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


South America


We continue our examination of Latin America with a sampling of countries in South America, moving roughly from north to south, to cover Peru, Brazil, Argentina, and Chile.


Because the culture gap between elites and lower classes in Peru has been so vast, the power-diffusion process has never worked. Instead, fear and mistrust have minimized the possibilities for vertical alliances, pluralism, and leverage.


From the time of the Spanish conquest in 1531-33, Peru has been a dual society. The Spanish invaders and their viceroys and hidalgos (minor nobles) took lands from the Inca, converting the people into serfs and the lands into haciendas. (The Inca had earlier done the same to other Indian peoples.) I have described the evolution of the land-tenure system in an earlier work. [1] As serfs bound by indebtedness or other sanction, the Indians could not participate in the market economy. Mostly they did not use money other than chits at the hacienda store, nor did they have access to credit, legal, or democratic institutions. To go into business for themselves was unthinkable. Many did not even know they were Peruvians. Substantial changes in these conditions were evident only after the 1960s.

Some intriguing earlier potential for Indians to make vertical alliances with leverage occurred, but they were not acted upon. Randall writes of a "crown policy [in the sixteenth century] designed to limit the income available to individual colonists. Such a policy was necessary to prevent the development of an independent nobility, which might compete with the Spanish monarchy for control of Peru." She also writes that "in 1565 an attempt was made to limit the abuses of the encomenderos [noble Spaniards to whom Indians had been "entrusted"] by appointing government officials — corregidores de Indios — in the provinces where encomenderos had wide powers." [2] Could not the Indians have sided with either the crown or the nobility or corregidores to lever their power in these struggles? The question is almost ludicrous, even though this is what peasants in northwestern Europe and Japan did. In Peru for the Indians, as in Spain for the Moriscos, the cultural chasm was so great that communication with upper classes on fundamentals was not feasible. Hence the leverage available in northwestern Europe and Japan was closed off in Peru, as it had been also in Spain.

Until the 1960s, Peru had experienced chronic growth based on nineteenth-century liberalism. [3] In the 1890s "the economic performance of Peru was impressive." [4] Spanish financial, legal, and parliamentary institutions had been transplanted for the use of the elite. Exports — primarily copper and other minerals, guano, sugar, and cotton — were the engine. Labor from the marginalized sector was cheap, and foodstuffs were extracted or imported sufficiently to feed the formal economy. Technically, there was room for positive-sum moves by which agricultural productivity might have been increased, and the hacendados might have shared the increment with tenants. But to do so would have been risky, even unthinkable, because it might have given the tenants enough power to upset the imbalance. Hence there was neither agricultural revolution nor "innovating landlords." Income distribution was highly skewed. [5]

A change — hardly a turnabout — began after World War II. Perhaps because of a worldwide move toward independence of less-developed countries, increasing manifestation of discontent among lower classes everywhere, and growing nationalism, Indians escalated the demand to restore their lands. Land invasions multiplied. Marxist students rioted in favor of radical changes. Guerrilla actions broke out in the sierra. The coup of 1968, in which a "new" military drawn largely from the underclasses announced great impending changes in favor of Indians and other poor, intensified the commotion.

This military government, and civilian governments thereafter, became new elites in an equally dual society. Although glorifying the Indians and acting in the name of the poor, they allowed neither of them any more share in decision-making than had their predecessors. Labor unions were coordinated by the government's own Confederation of Workers of the Peruvian Revolution. If they failed to conform or struck illegally, they were abolished, as happened to the teachers' union in 1973. [6] Virtually all businesses were declared to be "social property," to be managed by the state or (in theory) by the workers. [7]

The land reform of 1968 — which my co-author and I have described in an earlier work [8] — expropriated the large estates, but instead of dividing them into small farms in private ownership, the government organized large communal farms under different guises, called Agrarian Production Cooperatives and Agricultural Societies of Social Interest. In principle, these organizations were to be run by their members, but the government decided to make all important decisions until the land had been paid for by the peasants — an impossible task reminiscent of Russian "emancipation" in 1861.

This "Peruvian experiment" — declared to be neither socialist nor capitalist — was coordinated by a transitional government agency, the Sistema Nacional de Apoyo a la Movilización Social, or SINAMOS (sin amos means "without masters"). Reminiscent of the marxist dictatorship of the proletariat, SINAMOS would provide political support until a "government of popular organizations" might be assembled. In fact, however, SINAMOS was highly criticized by groups across the political spectrum, from extreme left to extreme right. In a 1973 pamphlet, SINAMOS itself conceded that "few times in the recent history of Peru has an organization been more violently attacked by traditional groups of all distinctions." [9] The probable explanation is that these groups had played no part in creating SINAMOS and therefore had no vested interest in it.

The state controlled the peasants using ways common to many less-developed countries: through bank credit and through "a centralized agency to control all public enterprises in the food industry . . . The Empresa Pública de Servicios Agropecuarios . . . [was made] the sole legal food importer and exporter." [10] In 1977, the concept of social property — clearly unworkable — was abandoned, in preparation for a constitution of 1979 and an elected government in 1980.

