From The Economic Development of Latin America.
Raúl Prebisch, 1950. Translated by ECLA.
It is obvious that the economic growth of Latin America depends on the increase of the average income per inhabitant (which in most countries is extremely low) and on an increase in population.
An increase in the average income per inhabitant could be achieved in only two ways: first, through an increase in productivity; and second, assuming a certain level of productivity, through an increase in income per man engaged in primary production, in relation to the income of the industrial countries which import part of that production. This readjustment, as already explained, tends to correct the disparity in income brought about by the way in which the benefits of technical progress are distributed between the centres and the periphery. We shall now consider the increase in productivity in relation to the existing population. There are two aspects of the question.
On the one hand, the adoption of modern technique will allow production per man to increase, making labour available to increase production in the same activities in which it was already employed, or directing it to others. On the other, the index of productivity will also be raised by the diversion of persons ill-employed in activities where the very low productivity cannot be increased to any notable extent, to others where technical progress makes such improvement possible.
Agriculture offers a typical example of the influence of technical progress. In some of its important branches, technical development has made possible a steady increase in production with a proportionally lower increase in employment. In other words, agriculture absorbs a decreasing proportion of the increase in the population of working age, with the result that industry and other activities have been able to increase their employment more. This is not a case of diverting, to other work, people already employed, but of offering a different form of employment to people reaching working age. There have, however, been instances in which the rapid growth of industry during recent years has brought about an actual transference of workers, with unfavourable consequences for agriculture.
Furthermore, the increase in foreign demand for agricultural products after the great depression was, in general, relatively slow, by comparison with the rate in previous years. Taking this fact in conjunction with the consequences mentioned above, it would be difficult to say what productive activities, other than industry, could have absorbed the increase in population of the Latin-American countries which export such products.
It is quite possible that technical progress in other activities will bring consequences similar to those just pointed out. That, too, will mean an important source of man-power for industrial development.
This is not the only possible source. The low-level of productivity in industry itself represents a wastage of man-power which, given the proper use of modern technique, can be employed to great general advantage in expanding existing industries or in developing new ones.
Finally, there is another possibility which the recent experience of some countries has shown to be worthy of consideration. The low-income level prevailing among the masses has made it possible for the higher income groups to enjoy hand-made goods and certain types of personal services at comparatively low prices. This is due to what we have termed ill-employed man-power. As productivity in industry increases and real income, per capita, rises, there is a natural tendency for the ill-employed to move towards industry. However disturbing this trend may be to some sectors of society, it is the usual way in which the benefits of technical progress are passed on to all social groups within a country, as the experience of the great industrial countries has shown. The solution does not lie wholly in an increase in productivity, however. The social aim of industrialization might well be jeopardized if too large a part of the increase were to be devoted to increasing consumption or to a premature slackening of productive effort.
It has been emphasized that, to achieve this increase in productivity, capital, per capita, must be considerably increased and the technique for its effective use acquired. The need is progressive. In fact, a general increase in wages resulting from greater productivity in industry gradually spreads to other activities, which are thereby obliged to use more capital, per capita, in order to achieve the increase in productivity without which they would be unable to pay higher wages. Thus many activities in which human labour is now more profitable, because it is cheaper, will tend to become mechanized; the same will happen to a certain degree in household economy.
It is not possible to estimate, even approximately, the extent of these potential capital requirements and thus of the resources that will be needed to satisfy them, since even present capital, per capita, employed in the principal Latin-American countries cannot be determined with any satisfactory degree of accuracy. However, to judge from the needs which have already arisen during the initial stage of the industrialization process, the resources made available by exports—at least by dollar exports—do not appear adequate to meet those requirements after other imports and foreign payments have been met.
As already explained, the possibility must be faced that a reduction in the import coefficient may be necessary. This may apply to either the general coefficient or the dollar coefficient and may be brought about by decreasing or eliminating non-essential goods, in order to allow increased imports of capital goods. A change in the composition of imports would in any case appear essential to the development of industrialization.
It should be clearly understood what this means. It is merely the adaptation of imports to the resources made available by exports. If the latter were to rise sufficiently, it would not be necessary to restrict imports, except as a further means of intensifying industrialization. Exports from Latin America, however, are largely dependent on fluctuations in income in the United States and Europe and on their respective import coefficients for Latin-American products. Consequently they cannot be controlled directly by Latin America, and the situation can be changed only by the decision of the other countries.
It would be a different matter if Latin America intended to carry industrialization to the point of directing certain factors away from primary production to industry in order to increase the output of the latter to the detriment of the former: in other words, if Latin America, being in a position to maintain exports and imports at a specified level, were deliberately to lower it, sacrificing part of its exports in order to increase industrial production as a substitute for imports.
Would there in that case be an increase in productivity? At this point the question would be defined in classical terms. It would be a matter of discovering whether the increase in industrial production brought about by the factors diverted from primary production was or was not greater than the amount of goods formerly obtained in exchange for the exports. Only if it were greater, could it be said that there was an increase in productivity, from the standpoint of the community; if it were not, there would be a loss of real income.
