Introduction

There are many routes to underdevelopment. This book is about the first steps in route taken by El Salvador, a poor, small, and weak country. The question is, What happens when a small and isolated territory devoted mostly to subsistence agriculture, with about 250,000 inhabitants and a professional class of only four lawyers, four physicians, twelve surgeons, and seven druggists, decides to organize itself as an independent country? Early in the process economic growth became synonymous with the expansion of export agriculture, and sharing the benefits of growth with the population at large was not a topic that deserved serious discussion at the highest levels of government. By the end of the nineteenth century the implications of export-led growth became apparent. The health of the Salvadoran economy was becoming highly dependent on the fate of coffee exports. Changes in the international markets were beyond the control of any Salvadoran but could have an effect on the life of most Salvadorans. At the same time the economic and cultural gap between a small elite and the majority of the population had widened tremendously.

The country's position in the international market was the epitome of the "small-country hypothesis." It could never bargain for the prices of the things that it bought or sold; it had to accept whatever the international economy imposed. The wisdom of increasing exchange with the outside world was seldom questioned. In fact, the quest for free trade was one of the motivations for seeking independence from Spain. Protectionist sentiment in El Salvador was never strong and, after the Gold Rush and the opening of the Panama Railroad, trade along the Pacific

coast rapidly expanded. Throughout history the country's geographical isolation had been the strongest barrier against the expansion of the export sector, and most of El Salvador's international trade had to be taken to the Atlantic coast through a long, rough, and convoluted route. (Needless to say that geographical isolation did nothing to improve the lot of the average inhabitant of the small colonial backwater.) That barrier rapidly crumbled during the second half of the nineteenth century when the Pacific coast of the American continent became a busy trade route. Aware of the opportunities, Salvadoran leaders moved to take advantage of the new situation. There was a consensus that "progress" and exports went together. Little thought was devoted to the dangers of having an economy too dependent on one export product, and little attention was paid to the long-term implications of the changes brought to Salvadoran society by this new phenomenon.

For the leaders of El Salvador the question was how to profit from the new opportunities. Despite all its dangers, and they were many, it was the right question. The new state was not organized enough to effectively police its porous borders or to force anyone to produce anything. Even if someone had tried to impose protectionist legislation it would have been almost impossible to limit the expansion of foreign trade. The temptation of making a fortune from indigo or coffee exports was too great for people to ignore it. It was hard to imagine any action or policy on the part of Salvadoran authorities which could have stopped the expansion of the foreign sector. Any Salvadoran government trying to impose such policies could not stay in power for more than a few months. The only possible question was how to profit from the opportunity and Salvadoran leaders, given the limitations imposed by the sheer scarcity of resources, were successful in this sense.

Not surprisingly, one of the main themes of this book is the way in which the Salvadoran economy was shaped by the increasing importance of exports. In that sense this book describes a story of modest economic growth. It is a discussion of how resources were organized to better adapt to the opportunities offered by the international economy. Changing prices and access to factors of production were important variables that needed to be analyzed in this context. From this point of view nineteenth-century El Salvador was a success story. Salvadoran producers adapted to changes in relative prices and were not timid in their pursuit of profits. Able and hard-working people made fortunes. In contrast with other Latin American countries, it was almost entirely a local effort; economic growth took place without large-scale imports of factors of production. Local entrepreneurs using local resources built the economy, almost from scratch. They made decisions on their own, taking their clues from foreign markets and not from foreign companies or governments.

A key theme in this context is the shift from traditional to modern agriculture. During the first years of independent life the main agricultural products of El Salvador were indigo and food crops, cultivated in exactly the same fashion for at least two hundred years. It was a situation that, following Theodore Schultz, we can call "traditional agriculture." In this form of crop-raising, long experience with the same techniques and endowment of resources make farmers very efficient. "In allocating the resources at their disposal," says Schultz,

"in choosing a combination of crops, in deciding on how and when to cultivate, plant, water, and harvest, and what combination of tools to use with draft animals and simple field equipment—these choices and decisions all embody a fine regard for marginal costs and returns," and therefore farmers "know from experience what their own effort can get out of the land and equipment."^[1]

When traditional agriculture is the main economic activity, children learn from their parents all that is necessary to be efficient producers, and formal schooling has little economic value. Moreover, there is no need to learn how to deal with economic changes other than variations in prices and the weather; it is unnecessary to take into consideration the benefits or the problems of technological change. This situation is upset, however, with the introduction of modern agriculture in which techniques are always changing; and it is essential, therefore, to learn how to rapidly adapt to new situations and constantly reallocate resources. This, together with the economy's need to compete with other countries that were also rapidly improving techniques, was what happened to El Salvador when coffee cultivation was introduced during the second half of the nineteenth century. A new and highly profitable crop had arrived which forced Salvadorans to learn not only a new agricultural technology but also new forms of financing and marketing. Neither experience nor tradition had prepared Salvadorans to deal with the complexities of the coffee business. Under the changed set of circumstances formal education acquired a new economic importance; the ability to identify economic opportunities in a changing world, to learn new techniques, and to constantly reallocate resources was enhanced by formal education. "The presumption is that education," says Schultz,

enhances the ability of students to perceive new classes of problems, to clasify such problems, and to learn ways of solving them. Although the problem solving abilities that students acquire pertain to classroom work, the abilities that are developed by this work seem to have general properties that contribute measurably to their performance as economic agents in perceiving and solving the problems that arise as a consequence of economic changes.^[2]

