2
The Latin American Economies in the 1940s

Rosemary Thorp

In the 1940s Latin America achieved satisfactory growth, even in per capita terms, and the share of industry in gross domestic product rose from 15 percent in the last five years of the 1930s to 18 percent by the early 1950s. Population growth accelerated, rising from an average of 2.1 percent in the early 1940s to 2.5 percent in the second half of the decade. Rising population was reflected in the growth of major Latin American cities. The global experience of growth and industrial expansion is presented in table 1.

In this chapter I explore the conditions that underlay these broad trends, dividing the 1940s into two halves: first, the war years and the economic effects of the war, and second, developments during the late 1940s in conjunction with the reshaping of the international political economy. The discussion focuses chiefly on foreign trade, industrial growth, and the role of the United States, and given the limitations of space, treats these themes only in a global Latin American perspective. I show that in many ways the war years had rather positive economic effects, but for various reasons events in the rest of the decade did not lead to a consolidation of the different positive elements.

World War II and the Latin American Economies, 1939–1945

Arthur Lewis has described the period 1913–1939 as "the longest depression " of the world economy.^[1] World War I opened the cracks in the existing

system and exposed shifting structures. By 1918 the old Victorian system centered on London and the gold standard was in disarray, and the new dominance of the United States in trade and capital flows was apparent. With hindsight, we understand that the stability of the old system was based not on gold but an on underlying equilibrium in trade and capital flows, now being disrupted by the entry of new members and shifting relative positions. But at the time, the relevant actors were unready for change. Contemporary thinking could only seek to reinstate a return not only to the gold standard but also, quite unrealistically, to the prewar currency parities. The extent to which the old system had depended for its success not only on an underlying equilibrium but also on a single center, London, was ignored. Since there was now more than one financial center, and a much larger supply of volatile short-term funds, the system became dangerously unstable. By the end of the war the United States showed a long-term credit balance of $3.3 billion, but its leaders failed to understand that they needed to encourage imports and to export capital to keep the system alive. Instead they adopted protectionist policies, and in the 1920s capital exports from the United States comprised only some inexperienced private lending, much of which flowed into unproductive projects.

The crash of 1929 highlighted the fundamental weaknesses of the whole system. Subsequently, during the 1930s most governments pursued purely defensive policies dominated by increasing protectionism and exchange controls that permitted only the slow growth of world trade. There was little foreign investment during this period; indeed the main capital flow was toward the United States, which once more became a net debtor.

By the late 1930s, however, the United States was once more becoming the leading actor in the world economy. Even before Congress declared war on Japan and Germany in December 1941, war production and the protection of strategic raw materials had become an issue of central importance. In 1940 the United States government established the Metals Reserve Company, whose task was to stockpile raw materials used to produce weapons and munitions, and began pressuring American business interests to cooperate in obtaining supplies of oil, tin, copper, and other minerals. U.S. public and private investment in Latin America now began to rise, particularly in the crucial fields of transport and communications, which in 1943 accounted for 31 percent of total direct investment to Latin America compared with 15 percent in 1924.^[2]

Simultaneously, the United States sought to assist Britain in the desperate struggle against Nazi Germany, although for some time legislation left over from the isolationist period between the wars made it difficult to offer credits. In 1942 these obstacles were overcome by the Lend-Lease Act under whose provisions the United States retained nominal title to the weapons and munitions exported to Britain and its allies, while the issue of paying for goods imported by Britain was deferred until the end the war. Between 1942 and 1945 supplies worth $44 billion in current dollars were exported under lend-lease, the great bulk of them to the British Empire.

Throughout this period the United States economy grew rapidly. While Europe was suffering enormous war damage, productive capacity in the United States rose by 50 percent. By 1945 the United States produced more than half the worldwide total of manufacturing goods and owned half the world volume of shipping, compared with only 14 percent in 1939. The United States now supplied one-third of world exports, but it took only one-tenth of world imports.^[3]

Even though profoundly affected by the weakness and disruption of the international system, Latin America, unlike the United States and the leading European nations, did not experience this period as "the longest depression." On the contrary, particularly in the 1930s, the region achieved substantial growth (see table 2). Import-substituting industry emerged as the leading sector in most of the larger countries, and agriculture for domestic use in most of the smaller countries. In several notable cases, like Brazil and Colombia, overall economic recovery occurred before exports returned to the levels of the 1920s and owed much to unorthodox policy management:

trade, exchange and capital controls, and countercyclical government spending. With growing urbanization and industrialization, the expansion of state intervention, and a declining reliance on primary exports, a new structure began to take shape in Latin America.

