Economy of Latin America: Dependency Theory and Debt Crises

Introduction: Latin America in the Global Economy

The economic situation of any specific geographic and geopolitical area is an integral part of the overall picture of that area. Although much is said about the increasing globalization of the world economy — that, essentially, the individual market areas of specific countries and regions are moving toward a single world economy — there remain significant economic trends and pressures within varied geopolitical areas that are quite unique. Indeed, although a so-called "new economy" may be emerging in which all nations are directly interconnected, that does not mean that all will be equal. Instead, it seems that some nations (at least for a time) will remain squarely at the top, while those countries already at the bottom will stay there as a result of their "top-down" dependence. The economic situation of Latin America is one such case.

Latin America is a geographic area generally described as comprising all of the countries south of the United States border. This geopolitical area is incredibly diverse culturally, linguistically, and politically. Yet, despite this diversity, the region holds significant interlocking similarities in its micro and macroeconomic landscapes. No discussion of the economic situation of Latin America can begin without referencing the tremendous influence that the powerhouse economies of the United States and Europe have held over the region as a whole. Indeed, many would assert that Latin America has not only been influenced by the economic policies of the so-called "First World" nations, but has been largely subordinated to the interests and wills of those countries. According to Skidmore and Smith in their work Modern Latin America:

"Latin America has occupied an essentially subordinate or dependent position, pursuing economic paths that have been largely shaped by the industrial powers of Europe and the United States. These economic developments have brought about transitions in the social order and class structure, and these changes in turn have crucially affected political change." (42)

Colonial Roots and the Dependency Theory

Although, on the surface, the influence of Europe and the United States on the Latin American economy could be seen as a positive force — perhaps encouraging more democratic and progressive political systems — it can actually have the very opposite effect. The Latin American economy can instead be viewed as dependent on the state and demands of the First World markets, a condition characterized by the dependency theory — an economic framework usually credited as emerging from the legacy of colonialism.

Although the problems of dependency may appear to be socially based — stemming from class and social stratification produced by racial power imbalances rooted in colonial influences — and to arise from the policy decisions of the early power brokers of newly independent nations, they actually exert a profound influence on the economic development and current economies of the region. As Latin America entered its development period following the end of colonialism, an era focused on creating a balance of import and export activity, most of the benefit from the emerging economies of the various countries would flow to a relative few. This dynamic resulted in future political destabilization, setting the stage for the region's enduring dependence on foreign nations.

Attempts by countries to exploit their natural resources often created a need for outside — foreign, First World — investment, which naturally served to economically "colonize" those countries dependent upon investors. For example, during the Industrial Revolution, British investment in Latin America grew from "85 million pounds sterling [in 1870] to 757 million pounds in 1913 — an increase of almost ninefold in four decades." The two World Wars that followed would catalyze economic development further, yet again in a form marked by even greater dependency.

Industrialization, Import Substitution, and Globalization

The reason that increasing dependency is so significant is that this extreme economic reliance on outside investment set the tone for the coming volatility of economic reality within Latin America. The region's inherent position — established through this dependence — as a producer of raw goods left it a collective entity exposed to the shifting winds of external political and economic influence. As a result, many individual countries within the region began to shift toward a new economic model known as "primary product import substitution," characterized by the development of internal, national industries.

The creation of real industry capable of producing finished products could help shield individual nations from external economic shocks, while also resulting in greater self-sufficiency with regard to their needs for finished goods and less dependence on their importation at prices set by dominant markets. Unfortunately, however, emerging trends of globalization began to undercut Latin American efforts toward self-sufficiency. As post-war economies — especially in Asia — began to compete for market demand in finished goods, Latin America was increasingly unable to compete. This created a vicious circle: decreased demand for Latin American goods led to increased unemployment due to reduced production, which produced higher political instability, which in turn drove an increased dependence on outside investment and loans.

Again, according to Skidmore and Smith, "Over time, the world market prices of Latin America's principal exports underwent a steady decline in purchasing power." The consequence was that Latin America would be drawn into the next phase of its economic development — beyond mere dependence to virtual indentured servitude in the form of massive debt and foreign corporate exploitation. Here began the dark side of globalism — also experienced by other world regions, and a primary reason so many oppose the trend — which emerged in force in the 1970s.

Conclusion: Breaking the Cycle of Dependence

The terrible thing about all of these examples — from Brazil to Argentina — is that this trend of almost inescapable dependence is pervasive throughout the whole of the Latin American economy. It is not limited to one or two countries. Moreover, the real tragedy is that the human cost of the economic ravages of dependence is tangible and severe. Poverty grows among the majority, education suffers, unemployment rises, inflation climbs, and governments destabilize — all of which produce real global problems: illegal immigration, political unrest, loan default, and the exportation of jobs to desperate workers in these suffering countries.

The great difficulty with a dependence-based economy is the extreme difficulty — many would say impossibility — of breaking free from the pattern. Many argue that once the pattern is established, it persists regardless of efforts to the contrary, as Brazil's experience illustrates. This is fundamentally because populations naturally resist suffering and will push for governments that relieve them of the overwhelming hardship that genuine independence after years of dependence would require. If a population can get a leader who reduces suffering through loans — and if the IMF and other investors are willing to extend them — then they will. If, in the long term, those who offer the loans require the same types of painful measures that the population was already suffering from, then the result is a situation like Argentina's.

Under such circumstances, free trade, globalization, and free trade associations naturally become the target of criticism from those on the short end of the economic stick. Yet one must ask: what is the alternative? Is there any solution that can genuinely break the cycle of dependence in the Latin American economy? Many economists would say no. Perhaps, if considerations of morality and the shared humanity of all peoples were introduced into the equation, there might be some effect. However, all nations in the global economy would still have to agree on what constitutes an acceptable bottom line — and unfortunately, as long as that bottom line carries a dollar sign, there is not much hope at all.