Even thereafter, poor choices, failure to communicate adequately with workers or to entrust management functions to the outgroup, inefficient state-run enterprises, and lack of government accountability, as well as guerrilla warfare by a formidable organization known as Shining Path (Sendero Luminoso) were all causes of Peru's economic collapse of the 1980s. Shining Path appears to be a small but vicious group of intellectuals that does not represent the urban poor or the peasants. Instead, it has tried to co-opt them by threats, "taxation," and violence or by murdering their leaders. Controlling vast parts of the country, it has forced peasants to produce cocaine for the foreign market, with which it finances its domestic operations. With the deterioration of legal exports — even sugar has had to be imported — the community experiments in coastal plantations failed. Toward the end of the 1980s these lands were parceled into private farms.

De Soto's Studies

Hernando de Soto has studied the Peruvian economy in two parts, the informal and the formal. It is a dual society, not a sectioned society in the sense of Guatemala and Nicaragua, since the two parts interact more closely. In scholarly investigations, de Soto and his students have mapped out the "informal economy, defined as all transactions not conforming to legal procedures." [11] In this shadow world he found that housing, production, trade, and transport were organized by persons excluded from legitimate institutions, who therefore had to agree on their own rules. In earlier sections, these are referred to as the "out-group," primarily peasants. But they may also be urban traders and even industrialists.

Two findings from de Soto's studies support earlier propositions in this book. First, "enormous entrepreneurial energy [is found] in the popular classes." In 1984, according to the de Soto studies, 38.9 percent of the GDP was produced in the informal sector, where 61.2 percent of all labor time was worked. [12] Second, for "ordinary" people — those without political connections or enough funds for bribes — doing business legally is impossible in a country that has not undergone the power-diffusion process. Land, credit, and protection of the law are not available to them. When de Soto asked his students to organize a small garment-producing company, they had to "spend 289 days on bureaucratic procedures to fulfill the eleven requirements." The total cost of permissions and bribes was "$1,231 — thirty-two times the monthly living wage." [13]

The informal sector, de Soto's studies found, compiles its own laws and "courts" to enforce them, its own assemblies approximating parliamentary democracy, its own landholding systems (through land invasions), [14] its own informal credit mechanisms (often by handshake), its own procurement methods, and its own sales and other contracts. His findings on informal credit are consistent with those of Goodell [15] and Tun Wai, [16] who discovered that "moneylenders" — so much reviled in the formal literature — are a vital link in the deprived segments of less-developed zones. The informal sector operates in a free market for institutions because that is all it has.

De Soto's studies are seconded by Dietz and Moore, [17] who found that the urban poor in Lima formed associations for common enterprises among themselves and also negotiated with national authorities when specific questions arose. But none of these authors, nor other sources available to me, tell of corporate groups created for an ongoing relationship with the authorities on such issues as land tenure, the ability to make economic decisions, or property rights. [18] Vertical negotiations are rare.

The Present Crisis

From 1980 until a few months before publication of this book, Peru's economy had been doing poorly. From 1960 to 1980, gross domestic product at 1985 prices had increased by an average of 4.58 percent per year, or 1.85 percent per capita per year. But from 1980 to 1990 it increased by only 0.45 percent per year, for a decline of 2.10 percent per capita per year. During those same ten years, consumer prices rose by 170 percent per year on average; in 1990 they increased seventy-five-fold. From 1989 to 1990, the government deficit soared from 5.2 million to 202.3 million new soles. The current account of the balance of payments was in deficit every year except three from 1971 to 1990, inclusive. [19]

Suddenly in 1992, President Alberto Fujimori, with the support of the military, disbanded Congress and government offices and began to rule by decree. Complaining that Congress could not agree on his or any proposed economic reforms, nor could the present government adequately confront the Shining Path, he "portrayed his drastic moves as the only way to save Peru's democracy." [20] He arrested the leader of the Shining Path, summarily tried and executed hundreds of suspected guerrillas (some of them probably innocent), obtained "voter approval of a new constitution that eases investment restrictions and curbs labor privileges [and] has set off an effervescence in the investment community." [21] Peru's economy has done a sudden turnabout: as of early 1994 it was the "fastest growing in the Americas." Opinion polls among urban groups showed that his moves were highly popular, as the middle- and upper-class people once again turned to the "savior on horseback" to confront groups with which they could not communicate.

Why did Peru, with chronic development and reasonable stability for decades, suddenly in the 1980s become destabilized? Will the surprising turnabout in 1993-94 last? Although the timing is not easily explained, the destabilization itself should not be surprising. In a dual society, with narrow participation in the formation of economic and political institutions, the equilibrium of tensions among plural groups, which elsewhere sustains free markets and economic development, does not arise. Peru and Guatemala, with their high economic growth for decades and then sharp reversals, should give pause to all who are encouraged by Mexico's top-down reforms of the 1990s and the sudden economic growth that is attached to them. Those who think President Fujimori can bring lasting change might also contemplate the immensity of history.


