North America Vs Latin America: Economic Change and Comparative Development

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North America Vs Latin America: Economic Change and Comparative Development

North America and Latin America have always been two nations, which possessed fairly different characteristics. North America, the third-largest continent in the world, consisting of twenty-three countries, occupies the majority of the northwest hemisphere. Latin America, based in the southern part of the western hemisphere, consists of a group of countries and dependencies. Latin America consists of the entire continent of South America as well as Central America, Mexico and the Caribbean islands, where citizens in the area speak languages such as Spanish, Portuguese and French. From the early years of colonization to the present day, the two nations have differed in various ways, specifically in their economic performance. North America, in present-day, is considered to be one of the largest most successful economies in the world as it generates gross domestic product (GDP) values which range within trillions (US$) per year and experiences positive gross domestic product growth percentages annually. Latin America, on the other hand, has a less successful economy. However, this was not always the case, in the previous century, initially, Latin America seemed to be the prosperous nation between two and exhibited immense potential for growth and development. Latin America was a nation with an abundance of natural resources, such as sugar, rubber and metals this lead many to believe Latin America would be one of the greatest economies in the modern world. However, this view has changed drastically and Latin America currently has very low economic growth prospects. Several researchers have studied the case of North America and Latin America, to deduce why the economic disparity exists between the two nations. Some have argued, “North Americas priority in development was predetermined by nature” (Landes, 1998). While others believed that culture and institutions were the driving force that led to North America’s economic performance outweighing that of, Latin America. It is evident that, in terms of economic performance, these two nations lie on opposite ends of the spectrum. This paper aims to analyze and assess the various factors, which have led to the difference in economic performance between North America and Latin America.

Institutions

The economic performance of a nation is determined by a combination of factors, one of which is the presence of institutions. Institutions occur quite frequently in discussions about development, as they account for the differences that occur in the economic performances of different countries. Institutions such as rule of law, regulation, transparency, accountable government and low levels of corruption are all necessary for economic growth. The presence of institutions within a nation could be the differentiating factor between a thriving and prosperous economy, compared to an economy without economic institutions, which often lacks markets and is less prosperous. Institutions play a great role in determining a country’s long-term economic growth and performance. Institutions are defined as, “systematic patterns of shared expectations and accepted norms” (Chang and Evans, 2005) and can be further broken down into two categories, political and economic institutions. Economic institutions can be inclusive or extractive economic institutions. Acemoglu and Robinson (2012) describe inclusive institutions as institutions that “create inclusive markets” which allow individuals to participate in economic activities. Inclusive institutions are institutions that help propel growth and improve economic performance. These institutions encourage people to participate in economic activities. Inclusive institutions are considered to be institutions that contain public services, which provide people in the economy with equal opportunities to exchange and they allow for entry into new businesses. Understanding the definition of inclusive institutions and the impact they have on economic performance, helps one identify why a nation such as North America, performs better than Latin America, economically. Colonial Latin America, unlike North America, exhibits patterns of extractive economic institutions. Extractive economic institutions are institutions that mainly generate growth in the short-term but in the long run, ultimately result in poverty within the nation. These institutions are designed to “extract income and wealth from one subset of society to benefit a different subset” (Acemoglu and Robinson, 2012).

The economic institutions in the Americas, as presented by Acemoglu and Robinson (2012), highlight the main reason that North America and Latin America, differ in terms of economic performance. The economic institutions in North America fostered economic activity as well as economic prosperity. This was achieved through the secure private property rights, which consequently encouraged individuals to invest and increase production throughout their economic activities. Secure property rights, rule of law, public services and freedom to contract and exchange were characteristics that North America possessed as a result of their inclusive economic institutions. Colonial Latin America on the other hand lacked property rights for the indigenous individuals, only the Spaniards had access to private property, this ultimately resulted in very little investment from the indigenous population, as it became evident that in the presence of extractive economic institutions, resources would be saved for the elite (Acemoglu and Robinson, 2012). Acemoglu and Robinson (2012) highlights the role of institutions play in helping an economy grow. For North America, the presence of inclusive economic institutions created incentives and opportunities, which aided the nation to prosper through technology and education. The absence of such institutions is the main reason Latin America’s economic performance is below that of North America. Once institutions have been formed within a nation it is fairly difficult for poor nations to adopt good institutions. Sokoloff and Engerman (2000) states “once on a particular path economies find it very hard to fundamentally change direction because of the built-in characteristics of institutions”. This reinforces the reason why a disparity occurs in the economic performance between North America and Latin America. Latin America is unable to improve their economic performance, because of the persistent extractive institutions within the nation. This also accounts for the inequality Latin America experiences in the long run compared to North America.

States

States are necessary for economic growth and play a vital role in the economic performance of a nation. The state actively ensures that the country can meet the needs of the citizens through the effective use of resources and economic development. The state also focuses on ensuring that equilibrium is met between developing the society and the economic growth of the country. States come in several different forms. Large states, which have very little capacity and have large autonomy amongst the state and the society, are considered to be predatory states. Evans (1989) defines predatory states as states, which, “extract investible surplus and provide so little in the way of collective goods in return”. Predatory states often hamper economic transformation in a nation. Alternative states, which encourage economic transformation and development, are called developmental states. Developmental states are those that “foster long-term entrepreneurial perspectives among private elites”, these states “increase incentives to engage in transformative investments” in doing so, they lower the risks which may be associated with the investment. Developmental states possess high levels of autonomy and embeddedness. Evans (1989) highlights that the most effective states are those which have “autonomy and join well-developed, bureaucratic internal organization with dense public-private ties”. It is clear that the type of state that a nation follows will have an impact on whether economic transformation will occur or not.