World War II had a major part in shaping the new model by delivering another severe shock—this time from the supply side, unlike during the depression—to the old export-led structure. The shock of the early 1940s came on top of those of earlier periods and intensified the growing conviction, particularly in the larger countries, that it was unsafe to depend on traditional export-led growth and that new sources of dynamism within Latin America itself had to act as a substitute. The unusual feature of the shock represented by World War II, however, which helped to account for the ambiguities in the subsequent evolution of Latin America, was that it failed to increase the region's autonomy. Instead, as the struggle began to safeguard supplies and to develop new sources of vital raw materials, the war marked a major advance in the influence of the United States in Latin America.

The transition was particularly striking in Mexico. There the transformation of relations with the United States became so far-reaching that by 1942

the Mexican foreign minister described the frontier as "a line that unites rather than divides us." Remarks like these were almost astonishing in light of the bitter clash over oil between the two countries only four years earlier. In 1942 an agreement was reached between the Mexican government and the Export-Import Bank to develop a steel- and tin-plate-rolling mill in Mexico. A Railroad Mission established by the U.S. government worked on expanding Mexico's communications infrastructure, and agreements were reached for the purchase of numerous raw materials.^[4] Similarly, when Brazil joined the Allies, the United States supported attempts to strengthen the Brazilian industrial base. The Cooke Mission of 1942, for example, was described as "lay[ing] the foundations of the long range strength of Brazil's whole industrial economy." During this period the United States also helped to bolster the growing links between Brazilian industry and the military. In Peru, U.S. funds and exports assisted in establishing the Corporación Peruana del Santa to produce iron and steel. There were numerous examples elsewhere of similar trends. Among the larger Latin American nations, Argentina alone avoided this process of penetration.^[5]

Among the striking paradoxes of the war years, and one of the major consequences of the war itself, was the growing involvement of the United States in Latin America alongside the expanding role of the Latin American states and the use of direct controls. Over many parts of Latin America the private sectors were becoming more closely tied to government in much the same way that in the United States business leaders were co-opted by the government to plan and to execute a whole range of new projects.

The Economic Effects of the War on Latin America

The war quickly intensified demand for Latin American primary products, spurring export revenues, although growth varied over different parts of the region. Some nations, led by Ecuador, Venezuela, Brazil, Colombia, and some of the Central American states, experienced annual growth rates of more than 6 percent; elsewhere, as in Bolivia and Chile, growth was negligible. Even so, on average Latin America's export revenues rose by more than 4 percent a year at constant prices (table 3).

The capacity of each country to benefit from the growth of exports varied widely, because in many cases, particularly as with minerals, price controls or delayed payments meant that little additional revenue was actually re-

ceived. Thus countries such as Chile, Bolivia, and Peru gained relatively few benefits from huge increases in export volumes. But even where additional revenues were available, as in Brazil, Colombia, and Mexico, there was little to spend them on, and in these countries the reserves grew rapidly (table 4).

Import scarcities undoubtedly prompted new efforts at substitution, but these efforts were limited by shortages of crucial imports and machines. The net result was a continuation of the industrial growth of the type already experienced during the 1930s but with a much stronger bias toward capital goods and basic inputs. During this period, for example, some of the firms that later achieved prominence in the Brazilian capital goods industry evolved from workshops to factories.^[6] For the first time ever manufactured

goods were being traded within Latin America: Brazilian, Argentine, and Mexican textile exports to other Latin American countries, for example, rose from almost nothing in 1939 to 20 percent of total exports by 1945. The emphasis of the missions and advisers from the United States on iron and steel and other basic inputs helped to push industrial development in new and healthy directions, although these trends were later reversed by the renewed emphasis on consumer goods.

The results of industrial growth on per capita income also varied (table 5). In contrast with earlier periods there was now little correlation between the growth of per capita incomes and that of exports.

In addition, in many cases rising exports combined with import scarcities inevitably meant inflation that climbed beyond the rates of rising world prices (see table 6).

