Why is Latin America Poor? Honoring Ken Sokoloff

I’m sitting in an AEA session honoring economic historian Ken Sokoloff, with speakers Claudia Goldin, Bob Allen, Jim Robinson, and Nobel prize winner Douglass North. Ken passed away last year at a still young age. It is a tragic thing to eulogize one’s graduate student, as Claudia did today. Teachers, like parents, should not have to bury their own children.

Most of Ken’s work has been extremely important in understanding early American development and industrialization. More relevant to readers of this blog, however, is how his recent work transformed our understanding of why Latin America has remained poor and unequal relative to its northern American cousins.

Ken’s early career focused on understanding US industrial growth, with an emphasis on the importance of technological advancement, organizational changes (which is just another form of technological change) and natural resources. He went on to study the nature and determinants of innovation and invention, using American history as his ‘field site’. We now take for granted the idea that proximity to markets and trade routes (such as navigable rivers) leads to production and learning-by-doing, the exchange of ideas, and the stimulation of innovation. Yet when Ken first proposed this idea in the 1980s it was a far from an accepted (let alone proven) proposition.

Later in his career, after two decades of studying early American development, he turned his attention to comparative development processes. His work with Stan Engerman compared Latin American development to American development. Why did the US and Canadian settler economies evolve more equal and growth-promoting institutions, while Latin American institutions were for so long undemocratic and volatile? And why did these inequalities of income and growth and freedom persist for so long in the same hemisphere?

Initial conditions, answered Engerman and Sokoloff, especially factor endowments–essentially a technical term for a country’s initial stock of resources, people, and climate. This account differed from the standard tales of the time—one that focused too much on capital accumulation, technological diffusion, or a supposedly lax Iberian work ethic. Rather, Engerman and Sokoloff developed a historical account of how different initial resources and climates helped lead to starkly different institutions and paths of development within the Western hemisphere.

Europeans arriving in the Americas centuries ago discovered a variety of environments: temperate climes and tropical ones; large local populations and scattered ones; developed states as well as effectively stateless native American societies. It is these initial stocks of resources (sadly, to a 16th or 17th century European, native peoples were either a resource or a nuisance, not a people) that influenced the region’s later path of development.

For instance, many of the tropical products one would want to produce and sell—cotton and sugar are prime examples—have economies of scale in production, meaning that it is more economical to have large-scale plantations with forced labor than it is to have smallholder farms with free or partially free labor. A similar logic could follow for certain minerals. Other crops, like wheat, were generally most profitably produced by smallholders, and the growth of such farms were encouraged.

Likewise with native populations. Where population was dense, there were incentives to enslave them, setting up initial inequalities and authoritarianism. Paradoxically, where native populations were less dense and were more easily exterminated or driven away, freer labor institutions and equality appear to have been the result.

As a result, tropical and subtropical areas like the US south, the Caribbean, and much of Latin America (above the Southern Cone) developed extractive and unequal systems and social structures, while those of Canada, Argentina, or the US north tended to be more free and equal. The US south had, in some sense, the ‘good luck’ to be part of a political union with the freer north, which would years later force them to adopt freer institutions and move down a path towards equality (albeit after a bloody civil war).

This paradism makes a strong case for path dependence in institutional development and in unequal economic relations. In doing so, Engerman and Sokoloff essentially ignored many of the dominant development paradigms and created their own. In this paradigm, the challenges faced by some Latin American countries today (think Chavez) are symptomatic of this deep, persistent, and historical inequality.

In this paradigm, moreover, it’s important to note that there are no quick fixes. There are no Jeff Sachs solutions that end poverty in our lifetimes (let alone by 2015). Factor endowments and initial characteristics do not mean that poverty is destiny for Latin Americans. But it does imply a slower path to equality and development. It is a path that requires deep reforms, and attention to reducing inequality.

The policy prescriptions in this case are far from clear. Righting historical wrongs, redistributing income, igniting democracy and equal growth in unequal societies—these are some of the most vexing issues we face. As Dani Rodrik has pointed out, best practices and first-best policy prescriptions do not necessarily work.

I think a great deal more exploring along this theme should be done, and it represents a wonderful research agenda for students of development, politics, and history. The EngermanSokoloff story is not airtight, and the exceptions could either prove the rule or revolutionize how we think about development.

3 thoughts on “Why is Latin America Poor? Honoring Ken Sokoloff

  1. Hi Mr. Blattman,

    I am sure your work in Africa makes a case for solution to poverty irrespective of any initial conditions. It seems that there are different kinds of poverty. A broad economy-based poverty (nation being poorer than the rest) and
    intra-economy poverty (improper distribution of incomes across the economy)

    I believe a country as a whole can move on to a positive development spiral if its endowment (labour skills / natural resources) address a economic need / desire. The economy then, hits a growth sweet-spot. The key is for the policy makers and population in general to discover this “need”. A crude example would be low-cost manufacturing for China and South east Asia. Similarly it was IT/ITES sector for India.

    The initial conditions determine if the country can discover this “need”. An enabling political climate, infrastruture and law and order are essential. Yet in certain cases awareness of the “need” might trigger political change (presence of oil!!! or influx of tourists-Nepal!)

    Poverty, I believe, can be countered with education- though I cant say if US offering eductional services to 20,000 Kenyen students can create positive impact 15 years down the line!

    Anyways, keep posting – I read your blog regularly – subscribed to it.

    Rahul

    http://rahuldeodhar.blogspot.com/2007/12/why-certain-people-stay-poor.html

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