A History of Wealth and Poverty: Why a Few Nations are Rich and Many Poor, by John P. Powelson.


Mexico and Central America


Nowhere in Latin America is the power-diffusion process greatly in evidence. In Mexico, however, a case can be made for reflected development in the manner of Spain. Although the countries of Latin America are disparate, nevertheless certain common characteristics make it possible to generalize from a sample. I have selected Mexico, Guatemala, and Nicaragua to be covered in this chapter, and Peru, Brazil, Argentina, and Chile in Chapter 18. Instead of alphabetical order, we will examine these countries from north to south.



The settlement of Mexico and Peru in the sixteenth century continued the tradition of Christian Reconquest in Spain, with Indians replacing Moors as dependents of the conquerors. Landholding was the focus of master-worker relations. Both others and I have written about this earlier, [1] so my summary here will be brief.

Upon arrival in Mexico, the Spaniards discovered an Aztec feudal system similar to their own, with an emperor (Montezuma, or Moctezuma), priests, warriors, free workers, serfs, and slaves. They replaced the emperor with a Spanish viceroy. Finding the Indians unwilling to work for Spanish money, [2] the Spaniards conscripted them for mines and farms through tribute labor, debt servitude, and "protection" by the church. Rebellions were virtually always suppressed, leaving an immense chasm between conquerors and conquered that still affects boundaries between the in-groups and out-groups found in Mexico today.

At no point did the lesser groups approach a degree of power that might have enabled them to negotiate with their "masters" as did the serfs and workers of northwestern Europe and Japan. They did not normally form independent unions that might have activated vertical alliances. Money, laws, and parliamentary "democracy" were handed down from on top. Today the Congress is mainly a rubber stamp for the Institutional Revolutionary Party (PRI), the home of the in-group, although the PRI is increasingly challenged by opposition groups. Marriages, inheritances, and immigration have blurred the distinction between Indians and Spaniards. Thus the border between in- and out-group is no longer clear, and some mobility is possible. Nevertheless, the dichotomy is real.

Despite the war of liberation from the Spaniards, the reforms of Benito Juarez, the dictatorship of Porfirio Díaz, and the Revolution of 1910-17, at no time did Mexico encounter a survival crisis that would have forced the in- and out-groups to cooperate, with some power or leverage for the latter.

During the period of oil prosperity (roughly 1972 until the "oil glut" of 1986-88) many enterprises were nationalized, [3] including the banks (1982) and all the corporations whose stock they owned. Public expenditures grew. Because of oil money, prospects for economic improvement, enhanced public services, and growth of infrastructure were widely predicted, but they fell short of expectations. Rather, new access to enterprises and their financing must have led to payoffs to well-placed officials of the in-group. Thus errors and omissions in the Mexican balance of payments show large debit balances in 1977 and 1978 and again from 1981 through 1985. [4] Surely these represent clandestine imports of goods and exports of capital, such as to buy land in the United States, by those who had illicitly acquired the funds. The arrogance of the government is also expressed in the following: " 'We are going to break the power of the transportation middlemen because we have our own trucks, boats and even planes,' explained Mr. Ovalle, who is coordinator of Copalmar [a government agency operating in rural areas]." [5]

While many explain these events as "corruption" or "exploitation" — therefore illegitimate or illegal — more likely they continue the conquest tradition of unclear boundaries between "public" and "private." Mexicans of the in-group have looked upon their positions as private property, from which they may legitimately earn rent. So also did the landowner or government official in Iberia in the fifteenth and sixteenth centuries, as well as the conquerors in Mexico and Peru in the same era. Octavio Paz has described the "patrimonialist system," by which "the head of government — prince or viceroy, caudillo or president — directs the State and the nation . . . as though it were his own household." [6]

Foreign economists have naively fit into this system, bolstering the power of the already powerful. As late as 1982, statist policies were being touted from Cambridge, England:

Strict controls on imports. Foreign exchange curbs. Big budget deficits. Nationalization of the banks. Vast foreign borrowings. They are all part of a radical economic experiment under way in Mexico, an experiment put into place by Mexicans but one that reflects the startling ideas of a group of economists here at Cambridge University. [7]

Further references to centralization and the concentration of power in Mexico are listed in Appendix 17.1. References to the lack of accountability appear in Appendix 17.2.