During the war only Colombia appeared to learn how to apply a sophisticated system of containing inflation. Robert Triffin, the well-known U.S. economist and expert in monetary matters, visited Colombia in 1944 and wrote a brief history of Colombian banking published in Bogotá as a supplement to the Revista del Banco de la RepÚblica . Triffin detailed the measures between 1941 and 1943 to increase savings and to counter the effect of the

inflow of foreign exchange. He concluded that "the anti-inflation measures taken in Colombia comprise[d] perhaps the most complete and balanced system introduced to date to deal with inflation in Latin America."^[7] He estimated that the measures effectively sterilized at least half the inflow of foreign exchange.

The more common pattern was one of inflation and accompanying exchange rate overvaluation. During the war many countries allowed significant overvaluation to develop, since nothing appeared to be gained from devaluation when many exports were being sold at fixed prices in direct purchase agreements with the United States. A beneficial effect of accumulating reserves and rising inflation was that the defaulted foreign debt of the 1930s could now be paid. Brazil and Mexico, for example, both settled with their creditors in 1943, thus clearing the way for their renewed integration with international capital markets: debt resolution became one of the main ingredients of the growth model adopted during the postwar period.

Despite these elements of disequilibrium, on balance the wartime period introduced some interesting and potentially healthy economic trends in the form of the broader base of industrialization, new areas of state activity, greater collaboration between the state and the private sector, and even experience with exports of manufactures in the context of a new interest in regional integration. How did these aspects fare as the war ended?

The Aftermath of War

The Postwar Economy

World War II thus brought conditions similar to those that followed earlier external shocks, although the new relationship between the private sector and the state marked one striking contrast with the past. An even greater contrast with the past, however, lay in the new international system that appeared after 1945. In earlier decades the signals pointing to the need for change were present but had remained weak and conflicting. Now it was clearly recognized that the old international system was bankrupt and in need of fundamental restructuring. Furthermore, the United States was now fully prepared for deliberate and positive action to lead institutional change and to support economic recovery. At the end of World War II American policymakers had a relatively clear idea of the changes that were necessary to reconstruct the international economy. First, there had to be a complete dismantling of the controls established during the 1930s and expanded during the war. Second, inflation, an unavoidable wartime evil, now had to be conquered.

The Bretton Woods agreement of 1944 marked the start of the new system. The chief purposes of the agreement were to return to stable exchange rates and to ensure that the supply of long-term capital was put to productive use. The creation of the International Monetary Fund (IMF) and the World Bank at Bretton Woods aimed to achieve those two goals. Bretton Woods established a "gold-exchange" standard in which convertible currencies led by the dollar became accepted as part of exchange reserves. For the next two decades this measure established the dollar as the leading reserve currency. Both the IMF and the World Bank were committed to supporting the liberalization of trade and capital accounts.

In 1944 there were hopes that after the inevitable emergency aid of the immediate postwar period these new institutions would facilitate a sufficient

flow of funds to "grease" the system. In fact, the problems caused by the U.S. trade surplus and the resulting dollar shortage, and the urgent needs of the Europeans for funds, were not so easily resolved. As a result, in 1947 the Marshall Plan was launched, providing for a four-year recovery program for Europe, with Europe pledging in return for Marshall Aid to raise productivity and lower trade barriers and inflation. Between 1945 and 1953 foreign loans from the United States totaled $33 billion, of which $23 billion went to Europe. By the latter year the recovery of Europe was in full swing, and world trade in manufactures began to rise sharply.

How did all of this affect Latin America? Not quite in the expected manner. The trade boom that followed the early postwar period derived mainly from an exchange of manufactured goods between the developed countries. Earlier, expansion of world trade had tended to result in declining terms of trade for manufactures. This time, as a result of postwar shortages and accelerating technical progress and substitution, terms of trade moved slightly in their favor. This trend intensified as the European Common Market took shape during the late 1950s.

Under these conditions the performance of primary products became extremely varied. Following the price boom of 1943–1948 temperate agricultural products performed poorly throughout the 1950s, as they were adversely affected by the expansion of agriculture in the developed countries. Coffee, by contrast, did spectacularly well until the mid-1950s, while on the whole tropical products fared better than temperate goods. Minerals behaved erratically, receiving a boost during the Korean War but falling afterward. In Latin America oil became the great winner, and Venezuela was thus the striking exception to the general trend throughout this period.

