DP7808 Institutions and the Historical Roots of Latin American Divergence
In this essay we analyze the relation between long-term growth and institutional development. Relative backwardness has been a constant feature of the history of Latin America. In the wake of Independence the gap between Latin America and the industrializing world was already wide and widened during the first decades after Independence. While Latin America resumed growth after the 1870s, the absolute gap continued to grow, as it did in 1913-1950 in spite of relatively good growth rates. In the last decades of the 20th century, the Latin American economies diverged even more from those of the West.
We argue in favor of the Neo-institutionalist approach to Latin American economic history in the sense that the colonial institutional setting had a long-lasting impact on Latin American development. We criticize Neo-institutionalist writings for being excessively focused on original colonial institutions and their lasting effects, and for neglecting to some extent how these institutions changed in relation to a profound transformation in international relations and technological environments, as symbolized by the Industrial Revolution. While Neo-Institutionalist propositions on Latin America are not really new, they are sometimes less nuanced than previous contributions to the topic
We also argue that many reactions against Neo Institutionalist approaches seem to be exaggerated, proposing artificial breaks in the historical process. Inequality was at a high level by the end of the colonial times. The kind of social and power relations underlying economic life and the distributional and technological dynamics they involved, before and during the First Globalization boom, could hardly be considered good for growth. By then the world economy had gone through not one but two industrial revolutions. International trade was increasingly moving towards skill-intensive products, inequality gave rise to serious shortcomings in terms of human capital accumulation, and the pattern of specialization reinforced a path of slow rates of technical change and social relations not particularly conducive to technical change. The colonial heritage mattered but was reshaped in more informal ways in interaction with domestic institutional developments.