The Liberalization of the 1990s

This historic spiderweb of interlinked power, of private claims to public assets and positions, and of paternalism up and down a rigid hierarchy, is the milieu of a remarkable economic experiment in the 1990s. If the leaders have their way, the Mexican economy, polity, and social structure will suddenly do a volte-face.

Although this turn was in principle planned by representatives of the farming, labor, and business sectors, who agreed on two pacts — one for economic solidarity and one for stability and economic growth [8] — nevertheless the whole arrangement was orchestrated from on top. Two earth-shaking moves were declared: privatization of government enterprises and a free-trade treaty with the United States and Canada. The nationalized banks have been returned to private ownership. Altogether some nine hundred government-owned enterprises were privatized from 1986 to 1991, [9] although the largest and most basic, such as steel, electricity, and petroleum remain in state hands. Foreign investment, previously discouraged by restrictions, is suddenly welcome. Tariffs were greatly reduced even before the treaty. Drastic cuts in expenditures significantly decreased both the government deficit and the rate of inflation. Some writers have been citing Mexico as "a model of economic modernization [that] the United States would do well to emulate . . ." [10] The results have been immediate and spectacular. Both gross domestic product and employment have increased. Although the slowness of Mexican reporting makes it impossible to have up-to-date official data, private estimates put the growth rate at about 4 percent a year. [11]

Is Mexico reflecting the institutions of development of the United States as Iberia may have reflected those of northwestern Europe? Will the free trade treaty be analogous to the entry of Spain and Portugal into what is now the European Union? Or is the whole event a temporary aberration — imitated organizations thrust into unchanging institutions — to be reversed when a new administration comes into power? The case for the former is that Mexican businesspeople have long been associated with the United States and know its institutions well. Through the Partido de Acción Nacional (PAN), they have long been opposing the statist policies of the Partido Revolucionario Institucional (PRI). Perhaps there has been a shift in political balance rather than a radical cultural change.

The case for the latter is that in Mexico, as in Russia, the reforms did not swell up from below. They are motivated by economic failure and the need for foreign assistance to maintain the current government and bureaucracy in power. Liberalization — the price of this assistance — will be resisted or reversed once the new financial assets have been guaranteed and debt reduction achieved. It is hard to believe that the centuries of chasm between in-and out-groups and the millions of interconnected power relationships can suddenly be set aside in favor of an impersonal market economy.

In neither Russia nor Mexico has widespread consensus emerged that the new institutions are advantageous to diverse interest groups. Nor can weaker ones ally with more powerful for leverage. Businesspeople and farmers have little influence in making the policies. Rather, the two most recent Mexican presidents, Miguel de la Madrid and Carlos Salinas, and Donaldo Colosio, the PRI candidate who was assassinated in March 1994 and his replacement Ernesto Zedillo, were all educated in the United States and brought with them the liberal economics they learned there. De la Madrid and Salinas seized the presidency in questionable elections and used its power to impose reforms in the face of a weak Congress and poorly organized opposition. This procedure contrasts with Spain, where membership in the European Union is widely favored by middle groups.

The president of Mexico is not all-powerful. He depends on a party apparatus spread wide throughout the country, at local as well as national levels. The PRI has co-opted the important interest groups, such as heavy industry, manufacturers, caciques (local strongmen), and labor unions. Thousands of persons belong to this in-group, which has marginalized the army, the church, dissident workers, peasants, and consumers in general. It also has aborted independent groups such as splinter unions. With its frequent internal quarrels suppressed, a fabricated unity is maintained against the out-groups. Therefore, we do not know to what extent internal opposition to the reforms may exist. Those in favor of reform have prevailed, and others may have gone along because they did not want either to be expelled from or to upset the system.

