Latin American Exceptionalism: The Politics and Economics of Unfulfilled

Potential

Professor Victor MenaldoUniversity of Washington

PART I

Recent Progress• Democratization• Rule of Law• Economic Growth• Decreasing Inequality and

Rising Middle Class

Latest Democratizations

Argentina 1983 Honduras 1982Bolivia 1982 Mexico 2000Brazil 1985 Nicaragua 1984Chile 1990 Panama 1989Ecuador 1979 Paraguay 1989El Salvador 1984 Peru 1980Guatemala 1986 Uruguay 1985

Note: Democracy coded as electoral democracy. Source: Cheibub, Gandhi & Vreeland (2009)

Steady Economic Growth1

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20

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0

Ind

ex

of

Re

al P

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Ca

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1996 1998 2000 2002 2004 2006 2008year

Note: Avg. Real Per Capita Income in 2005 dollars for Latin American countries excluding Central America Source: USDA. Macrostatistics

Declining Inequality

Taken from the World Bank LAC Regional Flagship (2012). Original report written by Francisco H. G. Ferreira, Luis Felipe López-Calva, María Ana Lugo, Julián Messina, Jamele Rigolini, and Renos Vakis.

Rising Middle Class

Taken from World Bank LAC Regional Flagship (2012). Original report written by Francisco H. G. Ferreira, Luis Felipe López-Calva, María Ana Lugo, Julián Messina, Jamele Rigolini, and Renos Vakis.

Chile• GDP per capita has doubled over past 18 years,

fastest sustained expansion in country's history.• Poverty rates have fallen precipitously. • Chileans from humble families attending college.• Chile has attained homeownership rate roughly

equal to that of the United States, about 70%.

Peru

• Country has grown at 7% per year over past few years.

• Commodity boom has fed public investment & consumption boom

• FDI keeps pouring in & currency strong.

MexicoLiving standards—infant mortality rates, life expectancy and years of education—have improved greatly.

Country is growing again; giving China run for its money with skilled labor.

Immigration to USA has been drastically reduced.

LATAM exceptionalism:unfulfilled promise

• Lower economic development than expected given these countries’ age, resources & proximity to foreign markets.

• Serious corruption and challenges to rule of law.

• Spending on education, health, social insurance & infrastructure less than expected, given the vast needs.

• Lower & more regressive taxes than rest developing world.

• Still highest inequality in the world

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Average Global Income Levels, by Geograhpic-Cultural Region

Source: Haber and Menaldo (2010). Notes: regions defined by Hadenius and Teorell (2005); Latin America includes Cuba and Dominican Rep.; Cyprus included in Western Europe/North America; Mongolia included in East Europe/post USSR

What if 2008 Financial Crisis was the norm?

This chart is taken from Bordo et al. (2000)

We think Greece has it bad today?

This chart is taken from Bordo et al. (2000)

This chart is taken from Bordo et al. (2000)

In 1899, Argentina was wealthier than the USA!2

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120

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DP

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1800 1850 1900 1950 2000

Year

Argentina's Long-Run Economic Development

Source: Haber and Menaldo (2010) and Coatsworth (1998). Notes: linear interpolation used between 1800 and 1874.

A big challenge is corruption

Notes: Transparency International’s 2012 Corruption Perceptions Index. Source: Screenshot taken by Julia Knight: http://foreignpolicyblogs.com/2012/12/08/in-case-you-missed-it-transparency-international-corruption-perceptions-index/

Progressivity of Taxation in 2005

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S.S.Afr. Avg

S.E. Asia Avg.

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PRY BOL URYDOMGTM ECU CRI HND SLV PER MEX NIC COL VEN BRA CHL

Notes: Income, Profits & Capital as defined by IMF GFSY. Source: Albertus and Menaldo (2013).

Income Inequality

Source: UN Human Development Report

Income Share of the Top Ten Percent

Haiti

Canada

U.S.A.

MexicoBrazil

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Source: World Bank, World Development Indicators (data refer to most recent year available)

LATAM Exceptionalism is Very Puzzling!

Consider a natural experiment• Areas conquered by Spaniards

populated by more sophisticated, wealthier civilizations.

• LATAM colonies wealthier & more important than North American ones.

• LATAM countries just as old as USA.

YET THERE WAS A NOTABLE REVERSAL OF FORTUNE

After colonialism, North America surpassed LATAM and became much wealthier and influential.

Much of LATAM got stuck in neutral.

Some LATAM countries went in reverse.

We became rich, steadily and then explosively!

Source: Haber and Menaldo (2010)

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DP

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(20

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1800 1850 1900 1950 2000

Year

The United States Long-Run Economic Development

So did our neighbors to the north

Source: Haber and Menaldo (2010)

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1870 1895 1920 1945 1970 1995

Year

Canada's Long-Run Economic Development

As did other “settler colonies”5

000

100

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5000

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5000

300

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DP

Pe

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(20

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1900 1920 1940 1960 1980 2000

Year

Australia's Long-Run Economic Development

Source: Haber and Menaldo (2010)

Comparing growth records5

001

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= 1

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1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Year

Argentina BrazilChile MexicoUnited States

Cumulative Growth of Real Per Capita Income, United States versus Latin America

Source: Haber and Menaldo (2010) and Coatsworth (1998). Notes: linear interpolation used for Latin American countries to fill in missing values during the nineteenth century.

Steady growth culminated in pronounced income differences

01

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Variation in Income Levels across Latin America and versus "Settler Colonies"

Source: Haber and Menaldo (2010)