Is Peru reaching the survival crisis, which might motivate wider participation by interest groups? Not many corporate bodies exist that are capable of negotiating with the government for change in underlying rules. The informal institutions found by de Soto and Dietz and Moore are democracy at the grass-roots level, such as has been seen in Asian villages for centuries. But they are not the kinds of bodies that have historically precipitated a power-diffusion process. Additional references on state power and lack of government accountability in Peru are listed in Appendix 18.1.



Authoritarianism has been the mode in Brazil ever since the first Portuguese settlement. At first it was embodied in the feudal estates (captaincies) exerting control over "their" Indians. [22] Both for defense and because of failures in settling the captaincies, a central government was established by the Act of 1548. It "gave Brazil unity, a bureaucracy, a capital, a leader, continuity in government. . . . As in [Portuguese] India, however, all the governors belonged to the top aristocracy." [23] In the fifteenth century, the Portuguese king confiscated land from the nobility and church, then declared "himself the owner of all lands discovered overseas. Having won these goals, he instituted a royal monopoly of international trade." [24] This eclipse of nobility and church by the monarchy inhibited vertical alliances and leverage by lower classes just as it had also done in Portugal. The communication gulf between Portuguese settlers and Indians foreclosed them completely at that level.

Authoritarian government was manifest in many ways. "The official policy of the crown was always to centralize learning and force everyone to study in the mother country." [25] In the eighteenth century, "The Overseas Council (Conselho Ultramarino) attempted to regulate in detail the life of the colony, so that many small administrative details had to be confirmed by the Council in Lisbon." [26] In 1702 the construction of a new road to Minas Gerais was stopped by the crown, because taxation of the gold trade would be easier if there were fewer roads. [27]

"Portugal [in the eighteenth century] wanted to limit the Brazilian trade to what Portugal could provide. To maintain that trade, Brazilian manufacture was discouraged. In 1785, textile factories were prohibited in Brazil, and those already in existence were ordered to be closed." [28] Power concentration in Brazil was therefore an extension of that in Portugal.

The power-diffusion process has never been at work. The Indians did not form village associations to challenge their feudal lords in the captaincies of the sixteenth century, nor did they ally themselves with those lords or the crown, to gain advantage from conflicts between these two. The miners of Minas Gerais did not negotiate corporately with the crown over terms and taxes, nor did an independent labor movement arise to negotiate its own terms free of government support or intervention. Producers and merchants did not draft laws of trading and ownership for passage by the legislature, which would promote security of investment and stability of production. Bankers did not create an alternative currency when the government failed to provide a sound one.

Power diffusion might have been expected from immigrant workers in the nineteenth and twentieth centuries, because the central government depended on their support. Instead of forming their own bargaining groups, however, these poorer people looked to the government for their patronage. They favored the paternalistic Estado Novo, populist government of Getulio Vargas in the 1950s, which aped the Salazar regime in Portugal. [29]

All this while, the interior remained wide open, with bloody struggles for land between European settlers and indigenous peoples. This struggle continues, still bloodily, today. Historically, land abundance had made it unnecessary for contestants to form corporate groups to seek solutions to land problems. In the case of Indians versus European descendants, the cultural gulf has been too wide, just as it had been between Moriscos and Portuguese in Iberia. The lack of trust — and therefore the perceived risk — was too great. These propositions apply as much today as they did at any time in history. Additional references on state power and lack of accountability in Brazilian history are found in Appendix 18.2.

The "Brazilian Miracle"

The first decade of the military government that took power in 1964 were heady years for the Brazilian economy. Real GDP grew by an average of 8.63 percent per year, or 6.41 percent per capita, from 1963 to 1975. Consumer price inflation was high also, at an annual average of 27 percent. These years were the heyday of Latin American theories — since discredited — that "structural inflation" was essential to economic growth. [30] With newly printed money the government would transfer resources to itself as prime investor.

The military entrusted governing functions, including economic, to highlevel professionals popularly known as "the technocrats." Left largely on their own because the military did not understand either economics or bureaucratic governing, they became "accountable to no one." [31] For example, by their decision facilities were built in the early 1980s that would produce more electric power than the country would need for the next twenty years. Many other state enterprises were founded. [32] Mainly, the growth was fueled by borrowing from abroad. Brazilian foreign debt grew rapidly.

The Brazilian Miracle did not last. From 1975 to 1980 growth slowed, to 6.47 percent annual average, or 3.57 percent per capita, still a creditable rate. Then Brazil went into recession, with an average drop of 2.43 percent per year, or 4.54 percent per capita, for three years, while inflation raged at an average of 76.26 percent per year. Growth resumed for the four years until 1988, with an average increase of 5.92 percent, or 3.80 percent per capita, in real GDP. Inflation from 1989 to 1991 reached 165 percent per year. From 1987 to 1990 growth slowed to zero or negative, and negative per capita. [33] The military government ended in 1982, and thereafter ineffective civilian presidents, highly interventionist, presided over the deteriorating economy.