One of the out-groups is the peasants, of whom the PRI boasts to be the nominal champion. In Mexico's agrarian reform of 1917 and thereafter, lands were confiscated from large owners (hacendados) and distributed to peasants, either as private properties or collectives (ejidos). However, as conditions for receiving land, the peasants acceded to government controls. These included co-optation of peasant leagues within the political structure, allocations of credits, forced delivery of merchandise, pricing restrictions, government participation in ejido management, and authorizations required before ejido lands might be transferred. Permissions, exemptions from requirements, and granting of credits depended on bribery or political obeisance. In these circumstances, many farmers saw agrarian reform "as a mere change of masters, and they preferred an individual and well-known patron to an abstract and all-powerful state as their landlord." [12]

In an earlier writing, [13] my co-author and I described a number of cases in which the government offered credit or other supplies on favorable terms to some ejidos and other growing areas while denying them to others. The criteria were willingness to do the bidding of the government-controlled Ejido Bank, buying inputs and selling crops at government-set prices, and/or political support for the PRI. The government spent vast sums for irrigation to benefit "politically correct" farmers in the northwest, but benefit-cost studies showed that these amounts would have been more profitably directed to smaller farms in the central region and the Caribbean coast. [14]

"They have to come to us first if they want land," says an official with the peasant confederation. "Even if they get land, they have to come to us to get water. If they get water, they still need credits and fertilizer. The party will never lose control of the countryside." [15]

The announcement at the end of 1991 of a proposed law to expand private farming was met with widespread consternation among collective farmers, just as their counterparts in the former Soviet Union are far from agreed on the end of collective farms there. When a Mexican government official told ejido farmers in Telpancingo that the government would soon allow them to rent or sell their land, the reply was: "Was the revolution worth nothing? What did all those people die for? There is nobody, not even the President of the Republic, who can take away our land!" [16]

This event underscored the paternalistic, top-down nature of the Mexican reforms, which "modernize" the economy against the will of large segments of the population. Unwittingly, Pedro Aspe, minister of finance, reflects the ingrained paternalism when he writes: "[T]he authorities must communicate with the various sectors and tell them what is being attempted, hear their comments, and outline for them the costs and benefits of the measures being taken." [17] The tenor of Aspe's remarks — indeed, his whole book — reveals a government that must determine and control the path by which economic liberalism is to be achieved, down to an expectation of the manner in which private enterprises, including banks, will organize and manage themselves, and that will teach these methods to "lesser" people who would not otherwise understand them. All this contrasts with both the power-diffusion process and reflected development, in which demands for land and other reforms are initiated and shaped by the parties directly concerned for them.

The impoverished underclass is deepseated and longlasting; it will not quickly be elevated by the North American Free Trade Agreement. The peasant rebellion in Chiapas in 1994 reveals both the deep schism in Mexican society and the paternalistic response of the government. Instead of learning what credit institutions, venture capital, and training the peasants might negotiate with a sympathetic government, "officials promised new food programs, farm credits and other aid to fight the crushing poverty of the region." [18]

Taking place as this book goes to press, the negotiations differ from the earlier European/Japanese models in three respects. First, in Europe and Japan peasants were usually represented by their own members, albeit the more prominent ones. Second, European and Japanese peasants usually negotiated for attainable changes directly related to their productive capacities and well-being, not for largesse by manorial lords or daimyo. Third, in Europe and Japan the peasants usually tried to minimize state intervention in their lives. In Chiapas, by contrast, the principal negotiator is a masked man known only as "Subcomandante Marcos," whose command of several languages and intellectual discourse distinguishes him from peasant culture. In addition to land repartition — an achievable goal — Marcos has demanded the resignation of the President of the Republic and all state governors, on the grounds of electoral fraud. [19] Correct though he may be in this judgment, nevertheless to waste negotiating strength on such millennial expressions hardly serves the peasants well. Finally, government promises for "speedy rural electrification; more housing; health clinics and schools," [20] and other social benefits will, if kept at all, make the peasants more beholden to the state instead of releasing them from official pressures.

In contrast to agriculture, the privatization of industry in the 1990s appears to be popular and taking hold. The telephone company, however, sold to a consortium including foreigners, was permitted to retain a monopoly until 1996. At the time of writing, any prediction on industry is subjective: whether privatization and free markets will represent changing organizations that fail when they confront unyielding institutions, or will follow the Spanish model of reflecting institutions from the north. In the first scenario, privatized companies would receive monopoly guarantees or other favors as yet unreported. They would exhibit inefficiencies similar to the government enterprises that they replaced. The telephone monopoly would be extended, for example. However, the second scenario may occur instead, because the PRI is more vulnerable than ever before. Its weakness is reflected in the ousting of three state governors by opposition protests; the PRI was unable to protect them. Possibly the survival crisis is being approached, or the government is too weak to co-opt the entrepreneurial forces now being unleashed, like Beijing versus China's southern provinces. In that case, the privatized companies might be reorganized and increasingly run by capable managers.

