I.

Introduction
In Latin America, reality is undermining the out-dated schema of the
international division of labour, which achieved great importance in the
nineteenth century and, as a theoretical concept, continued to exert con-
siderable influence until very recently.
Under that schema, the specific task that fell to Latin America, as part
of the periphery of the world economic system, was that of producing food
and raw materials for the great industrial centres.
There was no place within it for the industrialization of the new
countries. It is nevertheless being forced upon them by events. Two world
wars in a single generation and a great economic crisis between them
have shown the Latin-American countries ¿heir opportunities, clearly
pointing the way to industrial activity.
The academic discussion, however, is far from ended. In economics,
ideologies usually tend either to lag behind events or to outlive them.
It is true that the reasoning on the economic advantages of the inter-
national division of labour is theoretically sound, but it is usually for-
gotten that it is based upon an assumption which has been conclusively
proved false by facts. According to this assumption, the benefits of tech-
nical progress tend to be distributed alike over the whole community,
either by the lowering of prices or the corresponding raising of incomes.
The countries producing raw materials obtain their share of these bene-
fits through international exchange, and therefore have no need to indus-
trialize. If they were to do so, their lesser efficiency would result in their
losing the conventional advantages of such exchange.
The flaw in this assumption is that of generalizing from the particular.
If by "the community" only the great industrial countries are meant, it
is indeed true that the benefits, of technical progress are gradually dis-
tributed among all social groups and classes. If, however, the concept
of the community is extended to include the periphery of the world econ-
omy, a serious error is implicit in the generalization. The enormous bene-
fits that derive from increased productivity have not reached the periphery
in a measure comparable to that obtained by the peoples of the great
industrial countries. Hence, the outstanding differences between the
standards of living of the masses of the former and the latter and the mani-
fest discrepancies between their respective abilities to accumulate capital,
since the margin of saving depends primarily on increased productivity.
Thus there exists an obvious disequilibrium, a fact which, whatever its
explanation or justification, destroys the basic premise underlying the
schema of the international division of labour.

1
2 ECONOMIC DEVELOPMENT OF LATIN AMERICA

Hence, the fundamental significance of the industrialization of the

new countries. Industrialization is not an end in itself, but the principal
means at the disposal of those countries of obtaining a share of the bene-
fits of technical progress and of progressively raising the standard of liv-
ing of the masses.
The Latin-American countries are thus faced with an immense general
problem, embracing a series of minor ones which must be defined before
embarking on the long task of research and practical measures which
will be necessary if there is a firm intention to solve the problems.
It would be premature, in this initial report, to draw conclusions that
would have only the doubtful value of an improvization. Admittedly
much remains to be done in the Latin-American countries, both in learn-
ing the facts and in their proper theoretical interpretation. Though
many of the problems of these countries are similar, no common effort
has ever been made even to examine and elucidate them. It is not sur-
prising, therefore, that the studies published on the economy of Latin-
American countries often reflect the points of view or the experience of
the great centres of world economy. Those studies cannot be expected
to solve problems of direct concern to Latin America. The case of the
Latin-American countries must therefore be presented clearly, so that
their interests, aspirations and opportunities, bearing in mind, of course,
the individual differences and characteristics, may be adequately inte-
grated within the general framework of international economic co-opera-
tion.
The task ahead is thus considerable and the responsibility heavy. T o
deal with it methodically, it would be necessary to begin with a pre-
liminary examination of the principal problems as a whole, at the same
time bringing out certain general considerations suggested by direct con-
tact with the economic life of Latin America. Such is the purpose of this
report.
The industrialization of Latin America is not incompatible with the
efficient development of primary production. On the contrary, the avail-
ability of the best capital equipment and the prompt adoption of new
techniques are essential if the development of industry is to fulfil the
social objective of raising the standard of living. The same is true of
the mechanization of agriculture. Primary products must be exported
to allow for the importation of the considerable quantity of capital goods
needed.
The more active Latin America's foreign trade, the greater the pos-
sibility of increasing productivity by means of intensive capital forma-
tion. The solution does not lie in growth at the expense of foreign trade,
but in knowing how to extract, from continually growing foreign trade,
the elements that will promote economic development.
If reasoning does not suffice to convince us of the close tie between
economic development and foreign trade, a few facts relating to the situa-
 ECONOMIC DEVELOPMENT OF LATIN AMERICA

