasing power of each country's currency. Using the same unit of account (in this case international Geary-Khamis 1990 dollars), with roughly the same purchasing power in each country, makes comparison across countries more accurate. These estimates and others like them are usually referred to as having been adjusted for "purchasing power parity," or PPP estimates. Because less-developed countries often have weaker currencies and lower labor costs, their price levels tend to be lower than those of wealthier nations. PPP-adjusted estimates thus tend to increase local currency GDP estimates for the developing world and in turn show a narrower gap in GDP per capita between developed and developing nations.

Table 1 shows that the twenty Latin American countries (including Haiti) had an average per capita GDP in 2001 of $5811, or about one-fifth that of the United States, which had the world's most productive economy, but closer to one-fourth the levels of Western Europe and Japan. By contrast, Latin America's average stood at nearly four times that of Africa and nearly twice the Asian level (excluding Japan), and was higher in 2001 than the level to which the countries of the former USSR have fallen since 1990. Latin America's GDP per capita in 2001 was roughly comparable to that of Eastern Europe. In short, on average, Latin America is a "middle income" region.

The table also shows that there is great variation within Latin America. The GDP per capita of Chile, with the most productive economy in the region, was thirteen times higher than that of Haiti and over six times more than that of Nicaragua, the region's poorest economies. Latin America's most productive economies in 2001 were large, resource-rich countries with (except for Mexico) better-educated populations: Argentina (temperate agriculture), Chile (temperate agriculture, copper, timber, fish), Mexico (oil, temperate agriculture), Uruguay (temperate agriculture), and Venezuela (oil). Latin America's least productive economies were small exporters of tropical products, with less-educated populations, and with a history of political instability (Haiti, Honduras, Nicaragua), or landlocked (Bolivia, Paraguay). The gap between the richest and poorest Latin American countries, at 13:1, was large, but nonetheless much smaller than the gap between the world's richest and poorest nations, the United States and Chad, which was 238:1 in 2003.

Global inequality in c. 2000 (Gini index for income distribution)
RegionCountryGini Index
Source: For Latin America, Szekeley and Montes (2006), pp. 596-597; dates vary from 1996 to 2000. All others from World Bank, World Development Indicators (2006).
Latin AmericaArgentina0.493
Costa Rica0.461
Dominican Republic0.478
El Salvador0.545
North AmericaUSA0.408
Eastern EuropeCzech Republic0.254
Western EuropeDenmark0.247
United Kingdom0.36
South Africa0.578
Table 2

In addition to low productivity in comparison to the developed countries, Latin America is the most unequal region in the world. Table 2 uses a standard measure of inequality, the Gini index, to compare the twenty Latin American countries to other countries and regions. This index has a value of zero, when there is perfect equality of income, and 100, when all of the income accrues to a single individual. As the table shows, the Gini index values for the developed countries vary from a low of 0.247 (Denmark) to a high of 0.408 (the United States). Every Latin American country is more unequal than even the most unequal developed county. Latin American inequality also stands out in comparison to poorer regions (Asia and highly variable Africa) and the regions closest to it in GDP per capita (Eastern Europe and the former USSR).

How and why did Latin America come to occupy its current position in the world economy? How and why did the productivity of the region's economies come to be so backward in comparison to the advanced nations, yet so far ahead of Asia and Africa? How and why did income distribution in Latin America come to be so unequal, and poverty rates so high? To address these questions, this entry first examines data on long-term trends in productivity and welfare in Latin America. It then offers a review of the geographic, institutional, and policy environment that shaped the Latin American economies in each major epoch since the Columbus voyages. It concludes with an analysis of the prospects for economic development in Latin America in the twenty-first century.

GDP per capita, 1500–2001 (in 1990 Geary-Khamis international dollars)
YearUSASpainLatin AmericaaArgentinaBrazilChileColombiaCubaMexicoPeruUnited KingdomEastern EuropebJapanChinaAfricac
a Includes Mexico only in 1500 and 1600; 1700 is the unweighted average of Cuba and Mexico; 1800 includes Argentina, Brazil, Chile, Columbia, Cuba, Mexico, and Peru; thereafter Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, and Venezuela.
b Includes Albania, Bulgaria, Czechoslovakia, Hungary, Poland, Romania, Yugoslavia
c 57 countries
d 1929
Sources: Maddison (2003), except for Mexico from Coatsworth (2003); figures for 1800 Colombia from Kalmanovich (2006); and other 1800 data from Coatsworth (1998).
Table 3


Measuring productivity and welfare in the distant past requires the use of imperfect data and much guesswork. The principal sources for guesswork about trends in GDP per capita in the colonial era are trade and fiscal data collected by Spanish colonial officials, and demographic data from pre-Columbian tax and tribute records and Church registries of births and deaths. Portuguese colonists and administrators arrived later in Brazil than in Spanish America and kept fewer records. A few rough estimates of colonial GDP exist for the larger colonies, beginning with Cuba in the late seventeenth century. In the unstable half-century or so after independence in the 1820s, record-keeping did not improve and in many cases deteriorated, though compilations of data by scientifically minded individuals and even government agencies became common after midcentury. Toward the end of the nineteenth century, Latin American governments began carrying out regular population censuses; in the 1920s and 1930s, central banks and census bureaus began collecting economic data on a regular basis. Retrospective GDP estimates for the nineteenth and early twentieth centuries based on such sources have been constructed by historians for Cuba and for several of the larger countries (Argentina, Chile, Mexico, Uruguay). In the post-World War II era, Latin American governments began routinely issuing estimates of economic activity, many for the first time.

What is known about trends in productivity in Latin America over the long run from the Conquest to the twenty-first century is summarized in Table 3. The estimates indicate that, by the end of the seventeenth century, and possibly much earlier, average GDP per capita in the European-dominated regions of Latin America was comparable to that of Western Europe and the thirteen British North American colonies. By the end of the colonial era, the region had slipped behind, though slave (Cuba) and settler (Argentina) economies continued to outpace the newly independent United States. As economic growth accelerated in northern Europe and the United States in the nineteenth century, most Latin American countries found themselves challenged by foreign invasion and internal civil strife. In these conditions, most of the region experienced stagnating or even falling productivity, just as growth accelerated in the industrial economies. By the late nineteenth century, Latin America had become underdeveloped.

As postindependence turmoil subsided, international trade flourished and capital flows from the developed world, especially from Great Britain, accelerated after 1870. As a result, the Latin American countries experienced a burst of economic growth that carried them well beyond the levels achieved in the late colonial era. This growth spurt was fueled primarily by a spectacular rise in exports, which was briefly interrupted by World War I and then continued until the onset of the Great Depression in 1929. Growth resumed from the depths of the Depression and accelerated somewhat between 1950 and 1980, but never returned to the rates of Latin America's economic belle epoque (1870–1930). Moreover, the financial and economic crisis that struck the region in 1982 stalled economic growth for over a decade throughout Latin America. By the end of the twentieth century, the productivity of the major economies in Table 3 averaged over eight times the levels of the early nineteenth century. Most of these gains occurred in the twentieth century, which saw nearly sixfold increases in GDP per capita.

Impressive as these gains were, they did not match the growth achieved in the developed world. Less-developed economies might be expected to grow faster than mature industrial economies by leapfrogging over older technologies, as occurred in much of East Asia beginning in the late 1960s. Catching up, or what economists refer to as "convergence," did not occur in Latin America in the twentieth century. From 1900 to 2001, the region's GDP per capita fell from over one-fourth to barely one-fifth the U.S. level. Although the productivity gains of the past century were impressive in absolute terms, the Latin American economies nonetheless failed to keep pace with the growth of the developed world. Nor did any of the region's economies come close to matching the spectacular growth of the less developed Asian economies in the second half of the twentieth century.

Life expectancy
[in years at birth]
RegionCountryPrior to 196019602000
Source: For early years, UN Demographic Yearbook 1951; for 1980, UN Common Database; for 2000, World Development Indicators.
Latin AmericaArgentina6574
Brazil37 (1920)5570
Chile37 (1930)5777
Costa Rica6278
Dominican Republic54 (1962)71 (2002)
El Salvador5170
Guatemala37 (1939–1941)4666
Mexico33 (1930)5774
Panama52 (1941–1943)6174
North AmericaUSA60 (1929–1931)7077
Canada61 (1930–1932)7179
Eastern EuropeCzech Republic54 (1929–1932)7075
Western EuropeDenmark63 (1931–1935)7277
France57 (1928–1933)7079
Germany61 (1932–1934)7078
United Kingdom7178
Nigeria39 (1962)47 (2002)
South Africa4948
Table 4

Data on trends in welfare for the colonial era and the nineteenth century are much scarcer than for output, trade, and taxes. Precolonial and early post-Conquest living standards have been studied, based on a small number of sites where skeletal remains have made it possible to estimate average height and life expectancy. This information can be supplemented with data on the height of recruits into the colonial militias in the late eighteenth century and of soldiers in the new national armies after independence in the 1820s. The era of census taking in the late nineteenth century, which could not begin until Liberal governments wrested control of civil registries from the Catholic Church, inaugurated the era of modern data collection. Trends in the twentieth century are generally well-documented from censuses and, especially after World War II, by government statistical agencies and health ministries.

The data summarized in the next three tables make it clear that improvements in welfare in Latin America were inextricably linked to economic growth. As productivity (GDP per capita) rose in the twentieth century, living conditions and living standards improved. Table 4 provides comparative data on life expectancy for the twentieth century, which rises from 30 to 40 years (comparable to the Middle Ages) to over 70 in most countries. Life expectancy in Cuba and Costa Rica at the end of the twentieth century was equal to or above that of the United States. Similarly, infant mortality rates that hovered near 300 per 1,000 live births at the turn of the century in Mexico and the Andes fell to near 100 by 1940 (see Table 5), and then fell to less than 50 by 2000 in every country except for Bolivia and Haiti. Finally, as Table 6 shows, literacy rates in Latin America, which were below 50 percent, and in some cases below 20 percent, at the beginning of the twentieth century rose steadily to more than 90 percent in most countries by 2000. Nonetheless, as Table 7 shows, Latin America suffers from unusually high poverty rates due to its unequal income distribution.


The current state of knowledge makes it impossible to compare the pre-Columbian economies of the Western Hemisphere. In 1492 most of the New World's population lived in nomadic or seminomadic societies organized into bands and chieftaincies. Division of labor was rudimentary and based mainly on gender. Productivity levels were well below those of Western Europe. In the Andes and Mesoamerica, however, complex societies and states emerged after the development of sedentary agriculture. The development of agriculture occurred later in the Western Hemisphere than in the Old World for three main reasons. First, human populations did not arrive until about 13,000 bce, during the last Ice Age and prior to the agricultural revolution in the Fertile Crescent. Immigration slowed after the land link to northwest Asia fell beneath the sea; those that reached the New World had no knowledge of agriculture. Second, the food crops eventually adapted for cultivation (maize, beans, potatoes) were more difficult and time-consuming to breed for food consumption than the Eurasian grasses that became wheat, barley, rye, and other food grain staples in the Old World. Third, the abundance of wild life (game, fish, and wild plants) in a hemisphere with few humans made foraging more productive than in the Old World, just as the mass death of megafauna in Eurasia pushed people to seek new sources of food. It took more time, too, to discover that the mineral rich soils of the highland plateaus were better suited to cultivation than other regions. While some urban centers did develop along the north coast of Peru, by using the water of mountain-fed streams for irrigation, most of the agricultural societies of the New World developed inland at higher elevations, far from the ocean.

By the beginning of the first millennium ce, city states and even large territorial empires arose in the Andean highlands and from Central Mexico south into northern Central America. Some of these new societies, such as the Mayan city states, failed because of mismanagement of fragile ecosystems or in the face of natural disasters—catastrophes common in the Old World, too. Nonetheless, by the time the Spaniards invaded the mainland in the first half of the sixteenth century, as many as 30 million people were living in highly organized and productive societies centered on imperial cities with populations as high as that of Tenochtitlan (Mexico City), which numbered 100,000 to 200,000 inhabitants. Although no data exist on which to base direct estimates of productivity, urbanization rates can be used as an indirect measure. See the comparative data in Table 9. City populations included many people who contributed little or nothing to food production. These groups—rulers, priests, war-riors, administrators, architects, construction workers, craftspeople, and traders—survived only because agricultural productivity was high enough to provide surpluses for their subsistence. In turn, some of these nonagriculturalists contributed in their own ways to increasing GDP: rulers made laws enforced by warriors; administrators, architects, and construction workers produced housing and fortifications; craftspeople produced a wide variety of products like clothing, weapons, and religious art; traders pioneered markets that promoted exchanges linking distant producers.

Infant mortality (in first year, per 1000 live births)
Sources: Data for 1940 infant mortality rate, UN Demographic Yearbook 1949–50; 1960 infant mortality rate, World Development Indicators; 1980 infant mortality rate, Statistical Abstract of Latin America, Vol. 38 and B. R. Mitchell, International Historical Statistics: Europe 1750–2000, 5th ed. (New York: Palgrave Macmillan, 2003); 2000 infant mortality rate, World Development Indicators.
Latin AmericaArgentina906132.217
Costa Rica1328719.212
Cuba83 (1938)35177
Dominican Republic6110262.533
El Salvador1211297729
Haiti219 (1950)169122.188
Panama93 (1950)5830.420
North AmericaUSA47267
Eastern EuropeCzech Republic9920184
Poland140 (1938)62218
Western EuropeDenmark502285
United Kingdom6122126
Nigeria143 (1945/50)165107
South Africa118 (1970)50
Table 5

Conquest and colonization in the century after Columbus's voyages raised the productivity of pre-Columbian societies, but killed most of the New World's people. Disease compounded by mistreatment reduced the New World's population from tens of millions (estimates vary from 30 million to over 100 million on the eve of the Conquest) to less than 10 percent of the pre-Conquest level (estimated at between 3 and 8 million). Meanwhile, the opening of the Western Hemisphere to international trade, the introduction of Old World flora and fauna (sugar, wheat, hoofed animals), and the transfer of Eurasian technologies (ocean shipping and navigation, the wheel, deep shaft mining, metallurgy) and organization (money, credit, private property) yielded a substantial increase in the productivity of the surviving populations. In the mainland colonies, vast mining enterprises arose using native as well as imported African slave labor. Cattle and grain estates took over the lands of empty (or merely defenseless) villages. Tropical agriculture (sugar, cacao, tobacco) arose in the northeast of Brazil and the Caribbean islands, with slaves kidnapped and forcibly removed from Africa to replace the dead or dying indigenous populations. GDP per capita rose, both because the output of exportables rose dramatically and because the population in the export-producing territories fell. By the seventeenth century, the regions dominated by European enterprise (that is, excluding the vast unconquered interior) had reached levels of output comparable (or in the Caribbean sugar islands, well above) those of Spain and most of western Europe. (See Table 3 above.)