This then is one of the most important limits of industrialization, one of a dynamic nature which might become less restrictive as the economy developed but which should be constantly borne in mind, however, if the primary objective is to increase the real welfare of the masses. There is no sign that Latin America is approaching this limit. It is in the initial stage of the industrialization process and in most cases the man-power available as a result of increased productivity is still amply sufficient for industrial growth. Moreover, it does not seem that the countries in which this process of industrialization has reached a more advanced stage have yet been driven to choose between an actual increase in exports and industrial development.
Nevertheless, exports can be sacrificed to an illusory increase in real income long before the possibilities of intensifying productivity or of utilizing all the man-power available have been exhausted.
An increase in productivity requires a considerable increase in capital, and before this can be achieved, a long time will elapse and new techniques will appear which may call for further increases in capital, in addition to that necessitated by the growth of population. At the same time, savings are scarce. It is necessary, therefore, to use them in such a way as to obtain the maximum increase in output. However, a mistaken policy could cause deficient use of these savings, as can be easily demonstrated.
It has been said that technical progress in agriculture and the comparatively slow foreign demand for its products have, in many cases, allowed industry to absorb a larger part of the increase in population of working age than agriculture. Let us assume that year after year this increase in hands is required in agriculture in order to meet rising foreign demands in addition to the increase in domestic consumption, but that, as a result of various measures, industrial development is expanded to such an extent that agriculture is deprived of the hands it needs in order to continue increasing exports.
The reasons why the substitution of industrial production for exports may represent a loss of real income have already been explained. There would, however, be also another loss. Land is a very valuable factor of production, which costs nothing. By comparison with industry, the amount of capital that must be added to it is relatively small. Consequently, the men who could have worked efficiently in agriculture occasion a demand for more capital when employed in industry. That increased capital could, however, have been put to more productive use if, instead of being diluted in the total annual increase in population, it had been confined to a part of that increase: the higher capital per man would have resulted in greater productivity. Hence, the dilution of capital would not have allowed the increase in productivity that otherwise might have been obtained. Thus to the direct loss would be added another, which, although less tangible, would be nonetheless real.
Furthermore, if productivity did not increase, there would be less incentive for ill-employed persons to go into industry, with the result that, instead of man-power being used to the best advantage, it would be disadvantageous^ diverted away from highly productive occupations. This is not a remote possibility, but a danger to which Latin America is continually exposed and into which it may sometimes have fallen for lack of economic development programmes with specific aims and clearly defined means to achieve them. Capital is scarce and it would indeed be deplorable to invest it where it would lessen total productivity rather than where it could increase it.
It should therefore not be forgotten that the greater the exports from Latin America the greater may be the rate of its economic development. We should not, however, lose sight of the possibility that a recrudescence of protectionist policy in countries that import from Latin America might lead to the replacement of those imports with goods produced locally.
Such a turn of events would be highly regrettable, but should it occur, the only solution would appear to lie in limiting the growth of imports or even reducing them in absolute terms, in order to adjust them to exports. In such a contingency, the increase in real per capita income would be less than it might have been, and it is conceivable that it might decline if the phenomenon became acute.
In this connexion it is necessary to take into consideration one elementary fact. Europe has lost a large part of its investments in other parts of the world and, from the point of view of the availability of dollars, cannot be expected, even when the process of reconstruction is complete, to be in a position to supply dollars to Latin America. On the contrary, it will need to take great care to balance its own trade. Consequently, even if one individual country were able for a time to reduce its imports to Europe without perceptible loss in its exports to that area, it is obvious that Latin America as a whole could not do so.
In discussing the increase in capital, per capita, we have implicitly assumed that industrial establishments would be able to attain a satisfactory size, for which a minimum of production is required. What is this size in the Latin-American countries? The variety of conditions obtaining in the different countries makes it difficult to generalize in this case, as in others. Moreover, no systematic study of productivity and its relation to the optimum size of the establishment and the industry has yet been made in these countries. Depressive examples are quoted, however, of the sub-division of industry into an excessive number of inefficient undertakings within one country or of the multiplication of comparatively small enterprises in countries which, by combining their markets for a number of products, could reach a higher degree of productivity. The present division of markets, with its consequent inefficiency, constitutes another limitation of industrial growth, in this case one which could be overcome by the combined efforts of countries which, by reason of their geographical position and economic features, would be able to undertake it to their general advantage.
It was pointed out at the beginning of this section that there are two ways of increasing real income. One is through an increase in productivity and the other through a readjustment of income from primary production so as to lessen the disparity between it and income of the great industrial countries.
The second result can be achieved only in so far as the first is accomplished. As productivity and the average real income from industry increase in the Latin-American countries, wages in agriculture and primary production in general will have to rise, as they have in other countries.
The effect will be gradual and if there is not some relationship between all the respective increases in average income of the principal countries exporting primary products, unavoidable difficulties may arise in readjustments of the kind just mentioned, whether they be internal or international.
The possibility of gaining ground in this sphere depends also on the ability of Latin America to maintain the prices of primary products in the cyclical down-swing, the point at which it has frequently lost all or a part of the share of the benefits of technical progress that the periphery usually receives in the upswing. There is room here for international economic co-operation.