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# Capitalism-and-Its-Critics-A-History-From-the

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Prebisch’s report certainly attracted interest. It was quickly hailed as a manifesto for Latin American countries to challenge the center-periphery economic model by protecting and building up their own industries. In 1950 Prebisch became the executive secretary of ECLA, where he gathered around him a talented team of economists from across the region. The “Cepalistas,” as they came to be known, advocated tariffs on imported consumer goods and government support for domestic industries—a policy that came to be known as “import substituting industrialization,” or ISI. The Cepalistas’ goal wasn’t state socialism or autarky: they believed that countries in the periphery should continue to engage with global capitalism. But they wanted to reshape this engagement to the benefit of developing countries. Prebisch, echoing Eric Williams, also advocated regional cooperation as a way of leveling the playing field with advanced countries. He and his colleagues called for the establishment of a regional free trade area with external trade barriers—a Latin counterpart to the European Economic Community, which was created in 1957. “Preferential treatment is needed inside the area to promote specialization in industrial products and primary commodities,” Prebisch wrote in a 1959 article. “Latin America needs preferences to develop new forms of reciprocal trade, mainly in industrial products, that practically did not exist before.”11

Although some of ECLA’s critics portrayed it as radical, it was in large part advocating the same development strategy that the United States and Germany had successfully adopted in the nineteenth century, when they created unified domestic markets surrounded by tariff walls. By the 1950s, though, the United States, as the world’s most productive economy, was filling the role previously occupied by Britain and promoting free trade. In this environment, Prebisch stood out as a dissenting voice. Shortly after he took over ECLA, the United States sought to merge the commission with the Organization of American States, a multilateral entity that it dominated. With the support of Latin American governments, Prebisch managed to head off the merger proposal. US efforts to undermine ECLA continued through the activities of the International Monetary Fund, which was strongly opposed to tariffs and government interventionism. Prebisch later recalled a former managing director of the IMF, the French businessman Pierre-Paul Schweitzer, saying to him: “You know Raúl, when I joined the Fund you were presented to me as the Devil.”12

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Despite US protestations, ECLA’s arguments proved popular across Latin America. Nationalist sentiment fused with the self-interest of native capitalists to create a strong coalition of support for government-led ISI. By the 1960s, Mexico was imposing tariffs of 74 percent on imported manufactured goods; in Argentina, the tariffs were 84 percent; in Brazil, they were 184 percent.13 To support domestic manufacturing, Latin governments also provided subsidized loans and kept their exchange rates high, which made it cheaper to import machinery and other capital goods. These protectionist policies had a big impact. By the early 1960s, according to one account, plants located in Brazil “were supplying 99 percent of the country’s consumer goods, 91 percent of its intermediate inputs (such as steel and chemicals), and 87 percent of its capital goods (machinery and equipment).”14 Many Latin American countries also followed the example of Cárdenas’s Mexico by nationalizing key utilities, including electricity grids, railroads, ports, and telecommunications. Some governments also established or took over industrial concerns that were considered strategic, including energy producers, chemicals manufacturers, and steel mills. In Brazil, for example, Vargas’s wartime regime established a national steel company, and during his second stint as president, in the 1950s, the government created Petrobras, the national oil company, and granted it a monopoly on production.

In terms of GDP growth, the results of ISI were pretty impressive. Between 1950 and 1973, according to Angus Maddison’s estimates, GDP per capita across Latin America rose at an annual rate of 2.5 percent.15 While this performance didn’t match the quantum leap in Japan and western Europe, it was a big step up compared to the prior half-century, and it came at a time when Latin America’s population was growing rapidly. (Between 1950 and 1973, it rose from 165.8 million to 308.4 million.)16 Economic growth was particularly rapid in Brazil and Mexico, where GDP per capita more than doubled during the period.17 Mexico’s growth spurt became known as the Mexican Miracle.

The fruits of more rapid growth were spread very unevenly, however. Economic development was concentrated in the cities, where industry was located, and many rural areas remained chronically poor. Even in the cities, income gains tended to be concentrated in a few capital-intensive industries that had relatively highly paid workers. Outside this sector, masses of poor people lived at or below subsistence levels. At the top of the heap, meanwhile, the new industrialists joined the old agricultural oligarchy in a closeted property-owning elite. In short, ISI didn’t resolve Latin America’s most acute problem: its entrenched inequality and rigid class divisions, many of which had a racial component. Between 1950 and 1970, according to estimates from the Chilean economist André Hofman, the average Gini coefficient (a widely used measure of income inequality) for six big Latin countries, including Argentina, Brazil, and Mexico, rose slightly.18

