HONOURS GEOGRAPHY
Economics of Latin America

*The two wealthiest nations in Latin America are Brazil (#9 worldwide) and Mexico (#13 worldwide), both of which had GDPs (adjusted for purchasing power) of over $1 trillion a year.  Argentina is third (#22), and, for all its faults, Columbia is fourth (#28).  Next are Chile (#44), Peru (#47), and Venezuela (#52). 

*Little St. Kitts and Nevis have the smallest GDP ($596 million, #183 out of 193 in the world), and most of the other Caribbean island nations have similarly small GDPs.  Belize has the smallest GDP of any mainland country ($1.9 billion, #166 worldwide).

*In terms of GDP per capita, the Bahamas are wealthiest, with a GDP per capita of $18,288 (#40 worldwide), and Barbados, with $16,483 is next (#41 worldwide).  Next are St. Kitts and Nevis (#48), Trinidad and Tobago (#50), and Argentina with $12,468 per person (#52).  Next are Chile (#59:  $10,869 per person), Costa Rica, Mexico, Uruguay, and Brazil (#70:  $8,328 per person).

*Haiti has the lowest GDP per capita in Latin America ($1,556 per person (159)), but it is still wealthier than many African nations.  Honduras ($2,682 per person (#129)) and Bolivia ($2,902 per person (#127).  Cuba is thought to have about $3,000 per person (#126) but it’s hard to tell, as it does not release as many official figures as some other nations.

*Historically, Latin America was a colonial region, with colonial economies:  they produced raw materials for export, and imported finished goods from their mother countries.  Even when they ceased to be colonies outright, they retained colonial economies in many ways, which made it hard for them to attain real wealth. 

*In fact, wealth was even harder to promote because some places were barely even colonial in the economies—the haciendas were largely self-sufficient farms and ranches that did not even attempt to export much; they just grew enough to support themselves and buy a few luxuries.

*Land reform has been an attempt to change the problem of hacienda economies, and it has created more consumers and let more people become independent economic agents.  So has the rise of industrialisation.

*Historically, South America exported metals (and some rare woods and wood products, such as rubber, and bird droppings from the Atacama Desert), while the Caribbean exported sugar.  Once it became possible to refrigerate it for long distances, food also became increasingly important as a source for exports.  Beef, citrus fruits, bananas, coffee, chocolate, and cocaine are all important Latin American exports today.

*In some cases, the export of one particular crop became some countries’ entire reason for existing.  These were known as banana republics.  In many cases, they were dominated economically and politically by one or another foreign company with extensive economic interests there.

*The original banana republic was Honduras.  In 1910, the United Fruit Company (now Chiquita Banana) complained that its taxes were too high.  When the president of Honduras refused to give the company tax breaks, United Fruit sent some thugs down to throw him out.  The next president gave United Fruit a 25-year waiver from paying any taxes.

*In 1954, the United Fruit Company got the CIA to go into Guatemala when the president threatened to seize any unused land (including some owned by United Fruit) to redistribute to the poor, particularly to Indian peasants.  United Fruit convinced the US government that this was incipient communism, so the CIA helped local rebels overthrew the Guatemalan government.

*In some cases, United Fruit was good for the countries it ran:  it built schools to educate potential workers, and railroads to transport its products.  On the other hand, it sometimes discouraged the construction of roads, because these would cut into its railroad monopoly.

*Even today, Chiquita Banana and Dole Foods are very important in the economies and politics of Central America.

*At the dawn of the 20th Century, a century after independence, most of Latin America was still dependent on Europe and the USA for imports of many manufactured goods.  In the 1930s and 1940s, Latin America tried to change this (partly in response to the Great Depression and World War II, which badly disrupted the world economy without doing much to directly affect Latin America physically).  Thus, Latin America turned to Import Substitution Industrialization.