During the postwar period capital flows followed the trends in trade. The Korean War brought a repetition of 1939–1945 as the United States sought to extend its grip over mineral supplies in Latin America: American private capital sought to control oil in Venezuela, copper and lead in Mexico and Peru, and bauxite in the Caribbean. Unlike in the aftermath of World War I, when such steps had been regarded as threatening the interests of home industries, the United States was no longer opposed to American firms investing abroad in manufacturing: after World War II economic growth in Latin America came to be seen as the best protection for democracy. U.S. private investment in Latin America increased during the late 1940s, but the rise was very small compared with that of later periods, partly because of

the discouraging climate that prevailed in Latin America at this point. Meanwhile, U.S. public funds went elsewhere. Thus in 1945–1950 the capital inflow to Latin America was positive, but negative if Venezuela and Cuba were excluded; in 1951–1955, in contrast, the capital inflow increased by almost five times.^[8] Aside from the Communist world, in 1951 Latin America stood out as the single regional bloc that was not covered by a U.S. aid program; in 1945–1951 Belgium and Luxembourg together received more aid than the whole of Latin America.^[9]

Behind these trends lay the fact that Latin America had ceased to be an area of much interest to the United States, since it was regarded, at least for the time being, as relatively safe from the threat of communism. After World War II Latin America, in contrast, was now acutely aware of U.S. dominance in the region, which found reflection in the new patterns of trade and investment. Trade patterns for Argentina, Brazil, Chile, and Mexico shifted dramatically, primarily toward the United States (see table 7).

In all four cases, between 1938 and 1950 the European share of exports fell at least 20 percentage points, while that of the United States and Canada rose steeply, particularly with Mexico. Trade within Latin America declined

after the war but, except in Mexico, not to its prewar levels. Even so, trade within the region remained relatively marginal.

Although Latin America received very little U.S. investment after 1945 compared with Europe, the 1940s marked the consolidation of a pattern first visible in the 1920s in which the dominant capital flow came from the United States. In the 1920s a larger quantity of investment income flowed back to Europe than to the United States, but by 1949 the United States was receiving ten times more income from Latin America than the income flowing from Latin America to the rest of the world (see table 8). Of the increment in the book value of investment from the United States in Latin America between 1936 and 1950, 42 percent was in Venezuela, followed by 23 percent in Brazil and 17 percent in Panama.^[10]

But the United States of course remained interested in Latin America. In particular, after strongly supporting the expansion of the Latin American

states during the war, from 1945 the United States sought to restrict power in the region. At the inter-American conference held at Chapultepec, Mexico, in early 1945 the United States demanded a blanket commitment from Latin America to reduce tariffs and open the gates to foreign capital. The Latin Americans countered with requests for similar concessions for their exports to the United States. The Chapultepec meeting failed to reach any final agreement on tariffs, although the Latin Americans pledged to accept foreign investment but on condition it did not run "contrary to the fundamental principles of public interest."^[11] In Latin America protectionist sentiments were becoming stronger. As a Mexican entrepreneur later remarked: "What we need is protection on the model of the United States."^[12]

In 1945–1947 the Latin American nations continued to urge the United States to increase aid as the United States continued to drag its feet. Finally, during the inter-American conference in Bogotá of 1948, it became clear that the United States had no intention of offering a Marshall Plan for Latin America. In other international meetings Latin American protectionist proposals failed, although the Latin Americans managed to defeat counter-proposals from the United States requiring them to lower tariffs.^[13] Subsequently the Latin Americans secured another victory with the creation of the United Nations Economic Commission for Latin America (ECLA) in 1948, whose role was to defend and publicize the region's commitment to industrial development to escape dependence on unstable and undynamic primary exports.^[14]

Economic Trends, 1945 – 1950

As we have seen, the first half of the 1940s favored a major shift in the development of Latin America: industry and trade within Latin America grew, the role of the state advanced, and the weaknesses of dependence on primary exports were once more exposed. In comparison the second half of the 1940s marked a step backward, as the effort to discredit state intervention also weakened the commitment to developing basic industries. During this period too little was done in Latin America to correct economic distortions caused by overvalued currencies. Exaggerated fears of the inflationary consequences of devaluation tended to breed an undue reliance on import controls, particularly as imports grew rapidly during the early postwar years. Despite overvaluation, however, exports grew strongly and indeed helped to

sustain the prevailing exchange rates (see table 9). Bolivia alone remained outside the process, as international demand for tin fell sharply after the war.