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ISI brought with it other challenges, including high prices and rising joblessness. Since Latin American manufacturers were protected from foreign competition, they could charge high prices for goods that weren’t necessarily of high quality. Over time continually rising prices—inflation— also became a problem. Furthermore, although the industrial sector was growing rapidly in countries pursuing ISI, it still wasn’t creating enough jobs to keep up with population growth. Between 1945 and 1960, according to one estimate, industrial employment across the region rose by 2.8 percent each year, whereas the urban population grew at a rate of 4.3 percent.19 In many Latin American cities, urban poverty became increasingly acute. Yet another endemic issue with ISI was rising trade imbalances. The expanding industrial sector imported raw materials, fuels, and industrial components, but it didn’t export many of its products. This left countries vulnerable to currency crises when they couldn’t generate sufficient foreign exchange reserves to pay for essential imports. “It is thus ironic that the net result of ISI has been to place Latin American countries in a new and more dangerous dependency relationship with the more advanced industrial countries than ever before,” Werner Baer, an economist who was then at Vanderbilt University, wrote in a 1972 article about the unsteady progress of Prebisch’s agenda.20

★ ★ ★

Prebisch himself came to agree with some of the criticisms of the ISI strategy. Until the early 1960s, he recounted years later, he “had not paid sufficient attention to the problem of income disparities, except in the case of the outdated land tenure system. Nor had I paid enough attention in the early CEPAL years to the fact that growth had not benefited large masses of the low-income population, while at the other extreme of the social structure high incomes flourished.”21 On the left, critics had focused heavily on these phenomena, which they attributed to the fact that ISI hadn’t gone nearly far enough in breaking Latin America’s ties with an international capitalist system that ensured its dependent status. This critique became known as dependency theory. Broadly speaking, its exponents came in two varieties: structuralist and neo-Marxist.22 Close up, the boundaries between the two groups blurred. The fundamental divide between them was over whether it was possible for peripheral economies to make significant economic progress within the existing global system. The structuralists believed in the possibility of reform and progress. The neo-Marxists didn’t.

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The structuralist strain of dependency theory can be traced to Celso Furtado, a Brazilian economic historian who headed ECLA’s development division from 1950 to 1957 but eventually broke with Prebisch. Furtado hailed from the poverty-stricken state of Paraíba in northeastern Brazil. As an undergraduate at the Federal University of Rio de Janeiro, he studied law, then he served in World War II with the Brazilian Expeditionary Force, which fought on the side of the Allies. When Hitler had been defeated, he enrolled in a doctoral program in economics at the Sorbonne, in Paris. In 1949, after completing a thesis on Brazil’s economy during the colonial period, he joined ECLA and rose to head its economic development division. Under Furtado’s leadership, the division emphasized how high levels of inequality and social exclusion were holding back economic development throughout Latin America. Across the continent, it pointed out, many people lived outside the formal economy; wages were too low to support aggregate demand; and rich people spent their wealth on conspicuous consumption rather than on productive capital investments. To remedy these failures, Furtado’s team called for extensive government interventions, including income subsidies for the poor and detailed economic planning. It also queried the usefulness of orthodox economic theory in dealing with complicated development issues rooted in history and class conflict. Inside ECLA, Furtado’s department became known as the Red Division.23

In the mid-1950s, relations between Furtado and Prebisch deteriorated. One source of tension inside ECLA was Prebisch’s willingness to act as economic adviser to the military junta that deposed Juan Perón, the populist

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Argentine leader, in 1955. Claiming that Argentina was “in the worst economic crisis of its history,”24 the regime issued a draconian economic austerity plan in Prebisch’s name. Even setting aside the issue of Prebisch lending his intellectual authority to a nondemocratic government, there were serious questions about the regime’s economic prognosis. “The cafés of Buenos Aires flourished as usual,” Edgar J. Dosman, Prebisch’s biographer, noted dryly. “Argentina’s per capita wealth was higher than that of Brazil, Mexico, or Chile, or for that matter of Japan, France, or Italy.”25 Furtado disagreed with the proposed spending cuts, and he later suggested that Prebisch might have been “too involved with his old group of friends in Argentina.”26 But the decisive break between the two came over an in-depth report on the Mexican economy that Furtado and his team produced, which argued that the country’s pursuit of ISI had accentuated inequality and monopolization. The Mexican government objected to publication of the report. After much back-and-forth, Prebisch agreed to suppress it, and Furtado resigned.

He moved to Cambridge, England, for the academic year 1957–58, where, building on his doctoral thesis, he wrote an economic history of Brazil from colonial times onward. In 1959, Furtado returned home at the invitation of the reformist President Juscelino Kubitschek, who appointed him to head a new development agency for his native northeastern region, which had heinously high rates of poverty and infant mortality. Furtado produced an ambitious five-year development plan that encompassed agriculture and industry, with the financing to come from the Brazilian government and overseas aid agencies. The blueprint earned him an invitation to Washington from the Kennedy administration, but it was never put into effect. In 1961 Furtado became minister of planning in the leftleaning government of João Goulart. Three years later, when Brazilian military leaders staged a coup with Washington’s support, he was forced into exile.