Latin America's economies tended to stagnate, however, at levels determined by their natural resource endowments and the technology and organization imported to exploit them. Like the Iberian peninsula and most of the rest of the world as well, colonial Latin America imported, but did not produce, technological innovations. Once Eurasian technologies had been assimilated, GDP per capita leveled off unless energized by the discovery and exploitation of some new natural resource or increased demand (and therefore prices) of export products already being produced. This helps to account both for the economic stagnation that gripped the mainland colonies in the seventeenth century and persisted into the eighteenth century, despite the revival of mining in Mexico (after 1690) and Peru (after 1730). Economic decline in the mainland colonies in the seventeenth century coincided with the introduction of sugar cultivation using masses of African slaves along the tropical coasts of South America and the Caribbean islands. Slave imports and sugar production rose even more rapidly in the eighteenth century, especially in the islands wrested from Spain by the Dutch Republic, Britain, France, and others, but there is little evidence that sugar production became more efficient in the Spanish islands or Brazil. In the mining industry, no major technological innovations occurred after the amalgamation process, which uses mercury to extract silver from low-grade ores, was introduced in the 1550s. In short, colonial Latin America gained from Smithian growth—that is, as described by the eighteenth-century economist Adam Smith, from applying world-class (for the age) technology and organization to the production of natural resource-based exports. Although this sufficed to make some of the colonies and the Iberian mother countries wealthy by contemporary standards, it did not produce sustained growth.

The distribution of income and wealth in colonial Latin America was unequal by modern standards but does not appear to have been more skewed than in other, more successful economies. Table 9 compares Gini indices of wealth distribution at various sites in colonial and nineteenth-century Latin America with estimates for Great Britain and the United States. This quantitative comparison does not, however, reflect the far more significant inequalities in civic and property rights that developed and persisted in Latin America. Latin America's slaves, like those of the United States, possessed few rights and were subject to special legal codes that defined their status as inferior in nearly every respect to that of free men and women. Iberian legal codes also defined indigenous peoples as inferior in rights and status, an inferiority that persisted long after independence. The unequal distribution of civic and property rights institutionalized by slave and caste systems, rather than greater economic inequality in wealth or income, helps to explain Latin America's persistent failure to invest in human resources, even in the modern era, in contrast to other developed and developing societies.

Causes of Economic Stagnation

The principle causes of Latin America's economic stagnation from the colonial era to the late nineteenth century were an inhospitable geography, inadequate institutions, and excessive political risk. The main geographic constraint on productivity in the colonial era was the lack of navigable rivers linking exploitable natural resources to external markets. Most navigable rivers, like the Amazon system, ran through tropical regions with thin soils unsuitable for export agriculture. Rich soils and plentiful supplies of indigenous labor could be found in the highlands, but only precious metals and gems, with high value to bulk ratios, could be exported profitably given exorbitant transport costs. Overland transport, whether by wagon or mule train, cost ten times or more per ton kilometer than water transport.

Literacy rates in Latin America, 1900–2000 (% literate over 15 years)
CountryLate 19th century or 19001940195019702000
Sources: Data for late 19th century and 1900, Sokoloff and Engerman (2000), p. 229; 1940 literacy rates, UN Demographic Yearbook 1949–50; 1950 literacy rates, UN Demographic Yearbook 1955; literacy rates for c. 1970, Statistical Abstract of Latin America, Vol. 38; year 2000 literacy rates, UNESCO.
Argentina5287 (1947)9397 (2001)
Bolivia173273 (1976)87 (2001)
Chile43718996 (2002)
Colombia32 (1918)56 (1938)81 (1973)93 (2004)
Costa Rica337988 (1973)95
Cuba40.579 (1943)95 (1979)100 (2002)
Dominican Republic43647787 (2002)
EcuadorN/A5674 (1974)91 (2001)
El SalvadorN/A29 (1930)3857 (1971)81 (2004)
Guatemala11.33546 (1973)69 (2002)
Honduras3336 (1945)57 (1974)80 (2001)
NicaraguaN/A58 (1971)77 (2001)
ParaguayN/A6680 (1972)93 (2004)
Peru38.0 (1925)4273 (1972)88 (2004)
Uruguay5494 (1975)97 (1996)
Venezuela34.0 (1925)43 (1941)5177 (1971)93 (2001)
Table 6

Institutional constraints included legal discrimination against populations of African or indigenous descent (slave and caste systems), poorly defined and enforced property rights (even for European and creole elites), colonial trade monopolies that tied the colonial economies to their stagnant Iberian mother countries, and primitive fiscal systems that relied on state monopolies, burdensome taxes and fees, forced loans and confiscatory measures in wartime, and intrusive regulatory schemes to extract revenues from the most productive regions.

Political risk, that is, the risk of expropriation, was reflected in persistently high interest rates in comparison to Britain and its colonies. After independence, when freer trade, lower taxes, and looser regulation should have stimulated productive advance, political instability and international warfare wiped out most of the potential gains.

Economic historians used to argue that external dependence and even exploitation contributed to Latin America's relative backwardness. But research has shown that GDP per capita has been positively correlated with greater dependence on trade for as far back as data can be found. Table 10, for example, compares trade as a percentage of GDP with GDP per capita in 1800. In every case but Brazil, the economies that traded more were more productive than those in which exports accounted for a smaller proportion of GDP. (And the GDP estimate for Brazil may be too low.) Similarly, sustained economic growth, delayed until the late nineteenth century, was highly correlated with export spurts fueled by capital and technology imported from Western Europe and the United States.


Most of the Latin American colonies of Spain and Portugal secured their independence in the 1820s. By this time, the cumulative effects of the Napoleonic Wars (1796–1815) and the wars for independence (1810–1824) had caused a region-wide economic decline. Unlike Europe and the United States, however, the Latin American colonies failed to recover rapidly. In most cases economic recovery took decades. Mexico, for example, did not return to the level of its 1800 per capita GDP until the 1870s. The main exceptions were the export-intensive settlement colonies of Argentina (hides, salted beef, wool, and then grain) and Chile (copper), though Peru experienced a growth spurt in the 1840s to 1870s based mainly on the export of guano from offshore islands. In most cases, however, economic stagnation or even decline lasted for decades, just as industrial revolutions accelerated growth in the north Atlantic economies. As shown in Table 3 above, GDP per capita in the Latin American countries for which there are estimates fell from an average level well above that of the thirteen British colonies in North America in 1700, to 60.4 of the U.S. level in 1800, and then to 30.6 percent of U.S. GDP per capita in 1870.

This relative decline occurred despite a favorable external economic environment. Terms of trade moved in Latin America's favor for most of this troubled era. The Industrial Revolution made manufactured goods cheaper to import and simultaneously raised demand and relative prices for Latin America's exports. In addition, a dramatic decline in ocean shipping rates favored exporters of most raw materials (heavy bulk commodities with low value to volume and weight). The end of the Spanish and Portuguese commercial monopolies also helped to make imports cheaper and raised the income of export producers by eliminating compulsory transshipment through ports in the Iberian mother countries. In the early 1820s, in anticipation of export booms that never materialized, capital began flowing from Britain to Latin America, mostly into the public debt of the newly independent countries; but substantial quantities of direct investment also flowed to revive mining production in Colombia and Mexico, and into tropical agriculture. Despite expectations, sustained economic growth did not occur in most of Latin America until after 1870.

The unexpected and prolonged stagnation after independence had two principal causes: institutional constraints and political risk. Transport costs that had impeded growth throughout the colonial era were less important, not only because of the fall in ocean shipping rates and other costs, but also because railroads, a revolutionary technological innovation that became widely available in the 1830s, lowered land transport costs throughout the world. The first contracts and concessions for railroad construction in Latin America were signed in that decade. Unfortunately, railroad building could take place on a large scale only where stable governments could provide reasonable security, give credible guarantees against expropriation, exert eminent domain to create rights of way, and grant construction subsidies to private developers. These conditions did not exist in most of Latin America. The most rapid adoption of the new technology occurred in Cuba, which avoided instability (until 1868) by remaining a colony of Spain. Railroad development, which eventually proved even more crucial for economic growth in Latin America than in Britain or the United States, could not begin until Latin America achieved stable government and began modernizing the antiquated economic institutions inherited from the colonial era.

Institutional Modernization

Institutional modernization occurred in two phases. In the first, lasting as long as five decades, Latin America emancipated itself from the most debilitating institutional constraints inherited from the colonial era: caste systems and slavery, archaic property rights (entail, mortmain), internal taxes, state monopolies, centralized public regulation and controls, and separate court systems—taxes, and other rights for privileged groups. These constraints persisted longest where creole elites faced potentially hostile slave and indigenous populations and clung to inherited institutions for protection against liberal egalitarianism. Large slave or indigenous populations in Brazil, the Caribbean, Mexico, Guatemala, Peru, and Bolivia pushed elites toward conservatism and reaction. In these cases, institutional modernization did not begin in earnest until destructive civil wars had made it impossible to sustain major components of the colonial legacy. Elsewhere, institutional changes occurred as a by-product of independence or took less time to achieve unless complicated (as is the case of Argentina) by political struggles between poorly integrated regional interests. By the 1870s most of Latin America had experienced liberal revolutions embodied in new constitutions and legal codes that clearly signaled a break with the colonial past.

Poverty headcount ratios (percentage of population below $1/day and $2/day)
Sources: Data from World Development Indicators and World Bank.
Latin AmericaArgentina2004717
Costa Rica2003310
Dominican Republic2004316
El Salvador20021941
North AmericaUSA---
Eastern EuropeCzech Republic19962-
Western EuropeDenmark19978-
United Kingdom19996-
South Africa20001134
Table 7

Consolidation of the new order required political stability. Harbingers of the new era were the shift from reliance on internal direct taxes to indirect (mainly tariff) revenues, reforms of fiscal and tax systems, the adoption of new civil and commercial codes, judicial reforms that made courts more efficient protectors of elite property rights, the privatization of public lands and other assets, and the beginning of specialized legislation to encourage banking, insurance, mining, and other vital sectors of the economy. The defeat of conservative forces, or more often the recognition by new generations of creole elites that the colonial past had become irretrievable, facilitated the transition to stability. Consolidation of the new order would have taken much longer, however, without the incentives to peace, especially among contending elites, offered by the realistic prospect of attracting foreign capital and technology and profiting from export growth. In several countries, for example, new commercial codes and banking laws passed national legislatures only when leaders understood that interested foreign investors—especially railroad companies—insisted on them. In short, sustained growth began after 1870 in an unusually favorable conjuncture, when external incentives helped to consolidate political stability and encourage governments to press forward with institutional modernization.

Urban population as percentage of total, 1500
[percentage living in towns of over 5,000]
Source: Paul Bairoch, Cities and Economic Development: From the Dawn of History to the Present (Chicago: University of Chicago Press, 1988); Daron Acemoglu, Simon Johnson, and James A. Robinson, "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," Quarterly Journal of Economics 117, no. 4 (November 2002):1280-1289.
Argentina, Brazil, Chile, Paraguay, Uruguay, Venezuela0
Costa Rica9.2
Dominican Republic3
El Salvador9.2
Table 8


With elite dominance consolidated by political stability and the exclusion of contentious underclasses, and wealth now concentrating in elite hands, belle epoque regimes focused on managing their remarkable successes. Between 1870 and 1930, Latin America's eight largest economies grew at roughly 1.6 percent per year, the same rate as the benchmark U.S. economy and faster than any other region in the world (see Table 11). Although the productivity gap between Latin America and the United States did not diminish, the gap between Latin America and Western Europe declined notably. Exportled economic growth with high rates of targeted protectionism enabled most of the larger economies (especially Argentina, Brazil, Chile, and Mexico) to expand and develop their light manufacturing industries, such as textiles, food processing, beverages, glassworks, paper, and the like. Banking, virtually absent from Latin America at midcentury, suddenly took off, encouraged by new legal codes and government fiscal operations. Investments in infrastructure, nonexistent for more than a half century (in some areas since the first century after Conquest) took off when governments recovered their credit rating, borrowed heavily in London, Paris, and Frankfurt, and used the proceeds to subsidize railroad building, rebuild ports, and modernize towns and cities.

Foreign capital, technology, and trade reached unprecedented levels during the belle epoque. Table 12 compares trade (exports and imports as a percentage of GDP) in 1928, 1938, and 2003–2005, and capital flows (as a percentage of net investment) in 1900, 1950, and 1989–1990 in the Latin American economies for which estimates have been constructed. The table shows that "globalization," that is, the degree of economic integration of the Latin American and world economies, was greater at the beginning of the twentieth century than at any time since. The post-1982 market-friendly reforms, often acclaimed (or denounced) for having opened a new era of globalization, have yet to lead to the levels of global economic integration that characterized the economies of the belle epoque.

