Latin America: a brief look into how its colonial past is affecting its socio-economic present

By Ayan Banerjee

During the 16th to 18th centuries, European nations arrived and set up colonies across Latin America. Since the 1500s, the continent has undergone a relative economic decline. It's evident that a ‘reversal of fortune’ had occurred, where some of the richest countries of the 1500s are some of the poorest in the present day. This article will analyse and evaluate some of the factors responsible for this decline.

Spanish and Portuguese settlers landed in South America in the early 16th century, setting up colonies covering most of the continent. Spain 'followed a policy of conquest imperialism, exterminated the Aztec and Inca elites and their priesthood, and seized their property' (Maddison A., 2007). Furthermore, the arrival of new diseases (Smallpox, Measles, Diphtheria, Typhus, Influenza) had by the middle of the 16th century, wiped out 70-90% of the indigenous population; these lands were subsequently repopulated with Europeans and slaves from Africa. Even after leaving and granting independence in the 18th century, the effect of a colonial past has had a far-reaching impact up to the present day. Many economists argue that this long-lasting influence is the cause of the relative economic decline. Some go further stating that it is, in particular, the institutions set up by settlers that are responsible for this. Institutions are defined as purposely designed constraints that configure social, political and economic exchanges, essentially designing the incentives of economic agents. Path dependency is the concept that decisions presented to people are dependent on previous decisions or experiences made in the past. For example, the continued use of QWERTY keyboard layouts in computers and phones beyond its original use on the typewriter. The path dependency theory hypothesises that the institutions set up during the colonial past influences and impacts present performance.

M --> S --> EI --> CI --> P

Illustrated above is the path that is followed. M represents potential settler mortality that impacts settlements (S). S then impacts the early institutions (EI) which in turn affect the current institutions (CI). Finally, the current institutions directly impact a country’s current performance (CP). Institutions set up during the colonial past were often extractive, used to capture wealth and send significant amounts of it back to the colonial ruling country. These institutions were often characterised by greatly increasing inequality within settled countries. Therefore, many current institutions have similar characteristics. The economist Douglas North argues that institutions greatly govern the economic development and overall health of an economy. It can therefore be argued that the institutions set up in South America’s colonial past have created current institutions that are still extractive and act as constraints to growth.

South America in the age of the Bourbons: the ruling house of Spain from the 1700's.

One way in which institutions constrain growth in South America is through the ‘persistence of inequality’ (Sokoloff & Engerman, 2000). South America and other previous colonies such as Jamaica and Haiti are considered to be some of the most unequal countries in the world. These countries ran in their colonial past based on the control from a small group of elites with high levels of national inequality. Since then, those in power were able to set up a ‘legal framework’ which gave the ruling minority great influence over laws and government policies to extract more power. This continued after the settlers left with one group of elite exchanging for another. This new group of elites were able to institutionalise inequality in their countries to leverage long-term power and wealth. One of these methods of obtaining long-term power was through the control of land. After the settlers left, the minorities left in charge began owning and controlling most land in their respective countries. They could, therefore, control its distribution, the tax system used and also the threshold of allowed land ownership. Furthermore, through controlling large expanses of land, they owned some of the country’s largest revenue streams. These would include agriculture and access to natural resources such as oil, natural gas, minerals and metal ores. 

This control was continually secured behind a facade of democracy. Although the majority of South American countries were democracies by the mid-19th century, they were still controlled by an elected elite, largely decedents of the previous elite. They were able to leverage their power mainly through restrictions to voting. Not only was there a lack in secrecy in the balloting, but there was also often a wealth and literacy requirement; resulting in that most countries, less than 10% of people were allowed to vote between 1840-1940 (Sokoloff & Engerman, 2000). Although the suffragette movement and other voting rights movements travelled from North America and the West during the late 19th century, most were not imposed until the mid to late 20th century prolonging inequality. 

Overall, the spread of power being uneven was dependent on the homogeneity of the voting population. By reserving voting rights to a small minority, a small group of elites were able to secure power whilst acting as rent-seekers, extracting resources in a kleptocratic rule which stifled growth and fostered inequality for several centuries.

Continued restrictions to education also contributed to relative economic decline. Investing in education can be a powerful tool to encourage economic growth through improving the productivity and quality of workers and in turn of human capital. This is evident in most developed countries that have widespread and effective education systems available. Contrastingly, most South American countries failed to set up a primary education system up until the early 19th century due to their lack of prosperity. Governments chose not to invest in the mass education of its population unlike its ex-colony siblings in North America who realised the value of allocating resources to educating the youth. Furthermore, South American countries remained slow at introducing ‘schooling institutions.’ Overall, the lack of widespread education led to the quality of human capital remaining mostly stagnant and therefore, leading to the loss of potential economic growth. 

Some economists argue that economic decline continued through the 20th century to the present day due to South America’s failure to rapidly industrialise. Most countries globally underwent rapid urbanisation during WW2, however, those in South America failed to do so. The lack of industrialisation meant that much of South America was still reliant on commodity exports which would decline in price significantly. Combined with the price of imports increasing rapidly, this led to large prolonged current account deficits and hence extensive debt. Governments then operated protectionist policies in an attempt to stimulate domestic import-substituting manufacturing, however, this resulted in mass unemployment and further inequality due to being poorly imposed. Overall, poor governance in the 20th century failed to make the transition from a risky commodity-exporting based economy to an industrialised one. This further increased internal inequality and hence, continued the economic decline into the present day.
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South American countries experienced high living standards before settlers arrived in the 1500s. However, the settlers’ arrival and legacy after departure shaped the subsequent economic decline to the present day. The role of institutions in this is largely significant. The distribution of political power and wealth was imbalanced combined with general human capital not being improved, fostered inequality. This institutionalised inequality stifled growth as didn’t realise the ‘economic potential’ of large, marginalised groups. Furthermore, poor governance in the 20th century through protectionist policies and failure to move away from a commodity-exporting based economy continued this economic decline. As long as there remains an elite minority in power of South American countries, mass inequality and poor governance will persevere, restricting to growth and furthering the continent’s economic decline.