Problems of Economic Growth
3. Problems of Economic Growth THE EXISTENCE of national development plans is taken fo-r granted in Latin America, but we could find no such plans in the countries we visited. The failure was...
...I asked...
...When we spoke of the detrimental effect of mass illiteracy on economic progress before a group of economists, they were skeptical...
...A dollar brought 220 pesos on the free market in 1953, 315 pesos in 1954, 630 pesos in 1955 and 777 in May 1958...
...Many children enroll in the first grade at the age of 7 and leave school at the age of 8 or 9. IV...
...This was the richest country in Latin America when Per?n was elected president...
...They subsidize industry, encourage foreign trade, initiate the building of highways, invite foreign capital...
...We found the exercise books of pupils in good shape even in the poorest schools...
...In Latin America, with its striking contrast between luxury and destitution, the shortage of funds for investment is due largely, I believe, to the way in which the rich use their incomes...
...How much more will you give me...
...and the share of the national product available to public authorities for productive use...
...e 7 years and over...
...In different parts of Latin America, there is no appreciable correlation between the density of population or its rate of growth on one hand, and the level of economic development and pace of economic progress on the other...
...What the local economists described as plans or programs are neither in the sense we use these terms...
...When there are no Stinneses on the scene and inflation is effected for the benefit of speculators with the psychology of easy-going leisure classes, it slows down capital formation rather than accelerates it...
...But usually they leave their country in economic ruin...
...Brazil has surprisingly high illiteracy...
...No comparable statistics are available for the period since 1954, when inflation has been particularly violent and very little progress has been recorded in the national economy...
...since coeducation is a sin in the eyes of the local priest, girls are not admitted...
...We were told this was the Army officers' club built by the former dictator Rojas Pinilla...
...We do not wish to ask for import licenses...
...The contention that inflation accelerates capital formation rests on a misunderstanding of historical facts...
...Its acceleration may be confidently expected...
...Absence of an adequate domestic market prevents the development of mass production and threatens to frustrate the efforts to expand domestic industry...
...Our policy has paid...
...Four Obstacles to Progress: As I have tried to show, the rate of economic growth and the level of economic development vary widely from country to country in Latin America...
...It is not impossible there to rise from the position of a manual laborer or farmer to the top of the social pyramid, but the man who does so is a rare exception...
...Later, new ways of life and knowledge will penetrate from the cities into the villages, by a process of 'contamination...
...How many pieces of each model do you need...
...The simplest indicator of the educational level in a country is, perhaps, the percentage of illiterate persons in the population...
...A dictator requires that they use huge amounts of cement, concrete, stone and other materials usually provided by concerns controlled by him or his relatives and friends...
...No, sir...
...The prospective creditor had a ready answer: "I can get monthly interest of 7.5 per cent with practically no risk...
...The lack of elementary education in villages is the greatest obstacle to the development of independent farms with diversified produotion which could supply the domestic market...
...Lack of stability of the national currency and galloping inflation...
...We could raise all the capital we need in Mendoza...
...A dual economy—that is, the absence of coordination between different economic sectors, especially between urban and rural sectors...
...The system of licenses and monopolies in foreign trade, another favorite policy of dictators, operates similarily...
...A monumental style of public buildings is characteristic of dictatorial regimes...
...Illiteracy: Lack of universal education and the illiteracy of a large part of the population, especially in rural areas, also hold back economic progress in some parts of Latin America...
...dollars...
...He had a flourishing business and needed a loan of $100,000 to expand it...
...Splendid apartment buildings for a few are rated higher than slum clearance...
...No land reform can create such farms unless a decisive effort is made to cover the countryside with an adequate network of primary schools...
...A stronger anti-inflalionary policy is um vor«,-illy expected from th« new President, Jorge Alessandri...
...At least, the Ministry of Education in Rio de Janeiro is fully aware of the crucial importance of the problem of elementary education and is trying to attract public attention to it...
...Each Latin American country has, of course, many projects in different branches of economics, public welfare, administration, regional development and so forth...
...The example of Argentina is enlightening...
...Argentina and Chile come closest to universal primary education, followed by Costa Rica, Cuba, Puerto Rico and Panama...
...Of the countries not listed above, Mexico probably ranks close to the middle of the list, Peru close to the bottom, and Uruguay close to the top...