In either event, the belief of many observers from more-developed zones that simple shifts in monetary, fiscal, tariff and foreign exchange policies or the adoption of a free-trade treaty with the United States and Canada will tilt the course of employment, production, and inflation is an ethnocentric illusion. Instead, such policies may further concentrate power in the government. [21]

While development by reflection is a real possibility, nevertheless it is more likely that the volte-face required for a liberalized Mexico to initiate durable economic development will prove too much of a historical jump. Mexico did not have a nineteenth century like that of Spain, and too much history remains on the other side. A free market in goods and services promotes economic development only when the powers of participating groups are reasonably well balanced, so that no newly empowered group may distort prices and production or command others to yield undue favors to it. [22] That day has not yet arrived in Mexico.


To consider the precariousness of Mexico's liberal conversion in the 1990s, one need only look at its neighbor, Guatemala. This country maintained a stable currency, at 1 quetzal to the dollar, for decades ending in 1970 with only slight devaluations to 1980, a liberal foreign exchange and investment policy, a declining percentage of government revenue from import taxes, [23] and a satisfactory rate of economic growth: 5.43 percent, or 2.47 percent per capita, annual average from 1960 to 1980. [24] Inflation (consumer price index) averaged only 0.82 percent per year from 1960 to 1970, though it increased to 9.97 percent for the next decade. [25] Government expenditures were addressed to infrastructure, education, and agricultural improvement, and not especially to nationalized industries as in Mexico. The government deficit averaged less than 1 percent of GDP during the decade of the 1960s. Beginning in 1980, however, the economy worsened. From 1980 to 1990 economic growth averaged only 0.91 percent per year, or a decline of 1.94 percent per year per capita. Prices rose by 11.14 percent per year average, and the quetzal declined by 13.47 percent per year. [26] The government deficit, as percentage of GDP, was rising in the 1970s, and its average in the eighties reached 2.5 percent.

What had happened? First, a growing population of landless farmers, mainly Indians, provided the political reason for guerrilla violence. Active since the 1960s, these guerrillas stepped up their campaigns in the countryside. Land ownership was highly skewed: in 1970, 75 percent of the land was owned by 2 percent of the farmers. Productivity was high on large estates, mainly for export crops: coffee, sugar, and cotton (earlier bananas), but low productivity characterized crops for domestic consumption, [27] and malnutrition plagued the poorer farmers. Second, violent and probably fraudulent elections and a coup d'état brought military presidents between 1978 and 1984. To "pacify" the countryside, the military drove villagers into compounds. [28] Hundreds of tortured and mutilated bodies began to appear on the roads, and Guatemala was severely criticized abroad for violating human rights.

In 1986, a civilian president was elected who was widely alleged to have milked the treasury, appointed cronies, and enriched himself. [29] "Where has all the foreign aid gone?" wrote a Guatemalan economist, president of Francisco Marroquín University. "Nobody seems to know. Statistics are seldom published. Those that are published are carefully drawn up so as to confuse both economists and the laymen." [30] In 1993, with the aid of the military, the president suspended the Congress, only to be deposed himself by that same military.

The Guatemalan experience illustrates an important principle: that decades of "solid" economic growth are not durable if they are not grounded in a pluralistic society with countervailing powers. The prediction is therefore reinforced, that liberalization-from-above, as in Russia or Mexico or elsewhere, may not last.

Guatemala is what may be called a sectioned society, or an extreme case of economic dualism. A sectioned society is one in which an in-group attains its own maximum welfare, producing and trading among its members and with foreigners, without any need to communicate with a large portion of the out-group. Enough unskilled labor is co-opted by the in-group to sweep the streets, haul the garbage, and perform other menial tasks, but no more than is essential. Aside from these, the in-group would do just as well or better economically if the out-group did not exist. It can even run a high level of economic growth all on its own, like a separate country. In this case, macrogrowth data for the country tell little about its true development.