tion today will make it evident. The economic activity and level of em-
ployment in the majority of the Latin-American countries are consider-
ably higher than before the war. This high level of employment entails
increased imports of consumer goods, both non-durable and durable,
besides those of raw materials and capital goods, and very often exports
are insufficient to provide for them.
This is evident in the case of imports and other items payable in
dollars. There are already well-known cases of scarcity of that currency
in certain countries, despite the fact that the amount of dollars supplied
by the United States to the rest of the world in payment of its own im-
ports was considerable. In relation to its national income, however, the
import coefficient of the United States has, after a persistent decline,
arrived at a very low level (not over 3 per cent). It is, therefore, not sur-
prising that, notwithstanding the high income level of the United States,
the dollar resources thus made available to the Latin-American countries
seem insufficient to pay for the imports needed for their intensive
development.
It is true that as European economy recovers, trade with that continent
can profitably be increased, but Europe will not supply Latin America
with more dollars unless the United States increases its import coefficient
for European goods.
This, then, is the core of the problem. It is obvious that if the above-
men tioned coefficient is not raised, Latin America will be compelled to
divert its purchases from the United States to those countries which pro-
vide the exchange to pay for them. Such a solution is certainly very
dubious, since it often means the purchase of more expensive or unsuit-
able goods.
It would be" deplorable to fall back on measures of that kind when a
basic solution might be found. It is sometimes thought that, by reason
of the enormous productive capacity of the United States, that country
could not increase its import coefficient for the purpose of providing
the basic solution to this world problem. Such a conclusion cannot be
substantiated without a prior analysis of the factors that have caused the
United States steadily to reduce its import coefficient. These factors are
aggravated by unemployment, but can be overcome when it does not
exist. One can understand that it is of vital importance, both to Latin
America and the rest of the world, that the United States achieve its
aim of maintaining a high level of employment.
It cannot be denied that the economic development of certain Latin-
American countries and their rapid assimilation of modern technology,
in so far as they can utilize it, depend to a very large extent upon foreign
investment. The implications involved render the problem far from
simple. The negative factors include the failure to meet foreign financial
commitments during the great depression of the nineteen thirties, a
failure which, it is generally agreed, must not be allowed to happen
4 ECONOMIC DEVELOPMENT OF LATIN AMERICA

again. Fundamentally the problem is the same as that referred to in the

preceding paragraph. The servicing of these foreign investments, unless
new investments are made, must be paid for by means of exports in the
same currency and, if these do not show a corresponding increase, in
time the same difficulties will arise again. They will be the greater if
exports fall violently. The question thus arises whether, pending that
basic solution, it would not be wiser to direct investments toward such
productive activities as would, through direct or indirect reduction of
dollar imports, permit the regular servicing of foreign obligations.
Here one must beware of dogmatic generalizations. T o assume that
the meeting of foreign commitments and the proper functioning of the
monetary system depend upon nothing more than a decision to obey
certain rules of the game is to fall into an error involving serious con-
sequences. Even when the gold standard was in operation in the great
centres, the countries of the Latin-American periphery had great difficulty
in maintaining it, and their monetary troubles frequently provoked con-
demnation from abroad. The more recent experiences of the large coun-
tries have brought a better understanding of some aspects of the situation.
Great Britain, between the two wars, encountered difficulties somewhat
similar to those which arose and continue to arise in the Latin-American
countries, which have never taken kindly to the rigidity of the gold
standard. That experience doubtless helps to bring about a better under-
standing of the phenomena of the periphery.
The gold standard has ceased to function, as in the past, and the man-
agement of currency has become even more complex in the periphery.
Can all these complications be overcome by a strict application of sound
rules of monetary behaviour? Sound rules for these countries are still
in the making. Here there arises another vital problem; that of utilizing
individual and collective experience to find a means of harmoniously
fitting monetary action into a policy of regular and intensive economic
development.
Let this not be interpreted as meaning that the classic teachings are of
no value. If they do not provide positive rules, they at least show what
cannot be done without impairing the stability of the currency. The
extremes to which inflation has gone in Latin America show that mone-
tary policy was not based upon these teachings, since some of the larger
Latin-American countries increased circulation to a greater extent than
did those countries which had to meet enormous war expenditure.
There is yet another aspect of the problem of dollar shortage. It is
true that, as already stated, a high level of employment increases imports.
But it is also a fact that an excessive monetary expansion has often un-
duly increased the pressure on the balance of payments, thus leading
to the use of foreign exchange for purposes not always compatible with
economic development.
 ECONOMIC DEVELOPMENT OF LATIN AMERICA