...This is precisely what is happening in some parts of Latin America as a result of the lack of adequate education for all citizens...
...In charmingly quiet Quito, Ecuador, we saw private mansions resembling castles of the Old World, surrounded by brick-and-iron fences...
...Putting aside the question of foreign credits, I do not believe that a low rate of capital formation explains the shortage of funds for productive investment in Latin America...
...d 5 years and over...
...In a long row of pretentious private houses, we saw one with a gilded roof...
...But its initiator may disappear from the political scene before the project is completed, and his successor usually prefers to start something new, bigger and better, bearing his own name...
...The impact of a dictatorial regime on the national economy is strengthened by the technique of handling public funds...
...Efficient operation of a modern economic system is impossible in a country if managerial functions are distributed among wealthy families and no new blood from the rest of the nation flows to the managerial class...
...their writings and figuring, drawings and sketches of maps were surprisingly good...
...Nowhere is the disastrous effect of inflation combined with government control over foreign trade as clear as in Chile...
...Throughout Latin America, illiteracy is heavily concentrated in the villages...
...Argentine economists estimate that Peron had hundreds of million of dollars in banks in the United States and Switzerland when he fled the country...
...I use "inflation" not in the broad sense in which it is used in some United Nations publications, where each rise of prices is handled as inflation, but in a narrower sense, as a rapid depreciation of national currency caused by the monetary, fiscal and credit policies of the government...
...the way in which this surplus is used...
...No general statement of the reasons that economic progress lags in this area is possible because there is no such lag in Mexico, Brazil or Puerto Rico, and the causes of stagnation in Argentina are not the same as those of slow progress in Chile...
...If that country had been permitted to develop as other nations of the continent did—not quite as rapidly as Brazil or Mexico but, say, at a rate of 4 per cent a year—it would have reached an income of some $7.4 billion (at 1950 prices) by 1957...
...Straight stealing may be possible in small countries but would be considered bad manners in larger ones...
...In Lima, Peru, we were invited to a plushy club in a palace-like building of a style rarely encountered in the United States...
...A project is usually launched under the auspices of a president, minister, governor or influential politician and becomes associated with his name...
...Many villages have no school...
...A United States observer is surprised to see the lavishness of the private residences and public buildings in and around Latin American capitals...
...Local architects are not to blame for this extravagance...
...Since neither sound nor fantastic projeots can be launched without funds, the shortage of capital appears to local economists as the decisive factor which deprives the people of the good things envisaged in pending plans...
...Latin American economic policy still emphasizes industry and exports rather than agriculture and the domestic market, and results in accentuating the contrast between comparatively prosperous and less developed provinces...
...The propensities and business psychology responsible for such inefficient uses of capital belong to the heritage of the pre-capitalist, colonial era...
...Yet, we did meet people who had resisted such temptations...
...And the industrialist remarked sadly: "If I pay him 100 per cent interest, what will be left for me...
...A waste of capital also results from emphasis on the colossal and spectacular...
...The percentages of illiteracy in Latin American countries, according to this definition, are shown below in Table IV...
...It is one of the best developed countries in the area—not only economically but also politically, socially and culturally...
...In 1948, when he had grasped dictatorial power, Argentina's national income amounted to $5.4 billion (at 1950 prices...
...A local industrialist described his predicament...
...The Dual Economy: The contrasts in the distribution of income and knowledge, combined with the traditional domination of the villages by the cities and aggravated in some cases by the antiquated system of landlordism, have resulted in the perpetuation of a dual economy in Latin America...
...Official statistics estimate the average annual increment of real income from 1940 to 1954 at 2.3 per cent per capita of population, or 2.1 per cent per person engaged in active work...
...Its impact on education on all levels, from the rural school to the universities, and on family life and political morale is no less destructive, but these questions are outside the scope of this study...
...After a tour of the plant and laboratories, we visited the workshop, which resembled a tremendous barn or garage, with acres of idle benches and lathes...
...A large part of the rural population lives its own life, isolated from the monetized economy represented by the comparatively prosperous cities...
...Under a dictatorial regime an industrialist faces the choice between playing ball with the government and making money on manipulations with licenses, currency, doubtful partnerships and so forth, or trying to isolate himself from the omnipotent state as the courageous men in Mendoza did...
...A young and very able economist ridiculed my argument...
...We also heard a similar argument in another form: "A poor country cannot do much to improve its agriculture, but it can develop its industry...