Classical economic theory would say that such a society cannot reach a stable equilibrium (one that no force would alter) and remain sectioned. The neglected group would offer its labor cheaply. Because the marginal rate of substitution is high in many processes, [31] previously marginalized labor would be used instead of capital. Ultimately, the marginalized group would be absorbed into the modern economy. But this has not happened for centuries in Guatemala and in some other Latin American countries. Why not? Because power is an economic good, with a utility and a cost. Fear and mistrust of the out-group, and the prospect of losing power to them, are among the costs to the in-group. The marginal revenue to the in-group from doing business with the out-group may be less than the perceived marginal cost, including the risk of losing power. In that case, the in-group would maximize its welfare by ignoring the out-group completely, and no force would be initiated to alter this circumstance.

Of course, the boundary between in- and out-groups is never hermetically sealed. The former does employ members of the latter, and it is possible to cross. But mobility is difficult enough to validate the concept of the sectioned society.

The vicious equilibrium can be broken in only two ways. One is what happened in northwestern Europe and Japan: that the out-group — by increasing its capabilities, by forcing the in-group to bargain with it, and by forging vertical alliances with leverage — may negotiate changes in institutions favorable to it. The second is that the out-group may become so violent and "obnoxious" that the cost to the in-group of ignoring it is increased beyond endurance. The first way activates the power-diffusion process; the second way repeats the Chinese dynastic cycle.

In the 1990s, the threat to survival — which leads to negotiation and compromise — does not appear to have been reached in Guatemala. Whether the government or the guerrillas win, another power imbalance will ensue. Thus, another turn of the power cycle would appear to be the more likely event.


In 1979, the Nicaraguan dictator Anastasio Somoza was overthrown by revolutionaries calling themselves Sandinista. The Sandinistas remained in power until voted out of office in 1990. Much of the world looked upon these governments as diametrically opposite, but they are similar in critical respects. These similarities, which derive from Spanish authoritarianism, are mostly antithetical to durable economic development.

The Land System

Land, the primordial asset of any agrarian society, has been insecurely held by Nicaraguans and always subject to expropriation by authorities. Under both the Spanish conquest and nineteenthcentury independence, land was divided into large estates producing for export, which were appropriated by the Spanishdescended elite, while small, lowproductive farms were left for indigenous and poorer people. The confiscations happened in much the same way as in Spain during the Reconquest and in Mexico thereafter. [32]

In 1934, the Somoza family owned no land. By becoming president in 1937, General Somoza established his family as the ruling dynasty. By 1946, that family held almost a monopoly on coffee and beef exports and on domestic milk production. [By the end of the Somoza period in 1979, virtually all the land in large estates was held by Somoza or his sympathizers.] [33]

While the Sandinistas confiscated land of the Somozas and their friends, they were just as authoritarian as were their predecessors. Confiscated farms were turned into "cooperatives." I use quotations because these were mandated by the government, not formed by tenant initiative. Smallscale farmers, whose land was not confiscated, were "encouraged" to join "cooperatives" [34] by offerings of cheap credit, fertilizers, and other inputs, which would otherwise be available only at prohibitive prices if at all. Some large-scale export plantations remained private, but they had to sell their product to the government at controlled prices. By these methods, virtually all land came under the control of the Sandinista government, just as it had been under the Somozas.

While the peasants were permitted free choice over some crops, other crops were forcibly procured by official purchasing agencies at low prices specified by the government. In particular, all export crops were delivered to these agencies. By collecting crops from its members and turning them over to the state, the "cooperative" became like a state purchasing bureau rather than a representative of member interests. It squeezed the peasants by forcing them to sell their crops at less-than-market prices while buying their inputs, such as seed and fertilizer, from government agencies at high prices.

Like the Guatemalan government, the Sandinistas forced some peasants off their traditional lands and penned them up in compounds. The Miskito Indians had farmed on family plots, although families helped each other at harvest. The Sandinistas tried to abolish this system in favor of their own "cooperatives." The intervention was violent, and about ten thousand Indians were moved to fencedin compounds "for fear of subversion." [35]

The government did distribute some land titles, [36] but these did not include freedom to plant and sell crops where and for what prices the owner is able, and to sell, buy, mortgage or bequeath the land. Since the economic value of private land is the capitalized value of its earnings, which on most "cooperatives" was little or negative, these titles had little or negative value.