*ISI is based on building the kinds of industries that produce the things a country had previously had to import from outside.  It can be promoted through subsidies, through indirect government interference or direct government control of industry, through high tariffs on imports, or through several or all of these.

*It was most successful in countries that were already fairly large and prosperous, and that had a lot of materials and workers to draw from.  Argentina, Brazil, Mexico, and to a lesser extent Chile and Uruguay were fairly successful with this, while Ecuador, Honduras, the Dominican Republic, and other (mostly smaller) countries were not.  It usually worked best in nations that were relatively democratic and relatively free of corruption.

*In many cases, ISI did require (or at least result in) nationalisation of various industries, often those owned by foreigners—so many US companies, particularly oil companies in Mexico and Venezuela, lost some of their assets.

*Eventually, however, ISI fell out of favour in much of Latin America.  For one thing, it was too much like the hacienda system applied to the industrial world.  For another, nationalizing the industries made them, in many cases, inefficient.  Governments often mis-spent too much of the money they did make, or else just skimmed it off for their personal bank accounts.  A lack of exports also made it hard for countries to gain money to import the things they did want.

*In the 1980s and 1990s, much of Latin America began to move towards Export-Oriented Industrialisation.  Lowering tariffs, encouraging foreign investment, reversing nationalisation, and simply having cheap labour made it worthwhile for foreign companies to begin building factories there again.  In many cases, countries also devaluated the local currency, making their exports more competitive.

*To encourage exports, many South American nations have entered into free trade agreements. 

*The Andean Community, founded in 1969, is a trade bloc comprising the South American countries of Bolivia, Colombia, Ecuador, Peru and Venezuela.  Its member countries enjoy free trade or low tariffs on many goods traded within the region.

*Mercosur (or Mercosul), the Southern Common Market, was founded in 1991 to permit free trade between Brazil, Argentina, Uruguay and Paraguay.  Bolivia, Chile, Colombia, Ecuador, Peru, and Venezuela have associate member status. 

*Mercosur and the Andean Community are in the process of uniting into one free trade area, to be called the South American Community of Nations.  Full integration will hopefully be completed by 2007, although some tariffs will remain in place until 2019.  It would create a common market for all of South America except the Guyanas.

*There is also a Central American Common Market between five nations of Central America. It was established between the nations of Guatemala, El Salvador, Honduras and Nicaragua in 1960. Costa Rica joined the CACM in 1963.  The CACM collapsed following the Football War of 1969, but was re-instated in 1991.  It has greatly lowered tariffs between countries in the region.

*Mexico benefits from NAFTA, which went into effect in 1994.  It has let cheap Mexican labour work for American industries, particularly in the maquiladora plants of the border town.  These are factories owned by Americans but worked by Mexicans, and all their products are exported (usually sold in the United States).  Many of these assemble finished goods from parts made in the USA.  This has created boom towns opposite many major American border towns, but it has also created opposition from those (in Mexico) who feel their people are being exploited and from those (in the USA) who feel that their jobs are going over the border.

*There has been significant discussion of creating a Free Trade Area of the Americas to cover every state in North and South America except Cuba.  However, the 34 potential participating nations cannot agree on exactly which tariffs to lower, and what industries will lose subsidies, because American agriculture is heavily supported by the government, while for Latin Americans, agricultural products remain some of their most important exports, and they want to trade them freely, too.

*Now that most Latin American countries no longer practise ISI, they need and want foreign imports.  Furthermore, they are increasingly wealthy enough to afford modern conveniences and luxury goods—they are developing a real middle class (even if it’s still smaller and poorer than that of the USA or much of Europe). 

*Nations like this are described as emerging markets, and are particularly important because of the opportunities they afford foreign companies and investors.  This is particularly true because they do not yet suffer from market saturation—most people who want a car, TV, refrigerator, or other manufactured product may still need to buy their first one; foreign companies do not have to compete with existing product lines or wait for existing products to wear out.



This page last updated 3 September, 2006.