...Dictatorship is expensive...
...And to this hypothetical loss must be added two items: first, the funds appropriated by the dictator for himself, his family and political friends...
...A nest egg must therefore be set aside and transferred to a safe place in advance...
...In the latter, dictators act in accordance with laws and regulations...
...Most have climbed the ladder from the bottom...
...I found it difficult to explain to our Latin American friends the impact of universal education on economic progress in the United States...
...After a brief spell of recovery in 1950-51, the Chilean peso resumed its downhill movement...
...Ecuador and Bolivia, the problem of a dual economy merges with the problem of racial integration...
...Education has no economic value in the villages," he said...
...Having exhausted his political pull, he applied for a private loan...
...Rehabilitation of poverty-ridden villages is, to some extent, a regional problem...
...This is a long process, a part of a social and economic transformation of the South that began before World War I and is now in a fairly advanced stage...
...Some are ephemeral...
...Chilean economists are aware of the destructive effect of this development on the national economy, but some of them are inclined to justify the progressive depreciation of the national currency, arguing that inflation stimulates capital formation and is unavoidable in periods of rapid economic expansion...
...We also met, of course, people who saw the relationship between education and economic progress in the same perspective as we did...
...School Attendance in Brazil (by grade) Grades No...
...Why should one invest money in a business that requires steady work and promises a return of some 10 per cent a year when there are opportunities to operate with borrowed money and in no time double one's capital by shrewd use of licenses and inside information...
...Their era is often marked by the construction of palaces and public buildings in the capital...
...But the worst impact of a dictatorial regime on economic development is that it makes politics the surest and easiest way toward rapid enrichment, as in colonial days...
...To sum up, the slow movement of productive investment in Latin America depends less on a shortage of capital than on patterns in its use—in other words, more on the attitude of the people possessing money than on an insufficient surplus of current national product over consumption...
...All our efforts must be concentrated on the urban sector as the most dynamic, flexible and responsive...
...Instead, its 1957 income amounted to less than $5 billion, and its cumulative loss in national income from 1948 through 1957 was approximately $10 billion...
...b 14-29 years...
...I asked the president: "What does your country need for economic development...
...In some villages, schools are housed in miserable adobe huts without windows, with teachers who appear as destitute as the villagers around them...
...A Who's Who of business in the United States shows that only a few of the leaders of our big concerns have inherited their position...
...It is also noteworthy that, under conditions of galloping inflation a,nd government control over foreign trade, the success of export-import operations does not necessarily depend on the difference between the cost of the merchandise (including operational expenses) and the sale price...
...For the decade after World War II, the corresponding rates were 1.7 and 1.5 per cent...
...Illiteracy in Latin America, 7950 Population aged 10 and over Population aged 15-20 ( Percentages ) Argentina 13.3' 8.3" Chile 19.9 13.9 Costa Rica 21.2 18.4 Cuba 23.6 22.5 Puerto Rico 25.6 20.3 Panama 28.2 20.4 Paraguay 31.8 22.7 Colombia 31.4 Ecuador 43.7 34.7 Venezuela 51.Ie 42.6 Brazil 51.4 47.2 Dominican Republic 56.9 46.6 El Salvador 57.8 56.6 Honduras 66.3e 63.1 Bolivia Guatemala 70.3 68.0 Haiti 86.4 a 14 years and over...
...To these forms of unproductive investment and wasted capital, we must add psychological factors...
...And conditions are better in Brazil than in many other Latin American countries...
...Local businessmen, natives and foreigners, told me that 4.5 per cent per month was the normal interest on capital in U.S...
...But it was difficult to realize that the children whom we saw in these pathetic rooms represented the elite of rural areas: The majority of the children were left outside the school...
...Because illiteracy is a rare phenomenon in modern, economically developed nations, most of them do not record literacy in their censuses...
...In contrast to a widespread notion, I do not believe that the rapid growth of the population and its excessive density should be considered an obstacle to economic progress...
...Some projects were dropped because of a change in the administration...
...The highest tribute to these teachers is that, with practically no school equipment, they succeed in giving their barefooted little students at least a first glimpse of knowledge...
...Some of them are in the initial phase...
...It was built with an investment of $500,000, profits were reinvested, and at the time of our visit the book value of the enterprise was $2.5 million...