The most enduring and positive results of the growth achieved in the belle epoque can be seen in the huge investments made by governments of this era to improve urban life. Parks, monuments, public buildings, and opera houses are not the only legacies of this era. Trolley and later bus and metro systems proliferated, as did gas lines, then electric wiring, and telephones. Most important of all, elites learned that their own health and that of their families could not be safeguarded without improving heath conditions for all, because infectious diseases could not be confined to poor neighborhoods. Initially, urban reforms were designed to beautify city centers through slum clearance, forcing the poor to move out toward the fringes. Eventually, the growth of investments in sanitation, sewage treatment, and other public health initiatives dramatically cut death rates, especially infant mortality rates, and raised life expectancy, fueling a population explosion that did not abate for nearly a century.

Globalization between 1870 and 1930 spurred economic growth and improved living standards but did not usher in an era of free trade, inclusive citizenship, and progress for all. Latin American exports grew rapidly, but after early experiments with low tariffs in the 1820s, nearly every country pushed rates up to unprecedented levels to raise revenues as state capacities to collect other kinds of taxes declined and chronic political instability set in. By midcentury Latin America had become the most protectionist region in the world. (The United States briefly imposed even higher tariff rates during the Civil War, but allowed them to decline sharply thereafter.) The high tariff regime persisted, even after political stability and economic growth eased fiscal constraints, because instead of lowering tariffs the Latin American countries began to target their already high tariff rates to protect new industries. Latin America continued to be the most protectionist region in the world until the rest of the world caught up by raising tariffs in the 1920s. Latin America experienced export-led growth, but nothing like free trade, in the belle epoque.

Similarly, the nominal equality enshrined in constitutions did not extend to suffrage or elective office. Property and literacy requirements limited the right to vote or hold office to tiny minorities of citizens until well into the twentieth century. As intra-elite conflicts subsided, opportunities for popular participation in political life (e.g., urban "mobs" and machines, informal militias, local and regional rebellions) diminished. Concessions to popular classes became less urgent. In Argentina and Uruguay, with highly successful export economies and largely populated by immigrants from Europe, suffrage and office holding (for men) became more democratic early in the twentieth century; elsewhere it took the Great Depression of the 1930s or World War II to extend the suffrage. Most countries did not permit women to vote in national elections until after World War II.

Distribution of wealth, 18th-19th centuries
YearCountry or regionGini coefficient
adata from Alice Hanson Jones, Wealth of a Nation to Be: The American Colonies on the Eve of the Revolution (New York: Columbia University Press, 1980).
bRichard H. Steckel and Carolyn Moehling, "Rising Inequality: Trends in the Distribution of Income in Industrializing New England," Journal of Economic History 61 (2001): 160-183; male household heads only
cLyman L. Johnson, "The Frontier as an Arena of Social and Economic Change: Wealth Distribution in Nineteenth-Century Buenos Aires Province," (unpublished paper, n.d.).
dLyman L. Johnson and Zephyr Frank, "Cities and Wealth in the South Atlantic: Buenos Aires and Rio de Janeiro before 1860," Comparative Studies in Society and History 48, no. 3 (May 2006): 634-668; upper bound estimate for Rio de Janeiro
eJorge Gelman and Daniel Santilli, Historia del capitalismo pampeano, vol. 3 De Rivadavia a Rosas: Desigualdad y crecimiento económico (Buenos Aires: Siglo XXI: 2006), p. 97.
fLowell Gudmundson, "Costa Rica before Coffee: Occupational Distribution, Wealth Inequality, and Elite Society in the Village Economy of the 1840s," Journal of Latin American History 15, no. 2 (November 1983): 442.
177413 British colonies0.73a
1774New England0.8a
1820Buenos Aires (province)0.63c
1830Buenos Aires (city)0.66d
1830Rio de Janeiro0.87d
1838Buenos Aires (city)0.78e
1838Buenos Aires (province)0.86e
1843–1846Costa Rica0.84f
Table 9

As politics become more stable, and often less democratic, economic inequality increased. Everywhere, liberal reforms made land available for purchase by individuals and land companies by abolishing entail (mayorazgo) and mortmain (inalienable property rights of indigenous villages, the Catholic Church, and many town councils). Liberal governments also sold off public lands at low prices designed to encourage private development. The onset of economic growth, combined with railroad construction linking many formerly isolated areas to distant markets, stimulated the commercialization of agriculture throughout the hemisphere. Commercialization made Latin American agriculture more productive, but it often coincided with land and labor policies that initially encouraged usurpation and theft of peasant lands and the virtual enslavement of peasant laborers in labor-scarce regions, such as the henequen (sisal) growing region of Mexico's Yucatan peninsula. Many regions of thriving peasant agriculture and pastoralism, with widespread ownership and access to land in Mesoamerica and the Andes as well as the interior of Brazil, became simultaneously more productive and more unequal as commercialization accelerated. The onset of economic growth tended to concentrate the benefits from productivity advances in the hands of small minorities and away from unskilled labor. The concentration of income and wealth, already high in many urban areas, probably worsened in much of the region.

The notable economic growth of the belle epoque tended to obscure deeper institutional and policy failures that economic growth could not solve and may in fact have worsened. Elites learned early in the era that economic growth required conditions that facilitated capital flows and the transfer of technology. Institutional and policy changes that inspired confidence among both domestic and foreign investors were crucial. Less vital, perhaps even unnecessary, were institutional and policy changes that might have inspired greater confidence in ordinary citizens. Judicial systems and law enforcement authorities became more stable and professional but served mainly to protect the rights and properties of important investors and companies. Public education helped to promote order in the cities but hardly seemed necessary in rural areas. Whereas attempting to replicate the scientific and technical establishments of the developed countries would have been expensive, even in the early twentieth century, importing technology embodied in foreign direct investment was virtually cost-free. (Only Argentina, with a GDP per capita rapidly overtaking that of Western Europe and a substantial immigrant population that included a scattering of highly trained Europeans, moved toward such a goal in the early twentieth century.)

Had external capital and technology not become available in such abundance, economic growth would have proved more difficult to get started, required deeper reforms than liberal leaders envisioned, and perhaps exacted a more egalitarian consolidation than that achieved in the "oligarchic" republics of the belle epoque. Growth might have started later, as in most of Asia, but, other things being equal, might have proved to be more robust and rapid. Instead, Latin America opted for a trajectory in which tiny political and economic elites shaped institutional development in ways that initially facilitated economic growth but soon proved both politically fragile and economically vulnerable to external shocks.

Trade as percentage of GDP, c. 1800
ColonyTotal exports (current US dollars)Exports per capitaExports % of GDPGDP per capita (current US dollars)
Note: In 1800, the US dollar and the Spanish peso were equal in value, as both were based on the Spanish silver peso.
Source: John H. Coatsworth, "Economic and Institutional Trajectories in Nineteenth-Century Latin America" in Coatsworth and Taylor, 1998, p. 33; Salomon Kalmanovitz, "El PIB de la Nueva Granada en 1800: Auge colonial, estancamiento republicano," Revista de Economía Institucional 8, no. 15 (2006): 161-183.
Table 10


From the onset of the Great Depression (1929–1930) to the financial and economic crisis of 1982, the eight largest Latin American economies grew at an average annual rate of 2.2 percent, faster than during the belle epoque but again roughly equal to the growth of the U.S. economy. (See Table 12.) As in the previous era, however, Latin American growth rates varied considerably from one country to the next and tended to be more volatile than the U.S. rate. With World War II providing a powerful stimulus, the U.S. economy grew more rapidly than that of Latin America between 1930 and 1950, whereas Latin America grew faster during the postwar boom from 1950 to 1980. Welfare indicators advanced incrementally throughout this period, despite rapid population growth and persistent inequality. The consolidation of a cold war alliance between Latin American elites and the U.S. government helped to restore or retain more conservative regimes than the region's voters generally preferred (see Tables 4, 5, and 6 above).

Depression, War, and Recovery, 1930–1950

The political economy of the belle epoque collapsed with the worldwide economic crisis that began in 1929. Between 1929 and 1932, export prices and volumes plummeted dramatically. The purchasing power of Latin America's exports fell to 43 percent of their former level. Capital flows ceased and most countries became net capital exporters to the developed world as profits, dividends, and interest continued to be due from prior investments. Mineral exporters like Bolivia (tin), Chile (copper, nitrates), and Mexico (oil, copper, lead, zinc) suffered the steepest declines. Cuba was hit by the collapse of sugar prices but suffered mainly from political manipulation of the U.S. sugar market on which it had become dependent. Export prices and volumes fell less sharply in the rest of the region. The economic collapse precipitated fiscal and monetary crises. As in the developed countries, policymakers initially sought to stimulate recovery through orthodox stabilization measures, that is, by reducing expenditures and raising taxes. As foreign exchange earnings from exports continued to fall, external investment dried up, and economic activity declined, governments found it impossible to raise enough revenue to make payments on their outstanding external debt. Only Argentina managed to continue servicing its debt. Most declared a moratorium on external debt payments or defaulted outright. Ending debt service payments tended to ease fiscal problems, but did so by driving a wedge between policies aimed at the external sector (default, reducing imports) and those developed to repair the domestic economy (fiscal deficits to stimulate recovery financed by internal debt).

Recovery was facilitated by a rapid fall in imports. Terms of trade (export versus import prices) fell sharply throughout the region, so imports fell even faster than exports. This increased the demand for import-competing sectors, especially light manufacturing, but did so only where governments acted to shore up internal demand through deficit spending. Because governments could not borrow abroad, deficits had to be financed by internal borrowing, which proved effective only where domestic manufacturing could increase output by reactivating idle capacity or making more intensive use of existing plant and equipment. Otherwise, as in Bolivia, deficit spending merely fueled inflation. Cut off from new foreign direct investment, and thus new technology, productivity tended to decline. Industrial production recovered and even surpassed pre-Depression levels by the mid- to late 1930s in the larger countries, but the productivity gap between Latin American manufacturing and that of the industrialized countries also grew. Import-substituting industrialization (ISI) along with import-substituting agriculture (largely neglected in the literature) played a major role in the recovery, but much of the growth in the major economies (e.g., Brazil, Chile, Cuba) that occurred between 1931–1932 and the end of the decade depended on renewed growth in the export sector. Moreover, in the smaller economies of the region (e.g., Bolivia, Central American countries), which lacked a manufacturing base, ISI played no role in recovery from the Depression.

The economic crisis of the 1930s exposed the political fragility of the regimes that had presided over the region's export-led growth spurt. In Mexico, where economic growth had been especially rapid, economic recession, a prolonged drought, and intra-elite conflicts had already precipitated a major political upheaval. The Mexican Revolution of 1910–1916 overturned the political elite that had managed the economic growth achieved during the dictatorship of Porfirio Díaz (1877–1911). Similar challenges had already rocked oligarchic governments in Argentina, Chile, Peru, and Uruguay. With the onset of the Great Depression, the challenges multiplied. Popular protests and demands for inclusion fueled new political parties, coalitions, and movements. Many found support in the countryside, where commercialization of agriculture had pushed peasants off their lands. Urban workers, themselves recent migrants from the countryside or immigrants (as in Argentina and Uruguay), played a significant role. In most countries, however, the main beneficiaries of belle epoque growth—urban professionals, skilled and white collar-workers, shopkeepers—contributed disproportionately to shattering the old regimes. The Depression also tended to weaken export lobbies and simultaneously empower manufacturing interests.

The international environment added fuel to the flames that heated this complex mix. The importance of foreign investment fell dramatically from the onset of the Great Depression until after World War II. In 1920 the value of all foreign investment in Latin America was greater than the region's GDP. By 1950 it had fallen to only 23 percent. As it became clear that capital from the developed countries could not be enticed to resume flowing to Latin America, the opportunity cost of social and political reform declined. Economic competition between the capitalist democracies and fascist regimes (mainly the United States versus Germany) escalated after 1933, reducing the likelihood of external intervention. These conditions made it easier for governments to tax, regulate, and even nationalize foreign assets, when popular demands escalated for government intervention to restore growth and reduce vulnerability to external shocks. In its initial phase, therefore, import-substituting industrialization coincided with a shift toward nationalist, populist, and even socialist political discourse along with redistributive social policies, which included substantial wage concessions, land distribution (especially in Mexico), and a rise in public expenditures in health and education.

Growth rates of GDP per capita, 1870–2001
aArgentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, and Venezuela.
bBolivia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Paraguay, Puerto Rico, Trinidad and Tobago
cIncludes Albania, Bulgaria, Czechoslovakia, Hungary, Poland, Romania, and Yugoslavia
d57 countries
Source: Maddison (2003).
United States1.
Latin Americaa1.
Latin Americab2.20.3
Cuba0.1 (1850–1930)1.50.9−0.3
United Kingdom1.
Eastern Europec1.410.43.40.2
Table 11

Import-Substituting Industrialization (ISI), 1950–1980

By the end of World War II, most of Latin America had rejected the political economy of the belle epoque and embraced ISI as a conscious strategy for promoting economic development. In the eight largest economies (Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, and Venezuela), governments not only retained and even intensified the high tariffs that had protected new industries prior to the Depression, but also added an array of new measures to promote industrialization. These included import quotas and prohibitions, tax exemptions and subsidies to new industries, development banks to provide low-cost credit, infrastructure and energy policies designed to lower costs, subsidies to urban consumption to keep wages low, labor policies to weaken unions and re-duce wages, and a wide range of inducements and regulations to channel investment from export activities into industry. The mix of policies varied widely from country to country, but taken together they amounted to a deliberate strategy for fostering economic development through state-led industrialization. ISI achieved undeniable successes. The growth rate of GDP per capita in the eight countries that adopted ISI averaged 2.6 percent per year for the thirty years from 1950 to 1980. Brazil (3.3%) and Mexico (3.4%) were the top performers. Argentina (1.7) and Chile (2.1) were the least successful of the ISI countries.