The Brazilian Miracle illustrates that command growth is possible for short periods, even decades. But governments that command it either make mistakes, or — as in the Brazilian case — finance it and manage it in ways that cannot be sustained.

The Present Crisis

In 1989, a new President of Brazil — Fernando Collor de Mello — instituted sweeping, radical reforms in the face of inflation and a deteriorating economy. These included a floating exchange rate, freezing of large savings accounts, substantial tax increases and extension of the tax base, forced purchase of shares in state companies, closing of two dozen government agencies, and phasing out of import controls. A "supereconomics ministry" was established to monitor the changes. [34]

Economists were divided three ways on these reforms. To some, they were badly needed and overdue, to combat inflation, curb the excesses of irresponsible government, and create free markets. To others, they were capricious, inequitable, discouraging to investment, and economy-stopping. To still others, the reforms did not coordinate orthodox stabilization policies with complementary policies in product markets, labor markets, and financial markets (the idea was right; the choice of policies wrong).

I suggest still another perspective. That such sweeping changes were decided upon by one person reveals a noninterlocking society. Affected groups were "policy takers," not policy participants. It matters little what the policies were, since the conditions of their making were such that they could — and probably would — be reversed at any moment. The resulting capriciousness makes sound business planning impossible. Indeed, Collor was impeached and removed from office for corruption in 1992 and a new era of government intervention began, with no abatement in the charges of corruption.



Based on the usual criteria of economics, an observer in 1890 would have been hard put to predict whether Argentina, Canada, or even the United States would be the most economically advanced country of the western hemisphere one hundred years later. [35] Argentine output was increasing; farms were prosperous; the standard of living was high; and immigrants from Europe came to seek a better life. Some called Argentina the Australia of the western hemisphere. [36]

But the power-diffusion process was not at work. The Argentine "problem" dates back to Iberian ways of dealing with conquered Moors. In Argentina, even more so than in Spain and Portugal the land was so vast that Indians could not be captured as serfs; they were exterminated instead. Over the nineteenth century, the lands were doled out to European settlers, often in reward for military services of conquest. The result was a small but powerful landowning oligarchy, which also monopolized the cattle and beef industry, but whose government was unstable because of struggles for dominance among the oligarchy, especially between Buenos Aires and the outer provinces. These rulers manipulated prices, tariffs, and production rules in their favor. [37] They were served by cowboys of mestizo or European origin (gauchos), whom they rewarded but who gained no political status. After about 1850, immigrants from the poorer levels of Europe, especially from Italy, engaged in tasks considered "beneath" this elite, such as manufacturing. By the 1880s "the governmental machinery of the entire nation revolved around the person of the president. The legislators were usually subservient to the governors to whom most of them owed their election. . . . The governors were in turn almost the personal agents of the president." [38]

Change set in toward the end of the nineteenth century, when the immigrants had grown sufficiently numerous to contest the landed aristocracy. Their main political party — the Radicals (Unión Cívica Radical, or UCR) — incorporated within itself the idea of intransigence: no alliance or compromise with other parties or other groups. Indeed, until 1971 that word was part of the official name of one branch of that party.

Argentina is a prime example of failed power diffusion. Intransigence was made into a political precept, a matter of pride for standing on one's principles. As far back as 1877, certain Republicans "opposed all pacts or agreements between parties" [39] even though President Avellaneda had warded off civil war by a temporary "Conciliation of Parties." Hipólito Irigoyen, the major figure of the Radicals from the 1890s until 1930, declared himself intransigent. "In 1897 he was willing to see the UCR torn in two and almost disappear; he would not relinquish his position of intransigence" [40] (an example of break-the-system). The Organic Charter of the UCR of Buenos Aires province included this injunction: "There shall be excluded all accords or transactions that might impede, at the present and in the future, the integral application of the principles that form the program of this party." [41]

Yet for four decades the Radicals refused to divulge their program in advance, only when they applied it. Rather, they spoke in generalities, declaring themselves the moral renovators of Argentine society. Their only specific platform was for universal suffrage and provincial and municipal autonomy. Leandro Alem, their first leader, gave the party "a messianic fervor; to him the basic mission of the UCR was the reformation of Argentine morality." [42] By the 1890s, "Irigoyen had become convinced that he — and only he — could rescue the Argentine nation." [43] This behavior exemplifies our theses of centralization, elitism, and paternalizing as inhibitors of durable economic development. The Radicals won the election of 1916 and remained in power until the government, falling apart under a senile Irigoyen in 1930, was removed by the military. The Radical program, once it had come to light, was reformist and interventionist but not radical: to nationalize the petroleum industry, to establish minimum wages, to introduce restrictions on hours of labor for women and children, to initiate some price controls, to call for pensions, and to pass an inheritance tax.

