Latin American Industrialization after 1870

The fall in the net barter terms of trade in Mexico, Brazil, and Venezuela implied a rise (or at the very least, no fall) in the relative price of imported manufactured goods, a trend that obviously favored domestic industry there.

Brazil and Mexico enjoyed faster industrialization after 1870 than did the rest of Latin America and much of what we now call the Third World. In Was It Prices, Productivity or Policy? The Timing and Pace of Latin American Industrialization after 1870 (NBER Working Paper No. 13990), authors Aurora Gomez Galvarriato and Jeffrey Williamson try to determine how much of this economic performance was attributable to each of three factors: changing fundamentals, such as improving economic institutions and greater political stability, both of which would have facilitated greater technology transfer and accumulation; changing market conditions, such as more expensive manufactures and cheaper foodstuffs; and changing policies, such as pro-industrial real exchange rate and tariff policies.

They begin their analysis by examining textile production, which always dominates manufacturing during early industrial stages. Between 1800 and the 1870s, Mexico was flooded with cheap, factory-made European textiles, and thus lost a lot of its home market: the share of the domestic textiles market supplied by local firms fell from 79 percent in 1800 to 60 percent in 1879, a classic example of globalization-induced de-industrialization. After the 1870s, the local firms won back what they had lost, their share rising to 78 percent shortly before 1910. Brazilian industrialization was also impressive during these four decades, and both of these young republics did well compared with the rest of the poor periphery.

While protectionist policies did serve to offer modest support for some local industries, the impact was small. Instead, the authors find, trends in the net barter terms of trade (the price of exports over imports) made a much bigger contribution. This long-term trend in world relative prices worked in favor of industrialization in certain Latin American young republics, especially when compared to other poor nations in the Middle East, South Asia, and East Asia. The fall in the net barter terms of trade in Mexico, Brazil, and Venezuela implied a rise (or at the very least, no fall) in the relative price of imported manufactured goods, a trend that obviously favored domestic industry there.

The authors find that improved wage competitiveness did not make a significant contribution to domestic industrialization in most of Latin America, including Mexico, but it did favor industry in Brazil and Uruguay. Some part of the industrial lift-off in Brazil and Mexico can also be explained by real exchange rate depreciation prior to 1913, but this explanation does not apply to Argentina, Chile, or Colombia.

-- Lester Picker