In these ways the land system under the Sandinistas was similar to classical ownership as exemplified by the Somozas. Neither showed signs of the power-diffusion process.


The Somozas ran Nicaragua like a personal fief, granting permissions to do business or to own land, and controlling the money and credit system at their will. Political enemies were exterminated; for example Sandino himself. The Somozas were accountable to no one.

Nevertheless, they maintained a relatively stable and growing economy. The currency (córdoba) held a constant value throughout the 1960s and was only slightly depreciated during the 1970s. Inflation was less well controlled: consumer price increases averaged 10 percent per year during the 1960s and 16 percent during the 1970s as civil war intensified. The government accounts were approximately balanced throughout the 1960s but became deficitary in the 1970s. International payments were approximately balanced most of the time. Gross domestic product in 1985 prices increased by an average of 3.6 percent per year, or 1.0 percent per capita, from 1960 to 1979. [37]

As in Guatemala, these data are deceptive. Nicaragua was also a sectioned society. The Indians on the Caribbean coast and poorer farmers scattered throughout the country were marginalized. The Overseas Development Council gave Nicaragua a Physical Quality of Life Index (PQLI) of 66 out of a possible 100 rating points in 1980 (a composite index based on life expectancy, infant mortality, and literacy), ranking it eighth out of the ten Latin American countries measured. [38]

Probably stability was maintained because a stable economy benefited the elite who lived off exports. Economic growth was confined to a few, who perceived a possible loss of power if they dealt more efficiently with the marginalized groups. The affected liberalism and stability, therefore, were not the result of interestgroup interaction of a power-diffusion process.

Nor was the Sandinista government any more accountable than was that of the Somozas. No group could counter or even question its decisions on land, credit, nationalization of businesses and banks, or emission of money. It controlled prices capriciously, one time holding them down and the next suddenly raising them. The luxury homes confiscated from the Somoza family and cronies were assigned to Sandinista officials, who treated them like private property, refusing to give them up when voted out of office. They also kept vehicles and other government property. [39] Government accounts were carelessly maintained. [40] Just as Somoza considered his National Guard his "private property," so also did the Sandinistas continue to control the "national" army even after they had left office. Mass graves of their political foes were discovered after the Sandinistas were no longer in power. [41]

At first, the Sandinista economy showed some recovery from the civil war. GDP rose by 3.33 percent average per year, 197984, while declining by 0.36 percent per capita per year. Then it dropped precipitously, by 3.94 percent per year, 198488, or 7.30 percent per capita per year. [42] In an earlier volume, my co-author and I showed data from several studies of the decline in output of specific crops. [43] Per capita output has fallen by one fourth since 1980, while average living standards have been cut by more than 60 percent, according to a recent study compiled by foreign economists and underwritten by Sweden. [44]

Proponents and opponents of the Sandinista government have different explanations for the economic disaster. The former attribute it to the contra war, the latter to the economic policies of the government: nationalization of industries and banks, price controls, management of agriculture from the capital city, and inflationary creation of currency. Both explanations are consistent with a confrontational society, whose basic structure and economic policies are decided by power and war rather than by negotiation and compromise. They also reflect an authoritarian government that arrogates all major economic decisions to itself.

Although it had the power to create an egalitarian society, for example by redistributing land in smallfarm private ownership, the Sandinista government chose not to do so. Instead, it believed that structure and policies fabricated by its own officials would be superior to those determined by free markets in either institutions or goods and services. Upon departing from office, both the Somocistas and the Sandinistas left the national treasury empty. [45]

Lack of Pluralism

During neither period could Nicaragua be termed a pluralist society. Under the Somozas, the boundary between government and employer organizations was not clear. Collectively, the state and employer organizations controlled exports and imports. The Investment Corporation channeled both national and foreign resources, while the Institute of Foreign Trade regulated trade balances and prices. Cotton and coffee commissions reported to the government. Important unions were governmentcontrolled. [46]