All these are found to some degree in the more-developed countries of Europe and North America. But in Argentina, the beneficiary groups have been more confrontational in defending their positions and more prone to violence, kidnapping, and governmental overthrow than have the analogous groups in the more-developed zones, even counting labor violence in the nineteenth century, such as the Homestead strike of 1892.

The landed aristocracy of the nineteenth century was uncommunicative and overbearing with respect to lower classes, especially immigrants. When other groups came to power, they were equally so with all who disagreed with them. The result has been violence, corruption, government overthrow, capriciousness, and intransigence. These are the principal causes of underdevelopment in a nation that mostly sees itself as European and cannot understand what has happened to it.

Three Historic Properties

The failure of durable economic development in Argentina stems from three historic properties:

  • Power for its own sake — not just for the economic advantage it brings — is demanded by competing sectors of the elite. Not trusting the political parties, many in the military believe that stability and peace depend on themselves as fallback. These leaders deem themselves defenders of the fundaments, not just purveyors of policy.
  • Regardless of statements affirming democracy, every group in power has both favored and sustained an interventionist state. This has been true under military and civilian governments, both conservative and radical, including Peronist. All sectors of society endorse this precept, and all solutions or modus vivendi are designed accordingly. A politically or economically liberal course is beyond the horizon.
  • Confrontation characterizes the political process. In a study of ruling groups, Imaz concluded that there is no longer an "elite" in Argentina, for those who govern include persons of all classes, from descendants of immigrant laborers to the traditional landowning aristocracy. But because of differing backgrounds, these groups do not trust each other, they communicate imperfectly, and they make impossible demands upon one another. [44] Under such circumstances, a minor incident may be exaggerated into a serious crime. For example, in 1983 the president of the Central Bank was indicted for treason because he had negotiated an agreement with the International Monetary Fund. [45]

The "dirty war" of the 1960s illustrates a tendency toward break-the-system. Both the Montoneros (revolutionary group) and military government abandoned legality to gain their antithetical ends. Radical revolutionaries kidnapped and murdered industrialists. The military responded by kidnapping, torturing, or murdering 9,000 persons suspected of subversion. [46] Often these were university students who had presumably done no more than express themselves, and whose parents were left wondering what had become of them. [47] Other references to confrontation and break-the-system in Argentina are found in Appendix 18.3.

Yet all three historic properties must be qualified. Occasionally one hears proposals for decentralization and liberalization. Sometimes there are political compromises. After an unsuccessful military coup against him in 1987, President Raúl Alfonsín visited the rebel barracks to negotiate a peaceful settlement. [48] America's Watch interpreted the limited prosecutions of the military for "dirty war" crimes to be a compromise preserving the peace [49] — a sentiment disputed by many. Despite these exceptions, the balance lies with the confrontational ethic in Argentine political behavior. Government inefficiency, corruption, wage and price control, and improvident monetary and fiscal policies are the legacy of these historic properties.

While mainstream economists, foreign governments, and international agencies agree that these maladies are the basic problems, their error is threefold. First, they call inefficiency, corruption, and poor policies "structural" when a still more fundamental structure — the three historic properties — underlies them. Second, they call for their resolution by fiat or "structural adjustment," to be undertaken by the same authorities who gave rise to the problems in the first place. Third, by finding a "way out" of financial problems, outside agencies relieve the home government of the necessity to compromise. The International Monetary Fund becomes the scapegoat for unpopular policies not reached by internal agreement. But a scapegoat does not last forever, and when it is gone the problems it allowed to be evaded return in greater force.

The Failure of Reform

Reforms of all the abovementioned conditions are urged by foreign and international agencies and are made conditions for assistance. Yet decade after decade, promise after promise, little happens. It is not that the government has not tried to reform; it is that it cannot do so. The historic properties have left it interconnected with interest groups that stonewall more than dialogue, command more than compromise, and insist that their demands be met by central authority. [50]

When the government tried to divest nationalized enterprises in 1989 — a program still under way at the time of this writing — potential purchasers demanded monopoly rights. Because a monopoly commands a selling price greater than that of a competitive enterprise, the government — sorely in need of funds — is tempted to accede. The result would be the same excessive prices charged privately instead of governmentally, [51] by companies whose privilege would depend on continued central authority. [52] Industrialists exploit every political means, including bribery, to continue their subsidies.

Pressures to end such subsidies and move toward a free market were widely heard during the economic decline of the 1980s. [53] Yet in 1991 the U.S. ambassador to Argentina complained to the press because he could not get the ear of the president — about delaying red tape and demands upon American companies for bribes in order to receive import licenses and other permissions. [54]

The authoritarian ethos is exemplified by an incident in 1984, when the Argentine government bypassed a mission of the International Monetary Fund to seek approval of the managing director for its austerity plan. [55] Apparently the government believed that IMF authority would rule, just as top government authority rules in Argentina, not grasping that the Fund's culture could not allow this bypass; for unlike in Argentina, the IMF management would not ordinarily undercut its own staff.