In the postwar era, international trade and capital markets recovered rapidly. With dollar and sterling reserves accumulated during the war, the Latin American countries resumed importing manufactured goods they were not yet producing. A number of countries (most notably Argentina) used a portion of their reserves to nationalize foreign assets, such as railroads, trolleys, and utilities. As the import flood and buyouts drew down reserves, and governments turned to protecting and subsidizing new industries, balance of payment crises erupted, pushing policymakers to abandon the populist policies of the 1930s in order to balance budgets and control imports. Fortuitously, Latin America's new ISI strategy coincided with efforts by the U.S. government to forge an anticommunist alliance with the region's economic and political elites. Governments that had built popular credibility with progressive social legislation in the 1930s, such as Mexico, managed the transition to more orthodox stabilization programs with less turmoil. Elsewhere, however, elected governments that proved unable or unwilling to move rightward fell to military regimes.

The new ISI strategy received support from economists associated with the United Nations Economic Commission for Latin America (ECLA, now with the Caribbean added, ECLAC), established in 1948. ECLA's founding executive secretary, Argentine lawyer turned central banker Raúl Prebisch, argued that a strategy based on exporting raw materials, such as minerals and agricultural products, could not produce sustained economic growth. This was because over the long run the prices of manufactured imports tended to rise relative to those of raw materials. Because of deteriorating terms of trade, developing countries were trapped in an endless cycle, struggling to produce more and more raw materials to pay for a dwindling basket of imports. The solution, according to Prebisch, was to break the cycle of dependence on exports by actively promoting industrialization. Unfortunately, as ECLA-trained economists soon discovered, the new strategy had two flaws. First, the terms of trade argument turned out to be faulty. Better data showed either that there had been no long-term decline in terms of trade, or that the decline had been trivial—too small to impede growth. Second, the ISI countries soon discovered that fostering industry actually increased the need for imports, such as machinery, technology, petroleum for energy, and even raw materials. By ignoring or even discouraging export promotion, the Latin American ISI countries found themselves trapped in an endless cycle of balance-of-payments crises—too few exports to pay for the imports that their industries needed.

Meanwhile, however, the U.S. government for its own reasons endorsed ISI. Unable to secure congressional majorities for new trade agreements that would have lowered barriers to U.S. exports, the Eisenhower administration (1953–1961) shifted its strategy. Because tariff and other barriers made it difficult for large U.S. companies to export cars or refrigerators, they began to "leap over" the barriers to invest in manufacturing plants within the larger Latin American countries. The U.S. government then moved to support ISI as a strategy and simultaneously to lobby to make sure that U.S. companies would not be excluded, overregulated, or taxed excessively. U.S. efforts focused on discouraging state ownership, regulations that required local investors in new projects and restrictions or taxes on profit remittances. U.S. support for ISI crystallized just as ECLA was discovering its limitations and urging Latin American governments to overcome them through regional and subregional trade agreements, export promotion, and other measures.

Foreign trade and foreign capital as percent of GDP
CountryTotal foreign capital invested as percent of GDP: 1900, 1950, 1989/90Exports plus imports as percent of GDP: 1928, 1938 and 2003/5
Source: For investment as a percentage of GDP, see Michael J. Twomey, "Patterns of Foreign Investment in Latin America in the Twentieth Century" in John H. Coatsworth and Alan J. Taylor, Latin America and the World Economy since 1800 (Cambridge, MA: Harvard University, 1998), 182-185; for trade ratios, see Victor Bulmer-Thomas, The Economic History of Latin America since Independence 2nd ed. (Cambridge, UK: Cambridge University Press, 2003), p. 190.
Argentina415, 12, 6459.7, 35.7, 43.2
Brazil255, 18, 3638.8, 33.3, 29.5
Chile188, 49, 4057.2, 44.9, 71.7
Columbia74, 24, 2162.8, 43.5, 40.4
Costa Rica109.6, 80.7, 45.8
Cuba133, 47, N/A
Guatemala136, 12a, 8d51.2, 29.5, 45.8
El Salvador81.0, 62.4, 71.5
Honduras158, 38a, 6969.8, 39.5, 99.8
Mexico155, 17, 3247.7, 25.5, 60.1
Nicaragua54.9, 52.3, 97.3
Paraguay70, 18b, 31
Peru178, 22, 4853.2, 42.6, 44.0
Uruguay314, 18, 3138.0, 37.1, 56.9
Venezuela252, 55, 47120.4, 55.7, 56.9
Table 12

Some economists have argued that Latin America's ISI strategy prevented the region from achieving even faster growth. World trade increased dramatically in the three decades after World War II. Latin America's share of world trade fell from a high of 13.5 percent in 1946 to 4.4 percent in 1975. Although some part of this loss was due to the recovery of war-ravaged economies, Latin America's share continued to fall into the 1980s. With abundant labor and raw materials, Latin America might have been able to become an exporter of manufactured goods as well as raw materials by following the strategy later adopted by several rapidly growing East Asian economies, such as Japan, South Korea, and Taiwan. Such a strategy would have been difficult, however, because of U.S. and West European protectionism. The breakthrough in liberalizing trade did not occur until the successful completion of the Kennedy Round of negotiations for a new General Agreement on Trade and Tariffs (GATT) in 1967. As the markets of the industrial countries now opened to manufactured goods from the developing world, the East Asian "tigers" moved aggressively to take advantage of the new opportunities. By that time, however, the major Latin American economies were so committed to ISI that joining the GATT would have imposed huge economic costs (closed factories) and generated high unemployment among the most protected (and unionized) workers. In most of Latin America, political and social turmoil had produced authoritarian and military regimes unwilling to provoke even more unrest. In addition, many of the industries that would have suffered from freer trade were branches of multinational companies (many based in the United States) who could call on powerful ambassadors to defend them.

In the 1970s unsettled conditions in the global economy and instability in U.S. economic policymaking also contributed to Latin America's economic difficulties. With balance-of-payments problems of its own, the United States in 1971 abandoned the fixed-exchange-rate regime negotiated at the Bretton Woods Conference in 1944 and implemented in 1946. Then, in 1973, the Organization of Petroleum Exporting Countries (OPEC) quadrupled oil prices; at the end of the decade, in 1978–1979, oil prices again tripled. To pay for essential imports of petroleum, needed for generating electricity, running factories, and fueling transportation systems, the Latin American countries resorted to borrowing. Commercial banks in the United States and Western Europe, into which the oil-producing countries were depositing their windfall gains, had plenty to lend at reasonable interest rates. The ISI countries as well as the smaller non-ISI regimes borrowed heavily to keep their economies running. Latin America's main oil-producing economy, Venezuela, profited from high oil prices, but at the cost of becoming more dependent on oil exports to cover a rising import bill. Mexico also grew rapidly after the discovery of new oil reserves announced in 1976, but borrowed heavily, nonetheless, to pay for drilling, pipelines, and infrastructure. Latin America's accumulated external indebtedness rose from $28.2 billion in 1970 to $314.4 billion in 1982.

As Tables 4, 5, and 6 above suggested, indicators of human welfare improved during the ISI era. Economic growth fueled urbanization, making public services more accessible to an increasing proportion of Latin America's population. Nonetheless, income inequality remained high and poverty rates declined only slowly. The persistence of inequality was partly the result of the ISI strategy itself. Workers in protected industries received wages above what their low productivity would have earned them in open economies. Protection made it possible for employers to pass on higher labor costs to consumers, including the poor, in the form of higher prices and lower-quality goods. By the 1970s, at least, open economies could have provided more and better jobs for Latin America's abundant unskilled labor pool, though at the cost of closing inefficient ISI industries. Even without dismantling ISI, however, inequality could have been reduced by land reform, by taxes designed to shift income from the top percentiles, and, above all, by greater advances in education. Instead, the conservative drift in social policy put an end to most land reforms, left the wealthiest Latin Americans largely untaxed, and notably slowed educational progress. The children born between 1930 and 1950 increased their average level of schooling by 2.7 years. Between 1950 and 1970, as Asian countries accelerated, Latin Americans born in those years increased their average level of schooling by only 1.9 years. Moreover, the gap in educational levels between the richest and poorest Latin Americans remained exceptionally high—seven years or more in Argentina, Brazil, Chile, Ecuador, El Salvador, Mexico, and Panama.


A major financial and economic crisis struck Latin America in the summer of 1982. The crisis originated in the United States. To cope with inflationary pressures, the U.S. Federal Reserve raised interest rates to unprecedented levels in 1981 and 1982. The result was a rapid rise in global interest rates (already rising due to inflation) and a sharp contraction in the U.S. economy that soon spread throughout the globe. Commodity prices (especially oil prices) plummeted. In Latin America, Mexico fell first. With oil exports accounting for over 80 percent of Mexico's exports, Mexico's dollar earnings were no longer sufficient to cover its rising debt payments. Nor could Mexico's central bank continue to support the peso by buying dollars at the official rate. In August the Mexican government announced that it could not meet the payments due on its external debt. The peso was freed to float and quickly sank to less than a third of its former value against the dollar. When bankers and investors in the developed countries stopped investing anywhere in Latin America, the crisis spread. For most of the world, recovery from the U.S. recession began in 1983. In Latin America, with its huge debt overhang, governments quickly found it impossible to continue borrowing abroad to pay for the imports needed by their inefficient industries. The Latin American economies stagnated or declined for more than a decade. Only two Latin American countries had higher levels of GDP per capita in 1989 than in 1980: Colombia, because of rising exports of cocaine, and Cuba, because its socialist economy was closely aligned to the Soviet Union's rather than the United States'. In the two decades from 1980 to 2001, the eight largest Latin American countries averaged an annual rate of growth of only 0.3 percent—the lowest growth since the early nineteenth century. Only Chile's rebounded, beginning in 1985, producing a satisfactory 2.7 percent rate of growth over these twenty-one years.

The Washington Consensus

The prolonged era of stagnation and decline after 1982 forced most Latin American countries to abandon the ISI strategy and to reexamine the state's role in their economies. It soon became evident that it would be impossible to stimulate economic recovery through government spending, because there were no external lenders willing to finance the deficits of Latin America's nearly bankrupt governments. Government spending in such conditions led to inflation, which taxed the poor, but did not stimulate recovery. Moreover, the crisis and ensuing recession forced deep spending cuts that not only savaged social spending, but made it impossible to continue subsidizing inefficient public and private enterprises as well as urban living standards. Most governments felt compelled to continue making payments on their external debt, scaled back through negotiations with creditors, in the hope that foreign investors (and their own citizens with capital and savings safely invested abroad) could be persuaded to begin investing again. Public investment in infrastructure and human capital virtually ceased, which gave added urgency to renewing private investment.

Unlike the 1930s, when the global economy faced a prolonged crisis and the United States recovered slowly, most of the world rebounded quickly. This made some form of reglobalization not only an option, but the only feasible option available to most Latin American economies. The Soviet Union and its allies, hit hard by declining oil prices and internal problems, offered little aid in contrast to the economic and political competition of Germany and its allies a half century earlier. Popular discontent with economic stagnation was contained by transitions to democratic regimes in most of the hemisphere.

Eventually, all of the Latin American governments were forced to adopt a package of economic policy reforms that amounted to a new economic strategy. Unable to rely on spending to stimulate economic recovery, governments began reducing the restrictions on trade and foreign investment that had been the centerpiece of the ISI strategy. Most joined the GATT, predecessor to the World Trade Organization (WTO), to gain access to world markets on better terms, but this move required them not only to lower their own tariffs, but also to abandon most nontariff barriers to imports, such as prohibitions, quotas, special permits, and the like. To stimulate both domestic and foreign investment, governments adopted market-friendly domestic reforms to reduce the burden of cumbersome regulations, price controls, licenses, and monopolies. These reforms, predicated on keeping budget deficits low and allowing market forces to play a major role in determining interest and exchange rates, eventually came to be known as the Washington Consensus because both the U.S. government and the Washington-based multilateral lending institutions (the International Monetary Fund, the World Bank, and the Inter-American Development Bank) endorsed them. Latin American governments seeking aid or loans from these sources found that help was now conditional on carrying out the Washington Consensus reforms.

Privatizing state-owned enterprises (SOEs) became a significant part of the Washington Consensus strategy by the late 1980s. Chile and Mexico moved first and by the 1990s, the trend had spread throughout the region. Mexico privatized hundreds of SOEs including commercial banks (reversing a 1982 nationalization decree), telecommunications, transportation, utilities, and hundreds of companies producing goods as diverse as fertilizers, steel, trucks, buses, minerals, and textiles. Privatization yielded three main benefits. First, it helped balance budgets by eliminating public subsidies to those SOEs that had been operating at a loss. Second, privatization attracted foreign investment at a time when it was badly needed. By 2001, 18 Latin American governments had realized the equivalent of six percent of their combined GDP from sales of SOEs. Third, the privatized companies benefited from new infusions of capital and better management and became more efficient. For example, the number of private phone lines in Argentina more than doubled, the wait time for a new line in Mexico fell from more than two years to a mere 30 days, and in Bolivia, long distance phone service reached scores of towns that had never been served.

Critics of privatization noted that Latin American governments could have cut subidies and instructed managers to operate SOEs more efficiently without privatizing, though without massive borrowing (which would have been impossible) they would not have been able to invest in new technology or service extension. Critics also pointed to some privatizations that lacked transparency, rewarded cronies, or involved corrupt payments to officials or their relatives. In many cases, increased efficiency meant eliminating jobs; in Argentina alone 150,000 workers lost their jobs due to privatizations between 1987 and 1997. Lack of strong regulatory bodies to enforce competition resulted in the creation of private monopolies that needlessly raised prices to consumers. While nearly all of the economists who studied Latin America's privatizations concluded that they contributed to economic growth and did not lead to greater unemployment, inequality, or proverty, public opinion in the region turned decidedly negative by the early 2000s. Governments in Bolivia, Peru, and Venezuela among others renationalized sensitive public utilities.