Under the Sandinistas, major businesses and banks were nationalized; unions too were governmentcontrolled. Illegal until 1984, strikes were permitted as part of a new flexibility preceding the elections of that year, but the first strike to be called was halted.47 In 1988, a strike was declared illegal and strikers dismissed. [48]


A break-the-system mentality is one in which some individuals or groups are willing to destroy a significant element of the legal system, monetary system, parliamentary democracy, or the like, to win a point of specific interest to them. This contrasts with a social structure created by vertical alliances, pluralism and leverage, in which each interest group has a vested interest in the portion that it negotiated: merchants in commercial law, legists in other law, bankers in the monetary system, and so on. When a society is also interlocking, with mutual accountability among groups, then no part of the system may be destroyed without an adverse impact on other parts. As a result, groups develop vested interests not only in their own parts but in the total system.

This does not infer that an interlocking society will not change, only that changes are negotiated piecemeal.

Where a culture forebears from break-the-system, groups allow themselves to lose particular conflicts rather than win them in antisystemic ways. In Chapter 6, we saw how the law might take on a power of its own, because most groups (not all) would prefer to lose a case, or would be required to, rather than destroy the law. But when a group — say, government or military — bends or destroys the law to win a particular point, then it does not have a vested interest in that system of law. [49] If other groups allow it to do so, either through weakness or lack of interest, the society is not interlocking, at least with respect to the law.

Break-the-system also applies when institutional behavior is different from organizational expectations. Under the constitution of 1974, enacted by the Somoza government, the president could not be reelected, and legislative authority belonged to a bicameral congress. In practice, however, any "independent" president was a figurehead reporting to the Somoza clan, and the legislature was a rubber stamp. (The same was so during the Trujillo regime in the Dominican Republic).

The Sandinistas carried on the system of bending the law to suit their authority. They sometimes forbade rivals to participate in political campaigns, [50] and they supported mobs that broke up demonstrations by rival candidates. "If you are going to vote for the mobs, you are going to vote for the people" (President Ortega). [51]

When Somoza was overthrown, the entire system changed abruptly. When the Sandinistas left office, the nation also became convulsed over its basic structures more than over its policies.

In summary, this section makes three propositions on the continuity of historical tradition in Nicaragua from the colonial period to both Somoza and Sandinista times:

  • Land, always subject to confiscation, continued to be so under both Somocista and Sandinista governments.
  • Power over economic matters has always been concentrated in the government, and disputes have tended to be met by confrontation, or "stonewalling," more than by negotiations. Persons in power have not been accountable for their actions, a condition begun in the colonial period and continued under both Somocista and Sandinista governments.
  • Significant elements of the political system are so lightly valued that they are willingly sacrificed in order to win individual points. This characteristic, break-the-system, has been common to all Nicaraguan governments, including Somocista and Sandinista.

Further references to land, accountability, and break-the-system in Nicaragua are listed in Appendix 17.3.