These facts must be taken into account in an objective analysis of the

effects of the inflationary increase on the process of capitalization. It
must, however, be admitted that, in most of the Latin-American coun-
tries, voluntary savings are not sufficient to cover the most urgent capital
needs. In any case, monetary expansion does not bring about an increase
in the foreign exchange reserves necessary for the importation of capital
goods; it merely redistributes income. It must now be determined whether
it has led to a more active capital formation.
The point is a decisive one. The raising of the standard of living of
the masses ultimately depends òn the existence of a considerable amount
of capital per man employed in industry, transport and primary pro-
duction, and on the ability to use it well.
Consequently, the Latin-American countries need to accumulate an
enormous amount of capital. Several have already shown their capacity
to save to the extent of being able to finance a large part of their in-
dustrial investments through their own efforts. Even in this case, which
is exceptional, capital formation has to overcome a strong tendency
towards certain types of consumption which are often incompatible with
intensive capitalization.
Nevertheless, it does not appear essential to restrict the individual
consumption of the bulk of the population, which, on the whole, is too
low, in order to accumulate the capital required for industrialization and
for the technical improvement of agriculture. An immediate increase in
productivity per man could be brought about by well-directed foreign
investments added to present savings. Once this initial improvement has
been accomplished, a considerable part of the increased production can
be devoted to capital formation rather than to inopportune consumption.
How are sufficient increases in productivity to be achieved? The ex-
perience of recent years is instructive. With some exceptions, the rise in
employment necessitated by industrial development was made possible
by the use of men whom technical progress had displaced from primary
production and other occupations, especially certain comparatively poorly
paid types of personal services, and by the employment of women. The in-
dustrial employment of the unemployed, or ill-employed, has thus meant
a considerable improvement in productivity and, consequently, where
other factors have not brought about a general lowering of productive
efficiency, a net increase in national income.
The great scope for technical progress in the field of primary produc-
tion, even in those countries where it has already been considerable, to-
gether with the perfecting of existing industries, could contribute, to
national income, a net increase that would provide an ever-increasing
margin of saving.
All this, however, especially in so far as it is desired to reduce the need
for foreign investments, presupposes a far greater initial capitalization
than is usually possible with die type of consumption of certain sectors
6 ECONOMIC DEVELOPMENT OF LATIN AMERICA