Starting a coffee plantation was an adventure into the unknown that meant doing things in an entirely new way. Obviously there was an element of risk involved. At the beginning, even those who had some formal education needed an extra measure of courage and imagination to engage in coffee cultivation. Entrepreneurship played an important role. In a clear restatement of the problem of entrepreneurship, Nathaniel Leff provides a useful definition of the term:

Entrepreneurship clearly refers to the capacity for innovation, investment, and activist expansion in new markets, products, and techniques. As such, entrepreneurship may reflect superior information and, perhaps more importantly, imagination, which subjectively reduces the risks and uncertainties of new opportunities that are ignored or rejected by other investors.^[3]

Clearly, in El Salvador those with the capacity for innovation and investment, with access to superior information (and the ability to decode it), or the capacity to imagine the possibilities of a new crop, came from the very small group of people who had access to education. The pool of people from which the entrepreneur could arise was already extremely limited. Thus, the fact that the only rapidly growing sector of the economy was the production of coffee meant that the benefits of growth would only reach a select few.

The expansion of the export sector did not take place in a vacuum. This book shows how the emergence of a powerful oligarchy was the logical consequence of that expansion. International trade transformed Salvadoran society. During the latter half of the century the gates were opened to the outside world and powerful market forces were unleashed. The economy became more productive at the same time that the society became unequal. In the hurry to grow crops for the world market, food production suffered. The benefits of growth were not equally distributed to all Salvadorans. In theory it is not necessarily a bad idea to produce less food and more indigo or coffee if the latter are more profitable activities. But those who previously benefited from food production did not get their share of the benefits of coffee production. Concentrating on exports was not by itself a recipe for disaster. Despite the fluctuations of international prices there was no other economic activity that on average could have competed with coffee in terms of profitability. Moreover, it is very difficult to think of a plausible scenario under which nineteenth-century El Salvador could have grown by expanding production for its local markets. Given the agricultural tradition of the country and the lack of technical skills, it would have been foolish to think about the expansion of industry before exhausting the possibilities of agriculture.

Coffee production became the most profitable economic activity at a time when the institutions of the state were being created. All other things being equal, any movement away from traditional agriculture was bound to increase inequality. All other things, however, did not remain equal. The few educated people who could take advantage of international trade opportunities were also the few educated people who could organize the institutions of the emerging state. What would be the role of the state in the new country? The sheer scarcity of human and material resources together with the ideas of liberalism suggested limited state involvement in the economy, and that involvement was designed to promote exports. Very little was done to enable the majority of the population to take advantage of the opportunities created by international trade. By contrast, those who managed to engage in indigo and coffee production were subsidized by everyone else. Import taxes ultimately paid by consumers financed a transportation system designed to help exporters to take their products to the ports. Most of the budget was used to finance an army that kept order for the benefit of exporters while the educational system remained underfunded. Land policies were designed to favor coffee production. The state was created by and for the emerging oligarchy.

This is a book on the beginnings of a poor country. The idea is to show how its economic foundations were built. (Details of political history are mentioned only when necessary, but the reader is referred to the standard literature when it is deemed appropriate.) As in any history book it was difficult to set the limits for the period to be studied. The choice of a period is always arbitrary, forcing one to establish breaking points where continuities abound. In the nineteenth century, however, the starting point is easy to figure out. The independence from Spain offers one of those rare occasions where the division is clear. From the economic point of view, at least, the end of trade restrictions and the beginning of a period of political instability introduce new themes into the discussion.

So, at least one knows where to start, but where is the end? History offers a seamless fabric, but history writers have a limited lifetime; books have to end somewhere. The cutoff data presents a problem with no clear-cut solution. Three events seem to offer a credible way out: first, the legislation that privatized land (the liberal reforms, 1881–1882) helped to give a permanent shape to the liberal state; second, General Regalado's coup d'etat (1898) started a period of relative stability during which coffee planters ruled the country without surrogates; and finally, the 1932 peasant uprising known as the Matanza represented a dramatic moment when planters and soldiers began sharing power. Each of these events present difficulties as endings of the narrative. Although the liberal reforms had a tremendous symbolic value, when

they are set in the proper context they cease to be a breaking point and become an important step in long process that began much earlier and continued much longer. Choosing the liberal reforms as a cutoff date would be to recognize their status as a "breaking point" that needs to be revised, and it would have been impossible to provide a good idea of how the Salvadoran elite continued the process of consolidation in power. The Regalado coup d'etat, in turn, suffers from lack of dramatism; it was a coup after the first important economic crisis brought about by heavy reliance on coffee exports. Finally, the Matanza was enormously traumatic, but although it was arguably linked to the liberal reforms, it had distinctly non-nineteenth-century elements such as the role of the Great Depression, the influence of Marxist ideology, the political role of radicalized university students, and the role of a rural proletariat. The least dramatic of the three events, Regalado's coup d'etat, was chosen as the cutoff date for this book. In 1898, after a painful economic crisis created by a drop in coffee prices, the planters did not make any attempt to change the course. It was a recognition that, for better or for worse, they could not figure out an alternative, and for the foreseeable future the economic destiny of the country would be linked to the coffee industry and to the coffee elite.