  1. Powelson 1988:Chapter 18.
  2. Chevalier 1963:67.
  3. Junco, Alejandro, "Mexico's Private Sector Reels Under Government Control," Wall Street Journal, 6/29/84.
  4. International Monetary Fund, International Financial Statistics Yearbook, 1990: 514-5. The same figures may be found in other editions.
  5. Riding, Alan, "Mexico, Flush with Oil, Remembers its Rural Poor," New York Times, 9/21/80.
  6. Paz 1985:167.
  7. Rattner, Steve, "Mexico's Cambridge Connection," New York Times, 10/24/82.
  8. Aspe 1993:22.
  9. Moffett, Matt, "Two Mexican Airlines Go Separate Ways After Their Sale by State in Privatization," Wall Street Journal, 11/22/91.
  10. Shelton-Colby, Sally, "What We Could Learn from Mexico," Washington Post Weekly, 11/26-12/2/90.
  11. Moffett Matt, "A 1980-Style Boom is Just Now Reaching an Awakening Mexico," Wall Street Journal, 12/18/91.
  12. Meyer 1984:447.
  13. Powelson and Stock 1990:Chapter 3.
  14. Reynolds 1970:145.
  15. Frazier, Steve, "Mexican Farmers Get Grants of Small Plots, but Output is Meager," Wall Street Journal, 6/14/84.
  16. Golden, Tim, "The Dream of Land Dies Hard in Mexico," New York Times, 11/27/91.
  17. Aspe 1993:59.
  18. Golden, Tim, "Mexican Rebels are Retreating; Issues are Not," New York Times, 1/5/94.
  19. "Entra el diálogo en fase crítica," El Diario de Coahuila, 2/27/94. Other newspapers would carry the same story, but I happened to be in Coahuila at the time.
  20. "Score One for the Indians," Time, 3/14/94.
  21. Pazos, Luis, "Mexico's Worsening Binge," New York Times, 7/3/85.
  22. This should not be taken as opposition to a free trade treaty, which I strongly favor. Even if little is gained by it economically, nevertheless the opening of possibilities for new interest groups may spur the power-diffusion process.
  23. Inter-American Development Bank, Economic and Social Progress Report in Latin America, various annual issues; for example, 1970:230.
  24. Increase in gross domestic product.
  25. Economic growth and price index changes were calculated from International Monetary Fund, International Financial Statistics Yearbook, 1990:386-87 and March 1992:260-61.
  26. Same source as preceding footnote.
  27. Inter-American Development Bank, Socio-Economic Progress in Latin America, 1970:227.
  28. Chavez, Lydia, "Guatemala Tries to Win Over 5,000 Indian Refugees," New York Times, 11/20/83.
  29. Manning, Michael, "The New Game in Guatemala," The New York Review, 10/25/90.
  30. Monterroso, Fernando, "Foreign Aid Inhibits Market Ideas in Guatemala," Wall Street Journal, 11/03/89.
  31. Loehr and Powelson 1981:174-7. In this work we assembled a large number of studies (done by others) of technologies that demonstrated the high likelihood of substitutability of capital and labor.
  32. Powelson 1988:Chapter 18.
  33. Quoted from Powelson and Stock 1990:323. Data from Deere and Marchetti 1981:46.
  34. Kinzer, Stephen, "Sandinistas Make Ceremony of Freeing Former Rebels," New York Times. 9/26/83.
  35. Reuters, in New York Times, 6/8/84.
  36. Simons, Marlise, "Nicaragua Hastens Land Redistribution as Pressures Mount," New York Times, 7/19/83.
  37. All data in this paragraph are taken from, or calculated from, International Monetary Fund, International Financial Statistics Yearbook, 1990: 542-43.
  38. Overseas Development Council, U.S. Foreign Policy and the Third World Agenda 1982:162.
  39. Asman, David, "Sandinistas Clean Out Before They Clear Out," Wall Street Journal, 3/16/90; Branigin, William, "An 11-Year House Party Ends for the Sandinistas," Washington Post Weekly, 4/2329/90.
  40. Kinzer, Stephen, "For Nicaragua, Soviet Frugality Starts to Pinch," New York Times, 8/20/87.
  41. Uhlig, Mark A., "Sandinistas Accused as Burial Sites are Unearthed," New York Times, 8/5/90; Shea, Nina H., "Uncovering the Awful Truth of Nicaragua's Killing Fields," Wall Street Journal, 8/24/90. These reports were confirmed by America's Watch, a human rights organization, in a letter by Aryeh Neier, Executive Director, in Wall Street Journal, 9/14/90.
  42. Calculated from International Monetary Fund, International Financial Statistics Yearbook, 1990:544-45.
  43. Powelson and Stock 1990: 344-51.
  44. Passell, Peter, "For Sandinistas, the Newest Enemy is Hard Times," New York Times, 7/6/89.
  45. Uhlig, Mark A., "Sandinistas are Blamed for Financial Shambles," New York Times, 5/1/90.
  46. EBMa 1974:13:62.
  47. Kinzer, Stephen, "First Nicaraguan Strike since the 1979 Revolution is Halted, at Least Temporarily," New York Times, 8/27/84.
  48. Kinzer, Stephen, "Leftists Defy Sandinistas as Labor Strife Hits Peak," New York Times, 4/18/88.
  49. An exception for civil disobedience, which is part of the Western tradition, was discussed in Chapter 6.
  50. Kinzer, Stephen, "Sandinistas Move to Outlaw Rivals," New York Times, 8/23/84.
  51. Kinzer, Stephen, "Sandinista is Favored but Runs Hard," New York Times, 10/30/84.

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