of the community, or the high proportion of national income absorbed,

in some countries, by fiscal expenditure, which makes no direct or in-
direct contribution to national productivity.
It is, in fact, a demonstration of the latent conflict existing in these
countries between the desire to assimilate, quickly, ways of life which
the technically more advanced countries adopted step by step as their
productivity increased, and the need for capitalization without which
this increase in productivity could not be achieved.
For the very reason that capital is scarce, and the need for it great, its
use should be subjected to a strict standard of efficacy which has not
been easy to maintain, especially where industries have developed to
meet an emergency. There is, however, still time to correct certain de-
viations and, above all, to avoid them in the future.
In order to achieve this, the purpose of industrialization must be clearly
defined. If industrialization is considered to be the means of attaining
an autarchic ideal in which economic considerations are of secondary
importance, any industry that can produce substitutes for imports is
justifiable. If, however, the aim is to increase the measurable well-being
of the masses, the limits beyond which more intensive industrialization
might mean a decrease in productivity must be borne in mind.
Formerly, before the great depression, development in the Latin-Ameri-
can countries was stimulated from abroad by the constant increase of
exports. There is no reason to suppose, at least at present, that this will
again occur to the same extent, except under very exceptional circum-
stances. These countries no longer have an alternative between vigorous
growth along those lines and internal expansion through industrializa-
tion. Industrialization has become the most important means of expan-
sion.
This does not mean, however, that primary exports must be sacrificed
to further industrial development. Exports not only provide the foreign
exchange with which to buy the imports necessary for economic develop-
ment, but their value usually includes a high proportion of land rent,
which does not involve any collective cost. If productivity in agriculture
can be increased by technical progress and if, at the same time, real wages
can be raised by industrialization and adequate social legislation, the
disequilibrium between incomes at the centres and the periphery can
gradually be corrected without detriment to that essential economic
activity.
This is one of the limits of industrialization which must be carefully
considered in plans of development. Another concerns the optimum size
of industrial enterprises. It is generally found in Latin-American coun-
tries that the same industries are being attempted on both sides of the
same frontier. This tends to diminish productive efficiency and so mili-
tates against fulfilling the social task to be accomplished. T h e defect is
a serious one, which the nineteenth century was able to attenuate con-
 ECONOMIC DEVELOPMENT OF LATIN AMERICA

siderably. When Great Britain proved, with facts, the advantages of in-
dustry, other countries followed suit. Industrial development, however,
spurred by active competition, tended towards certain characteristic types
of specialization which encouraged profitable trade between the various
countries. Specialization furthered technical progress and the latter made
possible higher incomes. Here, unlike the case of industrial countries
by comparison with those producing primary products, the classic ad-
vantages of the division of labour between countries that are equal, or
nearly so, followed.
The possibility of losing a considerable proportion of the benefits of
technical progress through an excessive division of markets thus con-
stitutes another factor limiting the industrial expansion of these coun-
tries, Far from being unsurmountable, however, it is a factor which
could be removed with mutual benefit by a wise policy of economic inter-
dependence.
Anti-cyclical policies must be included in any programmes of economic
development if there is to be an attempt, from a social point of view,
to raise real income. The spread of the cyclical fluctuations of the large
centres to the Latin-American periphery means a considerable loss of
income to these countries. If this could be avoided, it would simplify the
problem of capital formation. Attempts have been made to evolve an
anti-cyclical policy, but it must be admitted that, as yet, but little light
has been thrown on this subject. Furthermore, the present dwindling of
metallic reserves of several countries means that, in the event of a reces-
sion originating abroad, they would not only be without a plan of de-
fense but would lack means of their own to carry out the measures de-
manded by the circumstances.
The principal problems having been set forth in this first part of the
report, the following sections will be devoted to some of their outstand-
ing aspects, which must be discussed both on account of their intrinsic
importance and of the need for carrying out systematic research on them. 1

i The obstacles in the way of carrying out such a task in Latin America are well
known. The greatest difficulty is perhaps the small number of economists capable of an
original approach to the specific problems of these countries. For various reasons, it has
not been possible to supply the lack by training an adequate number of young men of
high intellectual calibre. Considerable progress has been made by sending them to the
great European and American universities, but this is not sufficient. One of the most
conspicuous deficiencies of general economic theory, from the point of view of the
periphery, is its false sense of universality.
It could hardly be expected that the economists of the great countries, absorbed by
serious problems of their own, should devote preferential attention to a study of those
of Latin America. The study of Latin America's economic life is primarily the concern
of its own economists. Only if this regional economy can be explained rationally and
with scientific objectivity, cau effective proposals for practical action be achieved.
It must not be thought, however, that this desire springs from an exclusive individu-
alism. On the contrary, Latin-American economists can only accomplish it on the basis
of a sound knowledge of the theories expounded in the great countries with their wealth
of universal truths. An intelligent knowledge of the ideas of others must not be confused
with that mental subjection to them from which we are slowly learning to free ourselves.