...Their standard of living, often, extravagant in comparison with the economic level of their country, leaves them little for saving...
...If one was ready to accept a little risk—with regard to a possible change of government, for example—the interest might be 7.5 per cent a month...
...Moreover, estimates of real national income under conditions of galloping inflation fail to record the deterioration in the quality of products which usually accompanies depreciation of currency...
...This pyramid of school attendance by age is characteristic of the social structure of the nation...
...The average annual gain in real product per worker in the period 1944-57 was hardly more than 1 per cent if one accepts official statistics at face value...
...The manager showed us the plant...
...Chile is a classic example...
...And, even if they cannot consume all their income, they have no incentive to invest the surplus in enterprises which would increase national productive capacity...
...But literacy as defined by the censuses does not mean much...
...they unwittingly proclaimed that huge amounts of capital had been diverted from productive purposes for a display of vanity...
...This splash of splendor far outshone the modest Army and Navy Building in Washington...
...Just now this form of government is at low ebb, and only three or four full-fledged dictators are on the scene, with the danger of a relapse to dictatorship in a few other countries...
...A big hacienda owner told me that the only work he demands of his hands is to cut sugar cane with a machette, and he has never noticed that a literate worker does it better than an illiterate one...
...He smiled: "What we do here would be absurd under normal conditions, but it is the only sensible way to rim a plant in our circumstances...
...Capital, Clue to Prosperity: The gap between isolated projects and integrated planning may be partly responsible for the widespread notion among Latin American intellectuals that their countries are primarily handicapped by insufficient private capital formation, the lack of public funds, and the reluctance of foreign capitalists and governments to advance them loans and credit on the necessary scale and acceptable terms...
...It appears to be a problem of the south in Mexico, Argentina and Chile, of western areas in Colombia and Ecuador, of the great river basins and northeastern bulge of Brazil, and so on...
...The U. S. dollar was worth about 8 Chilean pesos in 1929, 31 pesos in 1939, and 99 pesos in 1949 on the free market...
...In countries where more than 50 per cent of the population is illiterate, a farmer who can read, write and count is a rare exception...
...Lack of educational facilities for the masses of the people, particularly in rural areas...
...Latin American dictators appear to be ardent promoters of industrialization...
...Only a few countries—Peru, Bolivia and Chile—are currently suffering from galloping deterioration of currency...
...others have been developed with engineering details...
...Such was the interest on money deposited with customs authorities by exporters, a completely legal and safe operation...
...For a prospective investor, there is more glamor in becoming a landowner or expanding his estate tha,n in running a factory or a store...
...They would cost us more in time and money than to build the necessary machines with our own means...
...In some countries, among them Peru...
...Competent lawyers in Buenos Aires assured me that it was doubtful whether an independent court could convict Per?n for his financial transactions, which consisted, in the main, of land speculation, juicy government contracts, import and export operations—all in accord with laws and regulations he himself had promulgated...
...expansion becomes very difficult, if not impossible...
...In Brazil, we heard another argument: "When we build a factory," a professor of economics said, "we are creating a new source of national income...
...Also, there is not much correlation between the potential natural resources and the progress in their utilization...
...One is amazed by vast halls, triumphal approaches, colonnaded fa?ades and heroic statues within and without the buildings erected by dictators...
...Source : UN Statistical Yearbook, 1957...
...They are gradually giving way to a new psychology, a new system of economic motivations and decisions...
...This is an encouraging conclusion...
...In Mendoza, a prosperous city in the center of the grape-raising and winemaking region in the interior of Argentina, we visited a factory manufacturing heavy chemicals, that had been established as a partnership by a group of local engineers and processed raw materials supplied by small mines situated around Mendoza...
...In the same city we met with members of the local federation of businessmen...
...Dictators: Dictatorship is a perennial problem in Latin America...
...This is where we build machines and equipment for our plant and mines," the manager explained...
...It is too late for him to begin to pack his valuables when opposition planes are droning over his palace...
...of pupils College 21,928 1 Twelfth 42,255 1 Eleventh 61,426 il Tenth 88,472 il Ninth 95,548 il Eighth 128,947 iil Seventh 174,892 Hi i i Sixth 230,567 mi l Fourth & Fifth 466,957 mmmi Third 735,116 iiiiiiiiiiiiiil Second 1,075,792 iimmmimmmi First 2,664,121 mm mmmmmmmimiimii In Brazil, for example, less than one-sixth of children enrolled in the first grade reach the fourth grade of the elementary school and less than 1 per cent go as far as the eleventh grade, as compared with 75 per cent in the United States...