The impact of the Washington Consensus reforms should have become visible by the 1990s, but the results were disappointing. Capital did begin flowing to Latin America again from the developed countries beginning in 1990. Most of Latin America began growing again in the early 1990s, but a series of financial shocks, most unrelated to Latin America, interrupted capital flows again and induced recessions or sharply curtailed growth throughout the region. The turmoil began in Mexico again in December 1994 with another peso collapse and near default, triggered by intense conflicts within the ruling elite during an election year. By the time the U.S. government responded with a loan guarantee to help Mexico avoid default and stabilize its economy in early 1995, the "Tequila effect" had pushed cautious investors to pull funds out or abandon planned projects throughout Latin America. Succeeding crises touched off by exchange-rate and balance-of-payments crises in Asian countries (1997) and Russia (1998), and a new U.S. recession in 2000–2001, had similar effects. In the two decades after the 1982 crisis engulfed the region, and after more than a decade of market-friendly reforms, economic growth in the region (with few exceptions) remained anemic.

Most (though not all) indicators of human physical welfare in the era of the Washington Consensus deteriorated or failed to improve. The poor performance of most countries in both economic and social development led voters to reject incumbent conservative or centrist governments in favor of center-left or socialist alternatives. With the threat of U.S. intervention receding because of the end of the cold war, and the prestige of the region's military establishments still sinking, voters in the late 1990s and early 2000s turned to parties, movements, and personalities long excluded from power and thus not responsible for past failures. Rhetoric aside, however, most of the new left-leaning regimes adhered to the basic Washington Consensus reforms, such as fiscal stability, freer trade, and deregulation.


The Latin American economies began to grow at or above their twentieth-century (historic) rates in the first decade of the twenty-first century. Despite notable acceleration in growth after two decades of poor performance, Latin America still compares poorly with other world regions. Even in the boom period from 2003 to 2007, Latin America grew more slowly than any other world region, including Africa. The region's exceptional inequality continued to generate higher poverty rates than other regions at comparable levels of GDP per capita.

Latin America's persistent economic failure led to a revival of debates over economic strategy. Some economists argued that the Latin American countries failed to implement fully the Washington Consensus reforms. Many urged greater liberalization of domestic economies and new trade agreements—bilateral and regional, as well as global—to make it easier for Latin America's exports to compete in the global market. An important trend in economic thinking also focused on deeper institutional issues, notably the persistent failure of most Latin American countries to provide effective protection for the civic and property rights of ordinary citizens and the equally intractable failure to assure adequate education and health services for all.

Among critics of the Washington Consensus, two lines of argument predominated. Some argued that the reforms themselves were flawed, because they tended to undermine the effectiveness of governments in the region at a time when more effective public policies were needed. Though agreeing on the need for deep institutional reforms, proponents of this view were skeptical of free-trade agreements that tended to limit the ability of governments to eliminate bottlenecks, correct imbalances, and channel resources to promising new growth opportunities. A second body of opinion among those opposed to the Washington Consensus asserted that many of the economic policy reforms of the 1980s to 1990s should be reversed, including privatizations of state enterprises, some kinds of deregulation, and the end of subsidies to improve urban living standards. Both anti-Washington Consensus schools criticized the failure of proponents to take into account the social costs and increased inequality that often accompany the productivity gains from freer trade.

As the twenty-first century advances, a new political economy appears in prospect. The elitist regimes installed at the end of the nineteenth century, some with diminishing popular clienteles added in the 1930s and 1940s, persisted into the 1980s because they were backed by powerful military establishments and external allies. Many of the democratic regimes installed as military rule ended in the 1980s and 1990s proved to be more inclusive than in the past, in part because of popular mobilizations spurred on by economic failures. Restrictions on the franchise, both formal and informal, ended throughout the hemisphere. Public demands on democratic governments—for better economic performance as well as more effective efforts to reduce inequality and poverty, to improve public institutions, and to provide greater security of rights and property for all—have risen with each new election. Elected governments with failed economic policies or that were broadly viewed as elitist or exclusionary fell from power in the 1990s and 2000s as a result of popular protests in Argentina, Bolivia, Ecuador, Guatemala, Peru, and Venezuela.

By the first decade of the twenty-first century, Latin American economic strategies tended to converge toward the macroeconomic prescriptions of the Washington Consensus (especially fiscal stability and more market friendly policies), but with increasing experimentation in the microeconomics of social policy. For example, Mexico's conservative governments and Brazil's center-left governments pioneered efforts to link modest welfare benefits for poor families to school attendance and medical checkups. On the other hand, the Hugo Chavez government in Venezuela embraced a more radical design by importing Cuban teachers and doctors in exchange for oil sold to Cuba at below market prices. This made it possible for Venezuela to increase educational and health services to the poor more rapidly than would have been possible if the country had been forced to wait until Venezuelans could be trained to do so. Still more radical was the Venezuelan decision to abandon the Washington Consensus to embrace "Bolivarian socialism." While Chavez succeeded in displacing Venezuela's traditional political parties and taming the country's economic elite, the country's economy remains highly dependent on oil revenues and therefore vulnerable to external shocks. Moreover, even with high oil prices, the success of Bolivarian socialism may well depend on better management of the state-owned oil company, Petroleos de Venezuel, SA and of the government' fiscal balances. Declining oil production and rising inflation would threaten any economic model.

It is still an open question whether Latin America will be able to develop a new political economy to supersede the exhausted elitist model that proved so resilient over the past century. Governments that can mobilize popular support to deepen institutional modernization without sacrificing the notable gains in productivity and welfare achieved in the past one hundred years will still face daunting economic dilemmas, both internal and external.

See alsoAgriculture; Foreign Investment; Foreign Trade; Industrialization; Privatization.


Contemporary data and analysis on world economic conditions is now widely available via the Web sites and annual reports of major multilateral lending institutions and international development organizations such as the World Bank, International Monetary Fund, the UN Development Programme, Inter-American Development Bank, and the UN Economic Commission for Latin America and the Caribbean. For historical and comparative purposes, the population and PPP GDP estimates of Angus Maddison are indispensable; see The World Economy: A Millennial Perspective (Paris: Organization for Economic Co-operation and Development, 2001) and the companion volume of data The World Economy: Historical Statistics (Paris: OECD, 2003).

Recent work on the history of the Latin American economies, from the pre-Columbian era to the twentieth century, is summarized in the two volumes of the Cambridge Economic History of Latin America edited by Victor Bulmer-Thomas, John H. Coatsworth, and Roberto Cortés Conde (Cambridge, U.K., and New York: Cambridge University Press, 2006). Four other collections of original essays have contributed to defining the field: Stephen Haber, ed., How Latin America Fell Behind: Essays on the Economic Histories of Brazil and Mexico, 1800–1914 (Stanford, CA: Stanford University Press, 1997); John H. Coatsworth and Alan M. Taylor, eds., Latin America and the World Economy Since 1800 (Cambridge, MA: Harvard University Press, 1998); Enrique Cárdenas, José Antonio Ocampo, and Rosemary Thorp, eds., An Economic History of Twentieth-Century Latin America, 3 vols. (New York: Palgrave, 2000); and Richard H. Steckel and Jerome C. Rose, eds., The Backbone of History: Health and Nutrition in the Western Hemisphere (Cambridge, U.K., and New York: Cambridge University Press, 2002).

For an excellent survey of the economic historiography, see Paul Gootenberg's review essay "Between a Rock and a Softer Place: Reflections on Some Recent Economic History of Latin America," Latin American Research Review 39, no. 2 (2004): 239-257.

An innovative approach to the pre-Columbian economies, which suggests a far greater sophistication in economic organization and resource management than is commonly assumed, can be found in Charles C. Mann's 1491: New Revelations of the Americas before Columbus (New York: Knopf, 2005). On the demographic impact of the Conquest, see the review essay by Massimo Livi-Bacci, "The Depopulation of Hispanic America after the Conquest," Population and Development Review, 32, no. 2 (2006): 199-232. The rich economic historiography of the colonial era is well represented in the collections cited above and by studies of institutions, sectors, and entire regions. Outstanding examples are Elinor G. K. Melville, A Plague of Sheep: Environmental Consequences of the Conquest of Mexico (Cambridge, U.K., and New York: Cambridge University Press, 1995); Stanley Stein and Barbara H. Stein, Silver, Trade, and War: Spain and America in the Making of Modern Europe (Baltimore, MD: Johns Hopkins University Press, 2000); and Enrique Tandeter, Coercion and Market: Silver Mining in Colonial Potosí, 1692–1826 (Albuquerque: University of New Mexico Press, 1993).

The search for deeper institutional causes that could explain Latin America's poor economic performance over the very long run has reawakened debates on the colonial heritage of inequality and inefficient economic organization. See, for example, Daron Acemoglu, Simon Johnson, and James A. Robinson, "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review 91, no. 5 (2001): 1369–1401; Kenneth L. Sokoloff and Stanley L. Engerman, "Institutions, Factor Endowments, and Paths of Development in the New World," Journal of Economic Perspectives 14, no. 3 (2000): 217-232; John H. Coats-worth, "Structures, Endowments, and Institutions in the Economic History of Latin America," Latin American Research Review 40, no. 3 (2005): 126-144.

The economic impact of independence on nineteenth-century Latin America is well covered by the essays in Leandro Prados de la Escosura and Samuel Amaral, La independencia americana: Consecuencias económicas (Madrid: Alianza Editorial, 1993). On the modern (post-1870) economic history of Latin America, see Victor Bulmer-Thomas, Economic History of Latin America since Independence, 2nd edition (Cambridge, U.K., and New York: Cambridge University Press, 2003) and Enrique Cárdenas, José Antonio Ocampo, and Rosemary Thorp, Progress, Poverty and Exclusion: An Economic History of Latin America in the Twentieth Century. Washington, DC: Inter-American Development Bank, 1998. On the political economy of the belle epoque, see Stephen Haber, Armando Razo, and Noel Maurer, The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876–1929 (Cambridge, U.K., and New York: Cambridge University Press, 2003); William R. Summerhill, Order Against Progress: Government, Foreign Investment, and Railroads in Brazil, 1854–1913 (Stanford, CA: Stanford University Press, 2003); and Jeffrey G. Williamson, "Real Wages, Inequality, and Globalization in Latin America before 1940," Revista de Historia Económica 17 (1999): 101-142.

On the economic development of individual countries or subregions, the following are especially helpful: Gerardo Della Paolera and Alan M. Taylor, eds., A New Economic History of Argentina (Cambridge, U.K., and New York: Cambridge University Press, 2003); Renato Baumann, Brazil in the 1990s: An Economy in Transition (New York: Palgrave, 2002); Victor Bulmer-Thomas, The Political Economy of Central America since 1920 (Cambridge, U.K., and New York: Cambridge University Press, 1987); World Bank, Chile's High Growth Economy: Poverty and Income Distribution, 1987–1998 (Washington, DC: World Bank, 2002); Miguel Urrutia Montoya, ed., El crecimiento económico de Colombia en el siglo xx (Bogota: Banco de la República, 2002); Jorge I. Domínguez, Omar Everleny Pérez Villanueva, and Lorena Barberia, eds., The Cuban Economy at the Start of the Twenty-First Century (Cambridge, MA: David Rockefeller Center for Latin American Studies, Harvard University Press, 2004); Stephen Haber, et al., Mexico since 1980 (New York: Cambridge University Press, 2008); and Carol Wise, Reinventing the State: Economic Strategy and Institutional Change in Peru (Ann Arbor: University of Michigan Press, 2002).

For helpful surveys of contemporary ideas on key institutional and policy issues, see Esteban Pérez Caldentey and Matias Vernengo, eds., Ideas, Policies, and Economic Development in the Americas (London and New York: Routledge, 2007), and Charles H. Wood and Bryan R. Roberts, eds., Rethinking Development in Latin America (University Park: Pennsylvania State University Press, 2005).

                                   John H. Coatsworth

Economic Development

views updated May 17 2018


The Seven Years' War (1754–1763) spurred unforeseen but profoundly consequential economic changes in British North America. Supplying soldiers and citizens required infrastructure and organization on a scale never before known in the colonies. French and Spanish silver greased the exchange of goods and promoted fuller employment of townspeople, while currency finance—the emission of paper money through provincial governments—expanded the ability of colonists to conduct business on an unprecedented scale. This war was also far more expansive in its operations, and far costlier, than previous wars in North America, and so some colonial governments issued negotiable bonds and provincial Treasurers' Notes to merchants and suppliers, thereby initiating the precedent, although on a small scale, of financing the government's role in war with debt in addition to infusions of currency.

between conflicts

Following the Seven Years' War, wartime demand for goods and services shrank. However, the return to a postwar status quo of colonial subordination to English mercantile regulations and general commercial authority was challenged—though not unseated—in three ways by colonial economic maturation. One way involved the expansion of the British-controlled western frontier, which created new opportunities for colonial trade among Native Americans, settlers and land companies, and towns to the east; a steadily growing population in the West and the land clearing and improvements it brought set the stage for economic development. Agricultural productivity rose rapidly, land values climbed, and settlers' demands for infrastructure to link farms to towns poured in from myriad backcountry locations. By 1775, more than a quarter-of-a-million colonists lived beyond the old fringe of settlement; nearly one-third of the southern white population inhabited the western backcountry, while streams of migrants trod well-worn roads into western New York and Pennsylvania, West Florida, and the lower Mississippi River area.