All this leads Mexican writer Octavio Paz to describe Argentina as "the great tragedy of Latin America" and Harvard economist Nick Eberstadt to call it "the most dramatic case of a country heading back from the First to the Third World." [56] More cases of state power and the failure of accountability are found in Appendix 18.4.


Chile has challenged us in the 1990s with the question: Can a brutal, military dictatorship that brooks no opposition and tortures its opponents decree a lasting free-market economy, bypassing the power-diffusion process? General Augusto Pinochet, who took power by coup in 1973, introduced free-market policies and privatization of industry by executive decree. He did away with the many permissions similar to those that de Soto found to be strangling industry in Peru. [57] As a result, the country prospered during his presidency, 1973-90: real GDP grew at an average of 3.07 percent per year, or 1.36 percent per capita, compared with a sharp decline during the preceding administration of Salvador Allende. Employment and incomes increased, and consumer goods again appeared on the shelves. [58] Chile took the grape export market from Argentina, where it had been damaged by frequent policy shifts, overvalued currency, and taxation of agricultural exports. [59] One columnist saw similarities with the free-enterprise spirit of Australia and New Zealand. [60]

Because of popular pressure, Pinochet restored democracy in 1989. His successor, Christian Democrat Patricio Aylwin, pledged to maintain most of the economic policies, including "low tariffs, export-oriented growth, the private social-security system, private ownership of the recently-privatized companies, a balanced budget and an independent Central Bank." [61]

Some are now speculating that sixteen years of Pinochet prosperity were enough to institutionalize balanced budgets, privatization, a stable monetary system, and a liberal economy. Political opponents, it is argued, have now become convinced. Recalling that command liberalization has failed in the past — many times — I am less sanguine about Chile's prospects. In order to judge, let us examine whether elements of the power-diffusion process are present in Chile's history.


Chile was settled by Europeans, principally Spaniards, who wanted to farm rather than seek precious metals. The Chileans did not conquer the Araucanian Indians but learned to live with them. Chile did develop an aristocracy capable of seizing land and forming a dual society — landowner and laborer — based on ethnic origin, however.

Possibly because of land abundance in the nineteenth century, and possibly because of the language-culture communication gap, the elite were not forced into vertical alliances or negotiations with poorer classes on land tenure, wage systems, or other economic institutions. (The gap was diminished by intermarriage with Indians but never eliminated). These institutions, along with law, monetary systems, and parliamentary democracy, were handed down to the indigenous people by the European elites.

Throughout much of the nineteenth century, Chile was a prosperous, liberal European-style democracy, with growing industry and exports of fruits, and later nitrates (chronic growth, similar to Peru). [62] But as in Argentina, a rural-to-urban demographic shift in the 1890s brought new class conflicts. President José Manuel Balmaceda, an aristocrat-turned-defender-of-the-poor, exacted new business taxes, opposed foreign investment, and instituted government-led, inflationary economic development. He was overthrown in 1891 in a civil war led by the navy, which advocated the traditional free market.

From 1891 to the present day, the gap has widened between conservative businesspeople and landowners on the one hand and radical defenders of the poor on the other. These constituencies became the National and other parties of the right versus leftist parties such as the Movement of the Revolutionary Left. The Christian Democrats occupy an unstable center, from which they have more often sided with the left than the right. Despite political polarities, these disparate groups are similar in crucial respects.

First, they are confrontational, each with respect to the other and often among themselves. Balmaceda "lost the support of important groups and eventually his congressional majority through his vacillating and imperious behavior and their unwillingness to compromise." [63] Military intervention in 1924 limited President Arturo Alessandri's attempts at agrarian reform, after which a military president (Carlos Ibañez) dictated agrarian reform and modern labor laws in 1927. Allende's agrarian reforms of the 1970s were similar in one respect to those of the Roman tribune Tiberius Gracchus in the first century BCE. Each used unusual, albeit legal, methods to obtain his ends, which alienated potential supporters. [64]

Hirschman argues that the chronic inflation afflicting Chile from the 1890s up to his time of writing in 1963 was caused by the inability of groups to agree on a financial policy of benefit to all. [65] The splits within the left during the Allende period resembled Irigoyen's intransigence in Argentina. Seemingly minor differences exploded, as when the ruling coalition was rent in two because Allende and his agricultural minister could not agree on whether to expropriate smaller farms. Diehl suggested that Pinochet's government could last for so long because opponents could not agree on a replacement. [66]

Second, despite the rhetoric of the left, neither group has endowed the dispossessed with any real political power. Presidents Balmaceda, Aguirre Cerda (1938), Ríos (1972), and Allende were all members of the upper classes "assisting the poor" without allocating any important government posts or decision-making functions to them.