...3. Problems of Economic Growth THE EXISTENCE of national development plans is taken fo-r granted in Latin America, but we could find no such plans in the countries we visited...
...But most of the Latin American countries include this query and record everybody who' can read a line of large print and sign his name as "literate...
...Would it not be more economical to import your equipment...
...The rate of recent economic progress in Chile has not been very impressive...
...Other ambitious development plans are collecting dust on shelves in the archives...
...But when we build a new school, we call to life an additional demand for further annual outlays...
...In this respect the situation is grim, indeed, in some parts of Latin America...
...However, certain features characteristic of the Latin American economic scene appear in various combinations in several countries that lag behind other parts of the continent, and can be described as roadblocks to economic progress...
...second, the funds he wasted or used for self-glorification...
...A luxurious airport often gets priority over the rehabilitation of railroads...
...I have mentioned only the economic impacts of a dictatorial regime...
...He replied without hesitation: "Freedom and sound government...
...Nothing short of a social revolution would deprive the landowner or land speculator of his wealth, while changes in government, whether by constitutional means or by violence, may jeopardize all other investments...
...Investment in land speculation is, of course, one of the worst uses of capital from the point of view of the national economy, but it is encouraged by the lack of continuity in government policy...
...In Bogota, Colombia, we drove past a group of luxurious buildings encircled by lovely gardens...
...Inflation: Along with political factors, currency instability and inflation are important obstacles to economic progress in some parts of Latin America...
...But inflation has been Chile's major problem since the 1880s and has become a way of life, a kind of national tradition in the eyes of local economists...
...The failure was due partly to language difficulties...
...To my mind, they are victims of an illusion...
...But one seldom hears of an integrated plan which would coordinate individual projects and dovetail them with available resources...
...Only a dozen workers were busy in this shop...
...The profession of a dictator is hazardous, and he must think of the future...
...In others, the one small school is reserved for the boys...
...Almost all Latin American countries have experienced this type of inflation at some time in their history, though it is not a common economic disease in the region today...
...others evidence vision and great ability on the part of local technicians...
...In the suburbs of Santiago, Chile, we drove along endless avenues of private residences...
...What counts is the difference between the actual value of exported and imported goods and their evaluation at the customs...
...Apart from the inefficient use of capital, the following are, in my opinion, the most formidable roadblocks on the road of economic progress in certain parts of Latin America: • Lack of political stability, excessive centralization of government, and, especially, the dictatorial regimes...
...Their experience deserves particular attention because what happens there could easily occur in half a dozen other Latin American countries...
...But the conditions leading to the concentration of power in the hands of an irresponsible individual have not been completely eliminated, and the problem of the impact of dictatorship on economic progress deserves serious consideration...
...Indeed, the amount of private and public capital available for such investment depends on three main factors: the surplus of incomes over current consumption...
...In brief, the combination of uncontrolled inflation with government control of foreign trade disorganizes the economic system to such an extent that its * The efforts of the last President of Chile, Carlos Ibanez, to slop or slow down the galloping inflation •» « frustrated by the pressure of businessmen and political circles...
...The cumulative value of projects started and abandoned in this manner may be staggering...
...What we need is a climate in which enterprises can thrive without fear of arbitrary action by the government...
...In the situation Germany faced after World War I, runaway inflation served capital formation by expropriating the middle classes and transferring their wealth to ruthless and unscrupulous but dynamic and shrewd operators...
...Latin America is studded with the abandoned foundations of stadiums and theaters, hydroelectric dams without powerhouses, irrigation dams without irrigation canals, highways without feeders...
...In one form or another, the evils of the dual economy are gaining increasing attention among economists in Mexico and Brazil, but the crucial significance of the problem has not been fully recognized...
...In this respect, the economic thinking in some parts of Latin America reminds me of a dandy who has discovered that his toes show through his shoes—and tries to improve his appearance by buying a new silk hat...
...They are, rather, enumerations of good intentions by the respective agencies, without any commitments or any indication of the sources of the needed funds...
...Then you do not believe that capital is the most urgent need in Argentina...
Vol. 41 • November 1958 • No. 43