Latin America is said to have followed a predatory state approach and as a result, struggled to catch-up to North America’s rapidly growing economy. After World War II, Latin America attempted to implement the developmental state as a means to tackle underdevelopment. However, when Latin America faced a serve debt crisis, which resulted in a financial crisis and hyperinflation, the developmental state ceased to exist. Instead, Latin America, followed the approach taken by North America, and became a Neo-liberal state. The neo-liberal state focuses on the reduction of government spending, increase of free trade as a means to increase the role of private sector in the economy.

Markets

Markets play a fundamental role in a nation’s economic performance. The right markets offer opportunities for investors to specialize in certain markets or services; nations are also able to diversify economic risks using markets. Markets were considered to be the most efficient way to make decisions about the allocation of resources. Although markets effectively allocate resources-markets, without institutions, often fail. When markets fail it is more often than not caused by failures in the institutional arrangements that support the market. There are four main economic systems that countries can subscribe to, these include, the free market system, mixed market system, command economic system, and the traditional economic system. While all four have particular benefits, Smith and Cannan (2003) advocate for the use of free-market systems. Free markets are known as markets; which have the ability to regulate themselves, through the supply and demand of goods and services. Smith suggests the laissez-fair approach towards markets. Smith believed that free markets could regulate themselves and needed very little involvement or regulation by governments.

North America, adopted the mixed economic system. The mixed system merges free markets with market systems, which encourage economic prosperity. In contrast, Latin America used a traditional economic system approach. This system relies on customs and history to make decisions about resources, production and the economy. This system seemed to be the ideal system at first, as it was a system that worked well for economies that dealt with agriculture. The traditional approach, however, does not foster economic growth and development. Many believe that the adoption of the traditional economic system played a role in Latin America’s lack of development and poor economic performance.

Social Conflicts

Economic growth and the economic performance of a nation requires political order and very little social conflict. A difference, which largely created and affected the inequality in economic performance within North America and Latin America, can be linked back to the colonizers of each of the nations. Although both nations were colonized, the British colonized one of the nations while the Spanish and the Portuguese colonized the other. The British colonized North America. Landes (1998) states that the British based their behavior mostly on trade rather than domination, this equipped the individuals with the necessary skills to become trade-minded and this ultimately assisted North America to achieve better economic performance. Latin America was conquered and colonized by the Spanish and Portuguese. The Spanish and Portuguese lacked governance and wealth-creation skills. The Spanish and the Portuguese focused on domination rather than trade and their main goals focused on increasing their empire, rather than growing the nations they colonized. Thus, the people of Latin America lacked the skills needed to truly develop the nations and achieve economic prosperity. This became evident in Latin America when war broke out throughout the nation, years after the nation gained independence from the Spanish and the Portuguese. The lack of governance skills, as a result of “autonomous institutions of self-government which only existed local level, and possessed heavily circumscribed authorities” (North, Summerhill, Weingast, 2000), meant that the people within the nation had no institutions of their own and had to create them without any framework to refer to for decision making, this often ended in conflict. This social conflict within the nation ultimately impacted the economic performance of the nation. “The instability imposed several types of costs. It diverted resources from economic activity and channeled them into caudillo armies and a variety of praetorian effort” (North, Summerhill, Weingast, 2000). North America on the other hand, experienced a different fate, the nation possessed a set of political arrangements, which ultimately provided the nation with stability after they gained independence and they were able to protect their markets from predation.

Conclusion

In summary, the economic performance of a nation can be a result of a various factors. The comparison of North America and Latin America finds that North America exhibits greater economic performance than Latin America. This is largely due to the presence of inclusive economic institutions in North America and the extractive economic intuitions in Latin America. The type of markets, social conflicts all resulted in the disparity between economic performance in Latin America and North America. Thus, North America in contrast to Latin America is a nation that exhibits: efficient markets, national institutions as well as political stability.

References

Hofman, A. A. (2000). The Economic Development of Latin America in the Twentieth Century. ECLAC.
Evans, P. B. (1989, December). Predatory, Developmental, and Other Apparatuses: A Comparative Political Economy Perspective on the Third World State. In Sociological forum (Vol. 4, No. 4, pp. 561-587). Kluwer Academic Publishers-Plenum Publishers.
Landes, D. S. (1998). The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York: W.W. Norton.
North, D. C., Summerhill, W., & Weingast, B. (2000). Order, Disorder and Economic Change: Latin America Vs North America. Governing for prosperity, 19.
Robinson, J., & Acemoglu, R. (2012). Why Nations Fail. Crown Publishing Group.
Smith, Adam, and Edwin Cannan. (2003). The Wealth of Nations. New York, N.Y.: Bantam Classic
Sokoloff, K. L., & Engerman, S. L. (2000). Institutions, Factor Endowments, and Paths of Development in the New World. Journal of Economic perspectives, 14(3), 217-232.

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