A second challenge to British control of the North American economy was evidenced in commerce. Although British merchants generously responded to pent-up colonial demand for goods and credit after the war, by then, northern colonial merchants had become more capable of shipping, ware-housing, and diversifying enterprises and of distributing goods themselves. Continual shipbuilding, waterfront development, the steady influx of immigrant labor, and capital for investment in goods all enhanced profits during good times and shielded

merchants from the worst downturns. In the Chesapeake regions, prices of exported tobacco tended to rise more than they fell after the 1750s, and planters had ever-larger quantities to export. In the Carolina low country, planters enjoyed a recovery of rice export prices (and higher yields) after 1763, as well as a tremendous surge in indigo production and export. By the eve of the Revolution, as much as one-fourth of colonists' disposable income was spent on imports from British and European sources, although scholars disagree about whether this proportion represented a rising standard of living for a growing number of people or simply the rising demand consonant with an increasing population. Moreover, even if colonists were indeed buying more goods per capita, import figures do not explain how much consumption came from increases in colonial shop and home production.

A third challenge to British economic domination arose from colonial craftsmen; more local industries such as milling, distilling, tanning, smithing, and iron production placed more American goods in local markets. Some of the expanding production by these colonists was consumed in nearby households and in local exchange; some of it—the proportion disputed by scholars—was targeted for external markets at significant distances. In either case, most colonists experienced periods of relatively modest satisfaction of needs that were punctuated by the ability to purchase desirable comforts. Moreover, coastal merchants were increasingly dependent upon, and the beneficiaries of, diversified local economies able to support a range of skilled lesser entrepreneurs, farmers, retailers, and consumers. Despite periods of recurring depressed conditions, the northeastern and mid-Atlantic economies were maturing rapidly—internally and internationally—by the end of the colonial era.

the american revolution

Many Americans believed the Revolution would release tremendous economic energies to improve, produce, and consume more, thereby shaping them into virtuous citizens even in the midst of their wartime public sacrifice. To some extent these views were correct, for wartime need spurred home manufacturing, westward expansion, and exploration of new foreign markets. A few iron forges and rudimentary gun manufactories sprang up, and more sophisticated systems of distribution arose to get shirts and food to military fronts. Privateering proved lucrative to a few men even as it ruined others. But the Revolution also introduced numerous short-term disruptions to production and exchange. Many farmers abandoned the fields for the war; mills and shops closed due to scarcities of raw materials, absent workers, and inaccessible markets; armies combed through countrysides for scant supplies of food. British blockades disrupted pre-war commerce, and occupied cities suffered shortages of many necessities. Whole towns and surrounding fields lay burned by one army or the other. Immigration slowed significantly, with the effect of shrinking the available pool of free and bound white labor as well as the number of new slaves entering America.

The Continental Congress and individual new states emitted vast quantities of the popular paper money that, according to eighteenth-century wisdom, was to be retired out of circulation with taxes. But by the late 1770s, the massive sums in circulation were seldom being retired, with the inevitable result that "continentals" and state currencies plummeted in value. Public confidence declined along with the value of currencies; the complex network of debt and credit that distinguished the late colonial economy was thrown into disarray when prices more than doubled in the last four years of the war.

Once the individual colonies and states finally created a loose government under the Articles of Confederation in 1781, nationalists in Congress quickly proposed remedies for pressing difficulties concerning army supply, civilian shortages, and Revolutionary finance. Most important, days before the Articles went into effect they appointed Robert Morris, probably the wealthiest merchant in America at the time, as superintendent of finance in February 1781. By that time purchasing power was at an all-time low and Congress's paper currency was "not worth a continental." Still, seven states renewed their commitment to issuing paper money in large quantities, while in most cases keeping taxes low and thereby initiating new spirals of depreciation. Congress halted its own currency printing presses. In December 1781 Morris persuaded Congress to charter the first private commercial bank in America, the Bank of North America, in which he deposited loans of Dutch and French specie and bills of exchange, as well as large sums of his own money. He then asked Congress to authorize the printing of new continental currency, which would circulate freely with the backing of interest-bearing funds in the bank. Morris also initiated a new contract bidding system for the failing supply system, pledging the confidence and finances of Congress to back it up. Although Morris also wanted to create a national revenue based on taxing imports, which would have been the first national tariff, he failed to secure the required assent of all thirteen sovereign states.

crisis and recovery, 1781–1800

Morris's bold measures had hardly been put into place when the war ended. Nevertheless, the fallout of wartime dislocations and disastrous Revolutionary finance would be felt for another generation. Despite the stereotype of urban merchants being wealthy beneficiaries of the wartime economy, the letters and legal records of many partnerships indicate deep indebtedness and loss of valuable commercial connections. Few knew how to interpret their dislocation—whether they should regret the loss of British mercantilism's protection and encouragement or celebrate their freedom to pursue new opportunities. In addition, per capita income levels achieved by 1775 by many groups of Americans probably did not recover until the late 1790s, and in the South great numbers of people remained indebted and impoverished even longer.

The Critical Period. Everywhere, the initial flood of cheap English goods and the easy credit of 1783 and 1784 came to an end quickly, and northern states began to raise taxes on the property of middling freeholders just as the money and credit supply contracted; as a result, debts went unpaid and investment in new lands and enterprises diminished. Moreover, Pennsylvania, New York, New Jersey, Maryland, and Virgina began to pay back, or "assume," large amounts of their state and national debts—debts which nationalists believed should be assumed by Congress in order to attach the loyalties of creditors to the Confederation government. Most of the states discriminated against each other in commerce; while some port cities invited more trade by establishing "free ports" that eliminated most import duties, others promoted their own commercial and manufacturing independence by tightening import regulations against "outsiders," who included foreigners as well as citizens of neighboring states. Newspapers printed stinging denunciations of imported "luxuries." After 1784, a deep depression settled on the cities, and within two years the portent of debtor rebellions rose on many rural frontiers, Shays's Rebellion in western Massachusetts being only the most conspicuous example. Nor did independence bring any immediate economic miracles to the domestic economy, for significant economic innovation and transformation were stymied for some years to come. In fact, the years 1781 to 1789 often bear the name "The Critical Period," which applies as appropriately to the new nation's economy as it does to its political turmoil during those years.

For state and national leaders, the decade's problems were due primarily to the huge debt generated from public and private loans during the Revolution. There was no national taxing and revenue-raising power; only states could tax citizens on internal wealth and services, and only states could levy port duties to raise revenue. Yet most states continued to issue currencies without levying sufficient taxes to retire depreciating paper money. Congress's securities changed hands from veterans, suppliers, and farmers to speculators in all walks of life, depreciating with each transaction. On a scale unknown in North America before this, and involving thousands of individuals, debts of the Revolutionary generation became widely exchanged in securities markets.

The Constitution of 1787 brightened some prospects for a more stable economy. The new federal government assumed the authority to end interstate quarreling over international commerce; created a steady revenue from uniform import duties that proved far greater than proceeds from the sales of western land for decades; sanctioned a single currency; shielded contracts and private property with a host of legislation; promoted more uniform business practices, patent inventions, new entrepreneurship, and money-lending practices under contractual relationships; naturalized immigrants; and more.

Trade. But in other respects, the economy developed according to the opportunities and constraints of individuals and markets during the era. Most merchants still formed small and temporary partnerships for trade, and their transatlantic ships entered and cleared ports only two times a year on average. Personal reputation still mattered immensely, and the incidence of failure was as great as it had been in the colonial period. New markets emerged within established trade networks; for example, merchants already engaged in commerce with the West Indies sent the Empress of China to Canton in 1784 with a cargo of ginseng, returning the next year with silks, porcelain wares, and eastern teas—and profits of 30 percent. Although the value of trade to new markets remained small, Cape Horn, Nootka Sound, and San Diego became familiar names in American ports. Then, from 1790 to 1807, exports and imports rose to over six times their pre-Revolutionary levels, shipbuilding revived, insurance and brokerage firms sprang up, ropewalks and cooperages lined dock streets, and carpenters and sailmakers found nearly full employment during many months of those years.

Although many new partnerships and small businesses did not survive the risks of business conditions in this era of Napoleonic Wars (1803–1815), sufficient numbers prospered to create a mood of confidence on the waterfront. Moreover, although American merchants encountered hundreds of privateers from foreign governments during the period and had to endure Thomas Jefferson's sweeping embargoes from 1807 to 1809, their mid-Atlantic grain and flour often sold well in the Caribbean and Europe, and southern cotton found ready markets when captains could circumvent hostile interference. Robert Oliver, an Irish immigrant to the budding town of Baltimore in 1783, and probably America's first millionaire, noted that he owed his success not to any commercial innovations, but rather to his "calculated boldness" and his spectacular good luck in West Indian and French markets. Stephen Girard, who migrated from France to Philadelphia, New York, and Cap François during the years of the American Revolution, profited handsomely after 1790 by feeding flour to the starving French and Saint Dominguans during their revolutions. Girard in turn invested in a great complex of mines, canals, shipping, and charity institutions, some of his own creation. Foreign wars also hastened a shift from tobacco to grain production in the Chesapeake and spurred small producers everywhere to raise prices for meat, lumber, fish, and flour during the Napoleonic Wars. The mid-Atlantic region's West Indies merchants claimed the greatest gains, but even the ailing New England shipbuilders profited from sales of vessels.

New institutions. Within the nation, new institutional forms advanced Americans' ambitious goals for economic development before 1800. For example, corporations were chartered by the states for specific purposes, as when in 1792 the Insurance Company of North America became the first joint stock insurance company in the country. The New York Stock Exchange was also loosely organized in 1792. In a few years longer roads, deeper canals, and larger ports attracted the small investments of thousands of Americans, who collectively poured millions of dollars into projects that otherwise might have languished for want of capital and who also circulated companies' notes alongside banknotes as currency. The Bankruptcy Act of 1800 had a short, three-year existence but paved the way for shifting the blame for crises from individual moral failing to structural economic traumas that required taming with government intervention.

Perhaps the most spectacular institutional innovations before 1800, and possibly the most consequential for the next phase of economic development, involved the organization of a national financial system. In January 1790, Alexander Hamilton's first Report on Public Credit established the principle of Congress's obligation to repay its debts to foreign countries, American states, and private citizens; the report proposed the consolidation of state debts into one national fund of interest-bearing securities that would be backed by revenues from import duties and special excise taxes. Despite formidable opposition to Hamilton's funding and assumption plan, it won the day, and soon national securities were traded in all the major cities; this success in turn prompted states and corporations to issue local securities to promote myriad special projects.

In December 1790 Hamilton offered his proposal for the First Bank of the United States, to be capitalized at $10 million, $8 million subscribed privately at $400 a share within the first hours of being offered to the public, and $2 million held by the federal government. Its charter permitted the bank to operate for twenty years with headquarters in Philadelphia and branches in other cities. Again, there was a storm of controversy. At one extreme, advocates such as Oliver Wolcott of Connecticut defended the necessity and constitutionality of the bank, arguing that banks would be of great benefit to an enterprising elite. At the other extreme, opponents attacked banks as reservoirs of aristocratic privilege that enticed the nation's best merchants and entrepreneurs into overextending their credit, and its farmers and small producers into a morass of rising excise taxes and rising prices when public speculation got out of hand. Already in 1791 the Whiskey Tax was widely seen as an egregious imposition on American livelihoods, especially on the frontier; in 1794 opposition erupted into the Whiskey Rebellion.

developing the republic, 1800–1819

Banks. Somewhere between these poles of opinion, many Americans welcomed the generous credit of state and local banks, although they also feared the periodic failures of large banks. Even Thomas Jefferson, who argued in 1791 against the constitutionality of the national bank and who divested the government's roughly two thousand bank shares after he became president, used the new financial system to double the size of the country when he paid France $11.25 million of just-printed Treasury bonds to purchase Louisiana in 1803. Napoleon in turn sold the American bonds primarily to British investors, whose capital was used to fund a war on Britain in 1812. Jefferson admitted in 1805 that notes of the bank provided a welcome supply of reliable currency for port merchants, and many Republican leaders believed rechartering the bank in 1811 would provide important regulatory functions for the nearly two hundred state and local banks that printed their own widely circulating notes. Recharter failed, but existing smaller banks dispersed paper money, gave liberal credit, and as a result, expanded public confidence in bold development projects. Foreign investors became eager buyers of securities as well, proving to some observers that international confidence in the Republic was growing, while raising concerns among others that Americans might lose control over their Republic. When it became clear by 1816 that the proliferating state banks failed to protect investors' credit by providing adequate specie reserves for their notes and that most small banks could not make large enough loans to aggressive investors, an influential group of political leaders and investors promoted and secured a charter for a new central bank, the second Bank of the United States.

National growth and transportation. Although the financial revolution of the first post-Revolutionary generation created the most controversy, other fundamental transformations were under way in those years as well. Between 1780 and 1820 the population of the United States doubled. American families were larger than European ones; American death rates were slightly lower, diets healthier, disease and epidemics less traumatic, and average farms larger than in Europe. The size of the country more than doubled during these years with the purchase, conquest, annexation, and settlement of vast areas that had been Native American country for hundreds of years as well as the contested dominion of overlapping English, Spanish, French, and African peoples. As American citizens spread across what Thomas Jefferson called their "empire for liberty," new vistas opened up for agricultural productivity, entrepreneurship, and institutional innovation; fierce warfare against thousands of Native Americans made possible the creation of five new states between 1810 and 1819. Never before or since did so many Americans move within the continent to new homes. Since labor was continually in demand, the arrival of a steady stream of immigrants—nearly a million between the Revolution and the 1820s—demonstrated America's capacity to absorb newcomers.

