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?