Third, each group has violated law. Balmaceda unconstitutionally extended existing laws when Congress refused to pass election laws in 1891. [67] Jacques Chonchól, the agricultural minister, illegally occupied small farms during the Allende period (1970-73). Pinochet set aside the law with his human-rights abuses. Retaining power over the military after ceding the administration to Patricio Aylwin, he protected his soldiers: "If anyone touches any of my men, the state of law is over." [68]

The Pinochet administration demonstrated, decisively, that the free market in goods and services is associated with economic growth. But this book is concerned with durable economic development, not momentary growth. With Chile's divisions, confrontations, and communication gaps, one cannot be sanguine over the longevity of Pinochet's or Aylwin's achievements.


The seven countries studied in this chapter and the preceding one carry certain similarities, which can be found in other Latin American countries as well.

First, they continue the Iberian heritage. The land abundance of the Christian Reconquest in Iberia was replicated in Latin America, and the communication gap with the Moors was translated into one with American Indians. A sectioned society — probably more prevalent in Guatemala and Nicaragua than in the other countries — is an extreme example of this condition, and a dual society somewhat less extreme.

Second, they are all elite managed, with a sharp distinction between ruler and ruled. The latter participate in the political process only as a protesting opposition or boisterous cheering section.

Third, institutions of economic transactions — law, commercial system, money system, parliamentary democracy — were imposed by the elite and may be violated at the convenience of the elite. Break-the-system is a common practice.

Fourth, except possibly in Mexico, violence and military overthrow are viewed as a legitimate means to resolve conflict. In each other country, the military stands ready to assume power when civil authority fails. But the military's record of incompetence in economics does not augur well for a stable, prosperous society when it is in power.

Fifth, each country shifts back and forth between free markets and centrally imposed, economy-distorting regulations. Any one shift, such as toward liberalism in Salinas's Mexico or Pinochet's Chile, should not be taken as a new historical era, in view of other times and places where liberalism was imposed from above — such as by Nobunaga, Hideyoshi, and Tokugawa Ieyasu in Japan or by Houphouët-Boigny in Ivory Coast — and what happened to them. Colombia in the 1960s ("showcase" of the United States foreign aid program) is an example from Latin America, not covered in this book. Consider also the decades-long economic growth under liberalism in Guatemala, Peru, and Chile, and how in each country it was interrupted.

None of the societies considered in these two chapters is interlocking; none supplies the milieu for interorganizational trust and stable, intergroup cooperation. Therefore, entrepreneurial impulses are not easily translated into durable economic development. Instead, one must expect sporadic, discontinuous growth for the indefinite future.