Export growth in Latin America after 1945 was based almost entirely on primary goods, and once international trade resumed the new manufactures of Brazil, Mexico, and Argentina were immediately displaced by U.S. and European suppliers. The flood of imports into Latin America, along with often poorly managed import controls and protectionism, now slowed down the process of import-substituting industrialization. Brazil and Chile, the two countries most firmly established on the path toward import substitution, succeeded in increasing the share of industry in gross domestic product.

Colombia also increased industry's share, but there industry was beginning from an exceptionally low base. Among the small countries El Salvador alone achieved an increase in industry's share of gross domestic product. Overall, the figures for share of industry in gross domestic product over 1940–1950 show either stagnation, declining rates of industrial expansion, or even actual reductions (see table 10). The general trend was downward from the perhaps artificial levels of industrial development achieved during the war.

Meanwhile despite overvalued currencies and the abundance of imports, inflation was typically increasing, even though by this point inflation abroad was declining. Albert Hirschman, in his classic study of inflation in Chile during 1939–1952, argued that inflation became the preferred escape valve for social tensions. In his view several of the following conditions prevailed: "fiscal deficits, monetization of balance of payments surpluses, massive wage

and salary increases,... bank credit expansion, war-induced international price booms, [and] Central Bank credit to state sponsored development agencies."^[15] One of the common elements of this period was the near absence of significant anti-inflation measures.

In addition to Chile, the countries that suffered the highest rates of inflation were Argentina, Bolivia after the revolution of 1952, and Paraguay. Other countries experienced more moderate inflation that was nevertheless higher than in previous decades. In Argentina inflation was fed by Perón's failed attempts to reverse his damaging relative prices policies that had initially discriminated against farmers and ranchers. In Paraguay stagnation and an isolated, closed economy allowed fiscal deficits to precipitate inflation. In Bolivia the revolutionary government encountered a depleted tin sector, international recession, and imperative political demands. The countries that managed to avoid inflation, such as Venezuela, Ecuador, Peru, and most of the Central American states, were those in which exports were rising rapidly and currencies were overvalued. Only Colombia achieved a coherent anti-inflation policy, while in Mexico the rapid expansion of agricultural production played a major part in keeping food prices stable.

At least during the 1940s the falling rate of industrial expansion, along with the growth of inflation, did not prevent overall growth. A large majority of nations, both large and small, experienced high per capita growth. The two countries that displayed the weakest export growth, Bolivia and Paraguay, were the most conspicuous cases of stagnation. Gross domestic product in Panama also stagnated because of the fall in exports of services as the United States scaled back its activities in the canal zone immediately after the war.

For most of the smaller countries the return to the old model of primary export-led growth during the latter 1940s was definitive, and they remained excluded from the subsequent boom in import-substituting industrialization. Venezuela and Peru, as exporters of oil and minerals, followed a similar path. In the larger countries, where industrial interests were becoming more important and the new urban masses were demanding new sources of employment, it was clear that industry had to be supported. But the inefficient continuation of controls, the unclear signals given to foreign capital, the unfulfilled hopes for Marshall aid, and the new strength of labor movements were all reasons for investors to hesitate. It was only in the 1950s that the

conditions for industrial development, the so-called ISI (import-substituting industrialization) model, were fully worked out.

Conclusion

The 1940s was thus a decade of considerable promise, in that it gave an impetus to industrialization, intraregional trade, and the expansion of the state. Expectations rose partly as a result of those trends and partly because of hopes for a "Marshall Plan for Latin America." However, instead of a Marshall Plan came a wave of tariff-hopping direct investment geared to the production of consumer goods for the local market. The elements of promise were by the end of the decade unfulfilled, with the result that the ISI model that emerged after the 1940s lacked a strong emphasis on state-promoted basic industries or intraregional trade, became consumer oriented and import dependent, and largely ignored issues of economic efficiency.