In 1790 the objectives of unifying the country's many regions and "taming the wilderness" seemed formidable. Traveling more than a hundred miles was likely to involve some combination of horses, wagons, flatboats, small sailing vessels, barges, or canoes. Before 1815, most commodities moved within America on small water craft and flatboats that followed the flow of main rivers or in slow-moving wagons that navigated rutted and dangerous roads. It cost as much to send a ton of goods from an American port to a point thirty miles inland as it did to bring the goods across the Atlantic. To get goods from Cincinnati to New York City, freighters maneuvered small boats down the Ohio and Mississippi Rivers, out the port of New Orleans, through the Gulf of Mexico, and finally up the coastline of the Atlantic, a trip that took seven weeks on average. Cargoes changed hands numerous times because river pilots and mule train drivers operated over only short distances; myriad local fees reminded farmers and storekeepers that their economy was far from being nationally integrated.

Yet by 1820 the astounding accomplishments of the transportation revolution unfolded everywhere. Some of the first changes resulted from merchants' efforts to integrate commerce and farming. For example, the great three-story flour mills near Wilmington, which grew up in a natural environment of fast streams and a densely populated countryside, became magnets for grain that scores of local boatmen brought from the hinterlands. Other changes represented the pooling of private and state-level resources and bold risk taking that cut new pathways into the interior. The engineering triumph of the Erie Canal, the "big ditch" between Albany and Buffalo that opened in 1825, linked New York City to all of the Great Lakes. On a much smaller scale, but proliferating everywhere, were macadamized roads, canals, widened rivers, new port construction, and bridges that were funded and maintained by boosters and projectors in every state. The National Road, although beset by interstate quarrels and periods of inadequate funding, eventually cut from the Cumberland Gap, through western Pennsylvania, to Columbus, Ohio, and finally to Vandalia, Illinois. Steamboats, known to many Native Americans as "fire canoes," slowly overcame their reputation for explosions and plodding pace to become a marvel of upriver navigation.

The consequences of these internal improvements surpassed all predictions: people and goods moved faster and more efficiently; the value of goods sent from new western settlements to external markets doubled; and farm productivity in the mid-Atlantic and the South rose exponentially between 1790 and 1820. The prices of everyday goods fell dramatically, and the differences in prices between widely separated places such as Philadelphia and Toledo, or New York and New Orleans, narrowed. Enterprising producers anticipated improved transportation that would remove natural obstacles to trade. Information itself flowed faster, too; by the 1820s eastern news reached Cincinnati, Ohio, or St. Joseph, Missouri, within days of appearing at the kiosks of Baltimore or Boston. In short, the transportation revolution helped knit distinctive local economies together in new networks of people over much greater distances. It also spurred a greater specialization of production and division of labor among farmers and craftsmen. Rather than provide a wide array of things for an intricate local community of buyers and sellers, many focused their efforts on growing or making one or two commodities for export while making their own clothing and bedding from store-bought fabric or working with ready-made tools.

Manufacturing. Americans were primarily a commercial and agricultural people until far into the nineteenth century. The wrenching effects on New England's commerce of Jefferson's embargoes from 1807 to 1809 demonstrated that region's dependence on trade. Yet commercial downturns also encouraged coastal people to turn to internal development and experiments with manufacturing. Already in the early years of the century, people and goods were more palpably integrated, institutions were taking root everywhere, and Americans became conscious of an increasingly interdependent national economy. Public discussions about banks, lotteries, work relief, and internal improvements crowded the pages of proliferating newspapers. In the northern states, leading interests began to question the value of international free trade and advocate protective tariffs.

Early American manufacturing bore little resemblance to large-scale manufacturing in industrializing England and Europe. When Hamilton presented his Report on Manufactures in 1791, most adult male workers made items by hand, with traditional tools, in small shops and alongside a master craftsman or mill owner. Farmers often did carpentry on the side, barrel makers shaved shingles when work was slow, millers ran small retail shops on the side, and most farmers exchanged labor time with neighbors to get odd jobs done. Peddlers, scavengers, and jacks-of-alltrades could be seen regularly, anywhere. Slowly, however, enterprising individuals laid the foundations for something bearing a closer resemblance to industry. Brickmaking and sawmilling sprang up throughout the countryside, and machine tool shops dotted the riverways near port cities. New towns emerged where trading, milling, and small-scale production met rural farmers' needs. In an address to Congress in 1810 that previewed his famous plan of 1824, Henry Clay made one of the first systematic arguments in America about the potential for linking commerce and agriculture to manufacturing. At the center of his vision—embraced by publishers such as Hezekiah Niles and many mid-Atlantic small manufacturers—was not an impoverished urban proletariat, but a middling people who knew the personal and social benefits of hard work. They would work, and employ others, to produce an array of desirable goods; the middling American would consume at levels not of "excess and luxury" but of "comfort and convenience." Clay's "American System of Manufactures," presented in 1824, also articulated the benefits of extensive private credit, more private and public spending, promotion of new technologies and inventions, and a nationally integrated economy.

Long before full-scale manufacturing arose in coastal areas, the traditional putting-out system used underemployed tradesmen of cities to transport cotton, leather, timber, or flax to homes, where women and children processed the raw materials into semifinished goods and received small extra earnings for their families. Weavers in rural and urban areas earned much more than these handicraft workers, and millers or fullers still more. Around Lynn, Massachusetts, thousands of women and children earned low piecework wages by sewing together sections of shoe leather that came from area farmers who enthusiastically gave up plowing grain fields in order to graze cattle. But in Rhode Island, merchant investors Moses Brown and William Almay teamed up with the skilled mechanic Samuel Slater in 1790 to organize a centralized putting-out system for women and children to spin in a main mill, while keeping hand loom weavers nearby to turn the yarn into cloth—all still run by waterpower in a rural community along the Blackstone River. Linked to all of these changes was the rapidly rising production of cotton in the South, thanks to the rapid adaptation of Eli Whitney's cotton gin, first used in 1793, and the renewed expansion of slavery and plantation agriculture in the South. While agricultural goods flowed in from the Old Northwest, immigrants who worked at low wages and lived tightly packed in separated neighborhoods provided cheaper labor for, especially, the cotton and woolen mills that dotted waterways for miles into America's interior.

A traveler in the 1790s could also marvel at the great flour mills along the Brandywine River between Wilmington, Delaware, and Philadelphia, where Oliver Evans incorporated new mechanical devices—using only wood and leather—to move, grind, cool, sort, and bag flour at unheard-of speeds. Ships pulled up next to these three-story mills to load on flour almost entirely without the aid of manual labor. By the 1840s nearly twenty thousand new mills, many of them in developing western regions, incorporated some or all of Evans's labor-saving mechanisms, making it possible for exporters to boast about a 200 percent rise in the value of the flour they produced. By the late 1820s Eli Terry, Seth Thomas, and Chauncey Jerome mass-produced clocks in their shops for the homes of middling families. Steam engines propelled boats up and down major rivers; soon steam would be harnessed to run factory machinery. The craze for interchangeable parts, machine-produced tools, and ready-made clothing gripped the East Coast initially, but rapidly spread far into the interior; additional state regulation and rising federal tariffs, as well as accumulating merchant and manufacturing capital, promoted the proliferation of infant manufactures everywhere by 1820.

Panic of 1819. The Panic of 1819 was the first truly national depression in America, and it prompted many people to reassess whether they had become overconfident about their still-fragile economic institutions and had created "an extravagant people" of speculators and overextended developers. Americans' easy credit came to a halt in the summer of 1818; banks began to call in their loans and demand that borrowers pay in specie or cotton, and other commodity prices declined; businesses failed; unemployment rose; creditors dunned debtors; and widespread foreclosures devastated hundreds of farm families. Indeed, the Panic of 1819 struck the hardest where expansion had been the greatest, in the South and new areas of the West. A wall of protective tariffs seemed to go hand in hand with new local prohibitions on the consumption of "luxurious superfluities." Despite the return of prosperity in the 1820s for well-placed merchants and commercial farmers, the panic was a harsh reminder of the uneven benefits of America's economic development and the fragility of the Republic itself.

See alsoAgriculture; Bank of the United States; Banking System; Currency and Coinage; Erie Canal; Hamilton, Alexander; Internal Improvements; Inventors and Inventions; Manufacturing; Panic of 1819; Revolution: Impact on the Economy .


Engerman, Stanley, and Robert E. Gallman, eds. The Cambridge Economic History of the United States. Volume 1: Colonial Era. Volume 2: The Long Nineteenth Century. New York: Cambridge University Press, 1996, 2000.

Ferguson, E. James. The Power of the Purse: A History of American Public Finance, 1776–1790. Chapel Hill: University of North Carolina, 1961.

Gilje, Paul, ed. Wages of Independence: Capitalism in the Early American Republic. Madison, Wis.: Madison House, 1997.

Kennedy, Michael V. "The Home Front during the War for Independence: The Effect of Labor Shortages on Commercial Production in the Mid-Atlantic." In A Companion to the American Revolution. Edited by Jack P. Greene and J. R. Pole. Oxford, U.K.: Blackwell, 2000.

Mann, Bruce H. Republic of Debtors: Bankruptcy in the Age of American Independence. Cambridge, Mass.: Harvard University Press, 2002.

Nettels, Curtis P. The Emergence of a National Economy, 1775–1815. New York: Holt, Rinehart, and Winston, 1962.

Peskin, Lawrence A. Manufacturing Revolution: The Intellectual Origins of Early American Industry. Baltimore: Johns Hopkins University Press, 2003.

Sawyer, John E. "The Social Basis of the American System of Manufactures." Journal of Economic History 14 (1954): 361–379.

Sellers, Charles G. The Market Revolution: Jacksonian America, 1815–1846. New York: Oxford University Press, 1991.

Taylor, George Rogers. The Transportation Revolution, 1815–1860. New York: Rinehart, 1951.

Watson, Harry L. Liberty and Power: The Politics of Jacksonian America. New York: Hill and Wang, 1990.

Cathy Matson

Economic Development

views updated May 23 2018


Economic development, generally speaking, is a process of change that is focused on the betterment of the community, state, and/or nation. Defining economic development can be difficult. The first term in this phraseeconomicrefers to an accepted paradigm for organizing the business and financial and even to some extent the governmental sectors of a nation. Economics is viewed as the foundation for building a prosperous society. However, it is the second termdevelopmentover which there is considerable debate. People's perceptions of development vary. For some, development has the appearance of successful commercial enterprise; for others, the face of development is one of economic equality. Nevertheless, the concept of economic development has the attention of government, the business sector, and the citizenry. Economic development is pursued as one of the goals of a successful country, state, or city. It captures the attention of the news media and impacts, as well as is impacted by, political objectives.


Economic development in a community can take many forms. However, before discussing the process of economic development, we must first understand how economic development has been measured, particularly at the national level. It is within this framework that communities have pursued their goal of improving the local economic environment. In fact, standardized measures of economic development are being used throughout the world, not just in the United States.

Standardized measures of economic development are used to identify the status of one's country, state, or local community. We use these measures for a number of different purposes, including identifying trends and understanding patterns of economic development in communities that face different resource opportunities and constraints.

One of the most common methods of measuring economic growth is by calculating the gross national product of a country. Gross national product (GNP) is the value of goods and services produced by an economy's factors in a given period of time (e.g., the value of all goods and services produced by U.S. operations throughout the world in a given year). Gross domestic product (GDP), on the other hand, is the value of goods and services produced in an economy in a given period of time (e.g., the value of goods and services produced in the United States in a given year). When these measures are adjusted for inflation, we correct for any changes in the GNP or GDP that are due simply to increases in the price level in the economy. Real GDP, for example, is the value of goods and services produced in an economy adjusted for changes in the price level. This is particularly important when comparing across different economies because changes in price levels will not necessarily be uniform from one country to the next.

The general purpose of using measures such as real GNP or real GDP is to collect and analyze information related to a country's economic transactions. Real GNP or real GDP provides analysts with an indication of how quickly the business sector of the economy is growing in a country. It also serves as a guidepost for local communities as they address economic development issues at a local level.

Trends in national economic development reflect changes occurring at the state and local levels and can

impact local economic development planning. For instance, if the real GDP of a country has increased, then we conclude that the country has experienced economic growth and the economy has improved. This information sends a signal to local economies suggesting that the national economy is in the growth phase of the business cycle. Communities can use this information to identify their position relative to the current trend and to plan future economic development. If, however, real GNP has declined, then the economy is thought to have experienced an economic downturn and a community can use this information to anticipate the impact of future economic downturns.


Positive trends in growth at the national level do not guarantee that individual communities are or will be successful in developing their local economies. The needs of local communities have changed as the patterns of growth at the local level have changed. Thus the rules of local economic development as they relate to attracting new business in order to promote economic growth also have changed. As communities compete with each other to attract new businesses and hence jobs to the local environment, they are discovering that the traditional methods of tax abatement and low-interest loans, coupled with job training, are not sufficient to guarantee a level of development that improves the economic base of the community. In fact, communities are looking for ways to ensure that they will get more from the investment than it will cost them in terms of tax abatements and infrastructure costs.

As firms increasingly engage in multilocation operations, communities are finding that, in addition to attracting new businesses, encouraging local firms to develop is a valuable economic development tool. The community's view of its resources has expanded beyond providing the traditional tax incentives to expand a community's economic resources to include factors such as a well-educated work force and adequate public services. Communities are more likely to target the type of firm that is right for the community. The emphasis on locating manufacturing enterprises has diminished as communities look to healthy businesses that fit the changing needs of the work force and infrastructure. Explicit consideration of the impact of the new business on economic equity in the community is also becoming more important, and growth and equity are increasingly recognized as complementary rather than opposing goals.

Many of these changes can be summarized in the phrase "sustainable development." The case of sustainable development is appearing more and more frequently in discussions of community economic development. Sustainable development is a process of development that "ensures the needs of the present are met, without compromising the ability of future generations to meet their own needs" (World Commission on Environment and Development, 1987, p. 9). The vision of sustainable development is one of developing within the capacity of our resources an ability to replenish themselves; by analogy to the financial sector, it means living off of the interest as opposed to the capital of our investment.