  1. Powelson 1988:234-39.
  2. Randall 1977:4:27, 29.
  3. Randall 1977:4:70. For definition of chronic growth, see Chapter 1.
  4. Randall 1977:4:137.
  5. Randall 1977:4:62. For income distribution, 1963-73, see Webb 1977.
  6. Cotler 1975:74.
  7. Fitzgerald 1976:34; Knight 1975:350-401; Inter-American Development Bank, Economic and Social Progress in Latin America, various years, for example 1974:400.
  8. Powelson and Stock 1990: Chapter 14.
  9. Dietz 1980:175.
  10. Powelson and Stock 1990:279.
  11. De Soto's work comes in two volumes, one intended to present the findings to a wide audience, and the other a scholarly report, with data, of the research results. These are listed in the bibliography as de Soto 1989a and de Soto 1989b, respectively.
  12. de Soto 1988:5.
  13. de Soto 1989a:134.
  14. I described the organizations of one such system in a land invasion in Colombia, where I interviewed the invaders (Powelson January 1964).
  15. Goodell 1986, 1990.
  16. Tun Wai 1976, 1977.
  17. Dietz and Moore 1979.
  18. Dietz and Moore 1979.
  19. All data in this paragraph are from International Monetary Fund, International Financial Statistics Yearbook, 1990:582-83 and March 1992:426-29.
  20. Kamm, Thomas, "Fujimori Shuts Down Peru's Congress, Risks Isolation, Deepening Social Chaos," Wall Street Journal, 4/7/92.
  21. Moffett, Matt, "Peru's Progress: Fujimori has Tamed Terrorism and Inflation but Means Still Rankle," Wall Street Journal, 2/22/94.
  22. Ajayi and Crowder 1976:311.
  23. Marques 1972:365.
  24. Powelson 1988:247.
  25. Marques 1972:367.
  26. Randall 1977:3:65.
  27. Randall 1977:3:32.
  28. Randall 1977:3:68.
  29. Cehelsky 1979:120.
  30. The main authors of these theories are Sunkel 1958 and Pinto 1960,1973. An explanation in English is found in Grunwald 1961. My own critique of structural inflation, a negative one, is found in Powelson 1964:176-80 and in Loehr and Powelson 1981:330-33.
  31. Kilborn, Peter, "Brazil's Economic 'Miracle' and Its Collapse," New York Times, 11/26/83.
  32. Hoge, Warren, "Brazil's Economy — After the Miracle," New York Times, 7/17/83.
  33. Data in this paragraph are from International Monetary Fund, International Financial Statistics Yearbook, 1990:250-51 and March 1992:134-37.
  34. Banks et al. 1990:79.
  35. Lewis, Flora, "Argentina Cries for Itself," New York Times, 5/15/90.
  36. Smithies 1965:17; Dyster 1979:91.
  37. Powelson 1988:240-46.
  38. Snow 1965:6, who cites Matienzo 1917:214.
  39. Snow 1965:5.
  40. Snow 1965:22.
  41. Article I, Section 26, cited in Snow 1965:22.
  42. Snow 1965:17.
  43. Snow 1965:20.
  44. Imaz 1964, esp. Chapter 12.
  45. Schumacher, Edward, "Argentina's Chief Banker is Held; Pressure Grows to Renounce Debt," New York Times, 10/4/83.
  46. As estimated by a government commission in 1984. See Chavez, Linda, "Argentina Detailing Army's Dirty War," New York Times, 9/21/84.
  47. The most vocal of the victims was journalist Jacobo Timerman, who wrote several articles, such as "Return to Argentina," New York Times Magazine, 3/11/84, and at least one book, Prisoner without a Name, Cell without a Number (1981) about his captivity in the "dirty war." See also Dionne, E.J., Jr., "Timerman Hoping to Identify his Torturers," New York Times, 12/13/83, and Schumacher, Edward, 3 articles in New York Times: "In Argentina: Mothers of the Missing Vow They Won't Give Up," 12/31/83; "Argentine Torture: One Who Looked On," 1/28/84; and "Timerman Visits 'Cell without a Number' in Argentine Suburb," 1/20/84.
  48. Christian, Shirley, "Visit by Alfonsín Peacefully Ends Argentine Mutiny," New York Times, 4/20/87; Cohen, Roger, "Argentina Chief's Halt to Army Trials is Risk Taken to Curb Discord," Wall Street Journal, 5/19/87; and Christian, Shirley, "Argentina Moving to Limit Human-Rights Trials," New York Times, 5/30/87.
  49. New York Times, 8/13/87.
  50. Editorial, New York Times, 5/31/89.
  51. Priest, George L., "Will Argentina Simply Replace One Monopoly with Another?" Wall Street Journal, 9/22/89.
  52. Solo, Tova Maria, "Argentina Tries Cosmetic Surgery on a Sagging Economy," Wall Street Journal, 8/31/90.
  53. Truell, Peter, "Argentina Tries to End Subsidies to Industries that Drain the Nation," Wall Street Journal, 5/31/88.
  54. Christian, Shirley, "Bluntly Put: It's Graft: U.S. Envoy Speaks Out," New York Times, 1/16/91.
  55. Schumacher, Edward, "Argentina Bypassing I.M.F. Staff," New York Times, 6/11/84; Farnsworth, Clyde H., "I.M.F. Seen Unlikely to Accept Plan" and Schumacher, Edward, "Defying I.M.F., Argentina Sets Austerity Plan," both in New York Times, 6/11/84.
  56. Cohen, Roger, "After a Long Decline, Argentina is Striving to Revive Economy," Wall Street Journal, 11/12/86.
  57. Cohen, Roger, "All Latins Should Try Chile's Homemade Growth Recipe," Wall Street Journal, 9/30/88; Christian, Shirley, "Chile's Privatization Pleases Investors," New York Times, 7/20/87.
  58. Only once during this period did the economy falter: in 1979-81 when the peso was tied to the dollar, becoming so overvalued that investment and employment fell. The error was corrected in 1982, and growth resumed. See Schumacher, Edward, "Economic Ills Shake Chilean Regime," New York Times, 12/8/82, and Schwank, Lucy, "Unintended Lessons from the 'Chicago Boys,'" Wall Street Journal, 12/23/83.
  59. Graham in Washington Post Weekly, 2/22/88.
  60. Cohen, Roger, "All Latins Should Try Chile's Homemade Growth Recipe," Wall Street Journal, 9/30/88.
  61. Gressel, Daniel, "Chile's Successful Transition to Democracy," Wall Street Journal, 12/29/89.
  62. Kirsch 1977.
  63. Blakemore 1974:60.
  64. Unable to persuade Congress to pass a new agrarian reform law to create state farms, Allende stretched the existing law, making several dubious interpretations. Gracchus misused his position as tribune to promulgate new land laws without senatorial approval.
  65. Hirschman 1963:209.
  66. Diehl, Jackson, "In Chile, Too Much Democracy is Perpetuating the Dictatorship," Washington Post Weekly, 10/5/84.
  67. Blakemore 1974:60.
  68. Orsinger, Christopher, "In Chile, a Stillborn Democracy?" New York Times, 3/11/90.

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