In the context of sustainable development, economic development is managed and controlled in a way that recognizes the dynamic nature of social, political, technological, and economic factors in a local community. Ultimately, the process of economic development is changed from one of identifying incentives for business growth to one of comprehensive planning to address social, economic, and environmental concerns. The themes of economic development also change. Traditional local economic development policies pursue increases in economic activity and thus in the income levels of local residents. A larger tax base and lower levels of unemployment are equated with business expansion. Sustainable development means that growth occurs alongside community goals of increased self-sufficiency and improved environmental quality. In fact, different forms of growth are encouraged. The sustainable development initiative is not opposed to growth but rather focuses its efforts on answering the question, "How do we grow?"

Successful economic development has been achieved in many communities pursing a sustainable development approach. Among the success stories is Kansas City, Missouri, which faced one of the most urgent economic development problems of urban areasurban sprawl. From 1960 to 1990, the population in the metropolitan area grew by less than one-third while the land area developed more than doubled. The city's population was moving to the suburbs while the inner city was slowly being abandoned. As a result, the jobs moved with the population, and the communities in the outer ring of the city used traditional economic development tools, such as tax incentives, to attract new business. The central city attempted to compete by providing additional incentives. The burden, however, was clearly felt by taxpayers, as this increased over this period.

A Metropolitan Development Forum was formed to address the community development issues associated with urban sprawl. The forum has been successful in many areas: they have identified regional transportation needs, achieved agreement on the role of tax incentives in the region as a whole, created a metropolitan greenway, and created local initiatives for economic development planning.

One community that has achieved long-term success is Portland, Oregon. Portland has channeled the economic growth in the city such that employment in the formerly dying downtown area grew from 50,000 jobs in 1975 to 105,000 jobs in 1998. This strategy has been successful because they focused the development of business in areas that are close to developed transit systems, limited commuter parking, and controlled the expansion of growth into the rural areas.

Kansas City and Portland are only two of many examples of successful sustainable development initiatives across the country. As a community's needs change and as development is more broadly defined to include social as well as economic indicators of progress, sustainable development and planned growth initiatives will continue to take hold. There are many opportunities ahead for local economies to grow and prosper in ways that recognize the importance of improving the quality of life as well as the economy's overall productivity and income levels.

see also Economics


Parkin, Michael (2005). Macroeconomics (7th ed.). Boston: Addison-Wesley.

Shaffer, Ron (1998). "Playing by New Rules in Local Economic Development." Community Economics Newsletter, No. 263. Center for Community Economic Development, University of Wisconsin-Madison.

Shaffer, Ron (1995). "Sustainable Community Economic Development." Community Economics Newsletter, No. 224. Center for Community Economic Development, University of Wisconsin-Madison.

Thomas, Margaret G. (1999). "Strategies for Sustainable Economic Development." Community Economics Newsletter, No. 267. Center for Community Economic Development, University of Wisconsin-Madison.

World Commission on Environment and Development (1987). Our Common Future. Oxford: Oxford University Press.

Ellen Jean Szarleta

Economic Development

views updated Jun 11 2018

Economic Development

What It Means

Economic development refers to the transformation of a simple, low-income national economy into a more sophisticated one in which citizens’ incomes rise. The term “economic development” is often used, in everyday conversation, as a synonym for “economic growth,” but economists draw a clear distinction between the two. Whereas economic growth refers to a simple increase in the quantity of goods and services produced in an economy, economic development describes a wide range of interconnected, qualitative changes at the structural level of the economy. The process of economic development involves changes in economic inputs (the resources, such as land, raw materials, equipment, and labor, that are used to produce goods and services), in the technologies used to combine these inputs in the production process, and in economic outputs (the final products produced by the economy).

Undeveloped economies tend to be predominantly agricultural, consisting of workers who act directly on the natural world with only minimal help from tools and technology. Development usually proceeds as businesses accumulate capital (equipment and machines that aid in production, as well as the skills that workers acquire through education and training). New equipment allows workers to increase their efficiency and to produce larger quantities of goods, and new labor skills develop in combination with the use of the new equipment, changing the nature of the labor force. Incomes rise, and people who have more money to spend begin demanding more and different products. The economy adapts to these new tastes, spurring the growth of new industries. Over time, as these structural changes occur, the economy shifts away from agriculture and into industrial production, and it begins to be considered a developed, rather than a developing, economy.

When Did It Begin

The economic development of Western Europe began roughly in the sixteenth century and proceeded gradually over the course of several centuries. Industrialization increased rapidly there in the early nineteenth century, and the latter part of that century saw the expansion and development of the economies of Eastern Europe, Australia, New Zealand, South Africa, Canada, and the United States. Russia’s economic development came primarily in the twentieth century.

Economic development became a more pressing concern when, after World War II, the colonial era (during which European countries and Japan conquered and ruled over foreign lands in Asia, Africa, and elsewhere) came to an end. Once ruling governments withdrew from their colonies, new countries were established, and most of these countries had undeveloped economies. Questions about how best to encourage economic development in these poor countries have been a central concern of many economists and government leaders since that time.

More Detailed Information

The most common measure that economists use to judge a country’s economic development is gross domestic product (GDP) per capita. Gross domestic product is a calculation of the monetary value of all goods and services produced by a nation’s economy, and GDP per capita is an estimate of each citizen’s share of GDP. Economists determine GDP per capita by dividing GDP by the size of a country’s population. According to their GDP per capita, countries are commonly classified as less-developed countries (often referred to as LDCs), developing countries, or developed countries. Among developed countries, those that have developed only recently are classified as newly industrialized countries (NICs).

GDP per capita does not, however, fully capture the degree to which a country has developed. For instance, the economies of the oil-producing island nation of Bahrain and the newly industrialized country South Korea both grew rapidly in the latter part of the twentieth century, and today the two countries boast similar GDPs per capita (of roughly $20,000 in 2007), but most of Bahrain’s wealth is produced by a single industry—oil—and the nation’s citizens do not fully participate in this industry. Instead, multinational corporations headquartered primarily in the United States and Europe locate their own employees in Bahrain to conduct the process of finding, extracting, and bringing the oil to consumers, most of whom, again, live in the United States, Europe, and other developed nations. Though the oil industry generates income for Bahrain’s government and its people, the economy has not otherwise industrialized or transformed at the structural level, so that the fortunes of the oil industry and the fortunes of the country’s economy are essentially inseparable. South Korea, by contrast, has both grown and shifted from an agricultural to an industrial economy. Workers have increasingly left rural areas and moved into cities to find the new jobs produced by a developing economy, and the economy as a whole is on a solid footing in a way that Bahrain’s is not. The incomes of South Korea’s citizens are growing, and there is real potential for them to keep growing. A broad range of the population shares in the benefits produced by economic development.

South Korea is not the only country to have developed a solid economy since the mid-twentieth century. Other success stories include the economies of Taiwan, Singapore, and Hong Kong, all of which are today considered NICs. At the other end of the spectrum, however, are the many countries of Asia, Africa, and Latin America that have failed to develop significantly since gaining independence from their colonial rulers. The question of how to spur development in such countries is one upon which more than profits and business opportunities depend. Since economic development usually corresponds with increases in quality of life (for example, better health care, education, and public services), the lives and futures of billions of people are at stake.

Though economic opinion is divided about strategies for development, most people agree that two basic ingredients often necessary for a country to transform its economy are the accumulation of capital and access to modern science and technology.

In the decades immediately following World War II, capital accumulation was believed to be the fundamental, if not the only, ingredient necessary for economic development. Capital can be broken down into non-human and human capital. Non-human capital includes buildings, machines, equipment, and other materials that allow for increased productivity. Human capital consists of the education and specialized training of individuals that allows companies to increase their productivity. Development strategies for LDCs during the 1950s and 1960s usually called for massive injections of foreign aid (money contributions) and investment that would allow for the accumulation of capital. It was believed that economic development would proceed naturally from this starting point. This did not turn out to be the case in many countries, however. While capital accumulation is no longer considered the supreme determinant of economic development, it is generally agreed that, if a country does not reinvest a significant portion of its income in capital, it cannot continue to develop over the long term.

Capital was not the sole or even the primary driver of the enormous and rapid development of the U.S. economy in the late nineteenth and the twentieth century. Many economists point to technology as the key ingredient in U.S. development. Indeed, the growth and structural change of the U.S. economy would have been inconceivable without the monumental advances in modern science made during that time. As the laws of physics, chemistry, and biology (among other fields) were applied to the production of goods and services, countless new economic possibilities emerged. While LDCs today have access to the discoveries of the past, they do not always have the capability to convert this knowledge into product innovations that will allow for economic growth and change.

Economists agree, moreover, that government policies are one of the most important factors influencing an economy’s course. Political stability is, naturally, one of the necessary preconditions for industrialization. Until the population and businesses in a country can be sure that they can safely pursue their economic goals, development is not possible. But stability alone is not enough. If a government does not actively promote economic development, then it will likely hinder industrialization. This occurred in Cuba in the mid-to-late-twentieth century, where the country’s socialist leader Fidel Castro promoted social goals over economic goals. This also often occurs in societies ruled by an elite group that benefits from a lack of economic development. European nations typically governed their colonies with the intent of benefiting the businesses and citizens of the ruling country, making no serious effort at economic development that would have benefited their colonies’ native populations.

Recent Trends

Among developing nations at the end of the twentieth century and the beginning of the twenty-first, China and India stood out in the minds of most economists and business analysts. Both countries are enormous in both geographic size and population, and the economies of both were growing at a torrid pace in the 1990s and in the early years of the new millennium. Experts commonly predicted that the countries would, within a few decades, surpass in size all national economies in the world except that of the United States.

China and India were following very different paths toward development, however. China excelled at heavy industrial production, which it bolstered with good infrastructure (roads, ports, and utilities) and large amounts of foreign investment. India, meanwhile, specialized in products and services less reliant on tangible assets, such as software, biotechnology, and advertising. China, as a socialist country (a country in which social goals centrally influence economic policy), exerted much greater government control over businesses and investors. Though government participation in the economy had allowed for the large capital investments necessary for heavy industrial production and for the effective infrastructure that supported those producers, some economists wondered whether government control of the economy might ultimately hinder China’s growth. India’s government, on the other hand, had since the 1990s taken an essentially hands-off approach to the economy. This had allowed for growth comparable to China’s even in the absence of infrastructure and without significant amounts of foreign investment.

Which one of the two courses would ultimately prove the most fruitful strategy for economic development was a matter of debate in the early twenty-first century. Few people, on the other hand, doubted that China and India would continue to develop, or that both would eventually rival the top economies in the world.

Economic Development

views updated Jun 27 2018

Economic Development

Economic development occurs with the expansion of the economic base of a community, region, state, or nation through the efficient allocation and use of available resources. In general, economic development is any activity that results in additional jobs and income. Economic development suggests an improvement in the quality of life for a community.

Water is the basis for much economic development and industry, transportation, and energy production. It is also fundamental to agriculture, forestry, recreation, and the environment . Water has influenced where people live, as is evident by the location of many major cities and towns along or near sources of water.

National Development

Water resources are a vital and underlying component of economic development efforts. As established under the Water Resources Planning Act of 1965, the "Principles and Standards for Planning Water and Related Land Resources" was published in 1973. Although repealed in 1982, the principles remain an important part of water resource planning. Of the two main objectives of the "Principles and Standards," one was "to enhance national economic development by increasing the value of the nation's output of goods and services and improving economic efficiency."

From the founding of the United States, water resources have affected economic development. From 1776 to 1875, water policy focused on improvements to navigation on the nation's rivers, including shoals and dredging, building canals such as the St. Lawrence and Erie, and opening the western United States to development.

The next 25 years saw projects on flood control and irrigation spring up throughout the country to aid in the development of the nation's growing economy. Numerous federal agencies, such as the U.S. Army Corps of Engineers and the Bureau of Reclamation, were established in the early 1900s to make water resources available for development purposes. Large water projects, such as Hoover Dam (1936), not only contributed to the economic resources of a region but also provided much-needed public works employment during times of economic downturn.

Community Development

Beyond the important role that large water projects have played in the nation's economic development, water is important at the community level. At any level, there are five options for economic development:

  • Improving the ability to capture existing income;
  • Improving the efficiency of existing firms;
  • Encouraging new business;
  • Attracting new industry or businesses; and
  • Increasing financial aid received from other government levels.

Communities seek to keep money spent on goods and services within the community and prevent "leakage" of income. Water resources, especially recreational ones, can keep income in a community and attract spending from those outside the area. Existing firms seeking to expand the creation of new jobs and additional income often rely on the availability and high quality of water resources in their production process. New businesses need support in terms of water resources to help the formation of local opportunities. New businesses and industry often are attracted to a community when water supply and quality are high. Finally, state and federal spending on water projects can provide employment and income opportunities for local areas.

see also Army Corps of Engineers, U.S.; Bureau of Reclamation, U.S.; Canals; Cost-Benefit Analysis; Dams; Hydroelectric Power; Irrigation Management; Land-Use Planning; Planning and Management, History of Water Resources; Supply Development; Sustainable Development; Tennessee Valley Authority; Transportation; Uses of Water.

Jeffrey L. Jordan


Pulver, Glen C. "Economic Growth in Rural America." In New Dimensions in Rural Policy: Building upon Our Heritage. Studies prepared for the use of the Subcommittee on Agriculture and Transportation of the Joint Economic Committee Congress of the United States, 99th Congress, 2nd session, June 5, 1986.

Woods, Mike D., V. Jack Frye, and Stanley R. Ralstin. "Blueprints for Your Community's Future: Creating a Strategic Plan for Local Community Development." Oklahoma State University Extension Facts, WF-916, 1996.

economic development

views updated May 23 2018

economic development See ECONOMIC GROWTH.

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Economic development