Throughout his work, Furtado emphasized the enduring legacy of colonialism. In Development and Underdevelopment, a book published in English in 1964, he contrasted the process of industrialization in advanced countries, which he referred to as “autonomous,” with the industrialization efforts taking place in “dependent economies” in poorer regions, including Latin America.27 In western Europe, Furtado pointed out, the industrial revolution had developed organically in an environment where a shortage of labor and high wages gave capitalists an incentive to develop labor-saving technologies. With high levels of capital accumulation and rapid technical progress, rising productivity and wages eventually became self-reinforcing. Contemporary Latin American countries faced a very different set of circumstances, Furtado emphasized. They weren’t undeveloped areas, he said, but “underdeveloped” parts of a global system (colonialism) that had allotted them a subsidiary role as suppliers of primary products. “The study of underdevelopment must start with the identification of the structures created in the periphery of the capitalist economy by this system of international division of labour,” Furtado wrote in a different article. “To isolate an underdeveloped economy from the general context of the expanding capitalist system is to dismiss from the beginning the fundamental problem … of such an economy, namely the fact of its global dependence.”28

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This argument was similar to the one that Eric Williams had made in his articles and books on the Caribbean, and it also echoed Rosa Luxemburg’s point that colonial capitalism had been organized to benefit the colonialists, not the Indigenous peoples. Furtado identified one key colonial legacy as a rigid class system featuring a landed oligarchy, a small native bourgeoisie, and a sea of impoverished workers, rural and urban. Enduring tensions among these groups had hampered efforts to form governments that could promote broad-based development, he argued. Another colonial legacy that he pointed to was a lack of manufacturing expertise and technology, which meant that Latin countries had to import machinery and production techniques that weren’t necessarily suited to local circumstances. Echoing J. C. Kumarappa’s critique of the Congress Party’s economic policies in newly independent India, Furtado criticized Latin countries for focusing on building up capital-intensive industries, such as steel and autos, rather than labor-intensive industries, such as textiles, which would have provided more employment to the masses.

He also highlighted the paradox that ISI tended to concentrate capital and production in the hands of large foreign-owned firms, such as Ford and General Motors, which established local subsidiaries to work around the region’s protectionist policies. These multinationals maintained strict ownership of their technology and repatriated much of the profit that they generated, Furtado pointed out. They also extracted financial concessions from host governments, including favorable tax treatment and exemptions from import controls. Furtado regarded these developments as examples of US capitalism steadily exerting its hegemony throughout the developing world. By establishing foreign subsidiaries or taking over local firms, the big US multinationals could expand even in adverse economic conditions. “Thus the economic stagnation of Latin America has coincided with a great expansion of American firms which operate in that region,” Furtado wrote in a 1968 essay.29

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To promote more inclusive growth, Furtado called for restrictions on the activities of multinationals and measures that he had advocated for during his time at ECLA, including development programs for backward areas and economic planning at the national level. Some Latin countries sympathized with Furtado’s ideas, particularly the smaller ones, which couldn’t ignore their weakness in the face of international capital. The high point of the structuralist approach to development came in 1969, when five Latin countries—Bolivia, Chile, Colombia, Ecuador, and Peru—established the Andean Community, or Grupo Andino, an ambitious effort to promote intraregional trade and coordinate the growth of domestic industries, such as metalworking, autos, paper and pulp, and chemicals and fertilizers, behind a common tariff wall. In August 1972, Grupo Andino released its first industrial development plan, which was very detailed: for example, it assigned seventy-two product lines in the metalworking sector to different countries.30 To help finance public and private sector investment projects, the member countries also established a regional development bank, the Andean Development Corporation.

★ ★ ★

The avowedly Marxist wing of the dependency movement was skeptical of any efforts to develop Latin American economies within the confines of the global capitalist system. Inspired by the 1959 revolution in Cuba, in which Fidel Castro and his band of guerrillas overthrew the corrupt US-backed dictatorship of Fulgencio Batista, Latin leftists hailed Castro’s regime as a beachhead of socialism in the Americas. When the Kennedy administration sought to overthrow Castro in the abortive Bay of Pigs invasion of April

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1961, the US intervention confirmed to many of them that global capitalism was irredeemable. (Even before the Cuban Revolution, the CIA had covertly engineered the ouster of a democratically elected government in Guatemala, which had moved to expropriate large unused tracts of land, including some owned by the United Fruit Company, a US multinational corporation.)

One of those inspired by Castro’s Cuba was Andre Gunder Frank, a German-born economist who received an orthodox training in the United States before settling in Chile in 1964. In a letter he wrote in the summer of that year to his friends and former colleagues in the United States, Frank said he was reading some classic Marxist texts and had been told that he now reasoned like a Marxist dialectician. “Be that Marxism or not,” Frank wrote, “I myself recognize that both as a person and a scientist I view and analyze the social, economic, and political reality around me so differently from my liberal friends and erstwhile colleagues that we hardy seem to be living in the same world.”31 He added that he supported “the present Chinese position on major world problems and … the most militant black nationalists such as Malcolm X and Robert Williams on American domestic ones.” His goal, he said, was to develop the “science, policy, and politics” necessary for the liberation of the underdeveloped world: “This may involve, of course, fighting with more than a pen.”32

Frank was born in 1929 in Berlin. His father, Leonhard Frank, was a pacifist writer who left Germany after Hitler took power and ended up living in the United States, where, among other things, he worked on Hollywood movies. The younger Frank attended high school in Ann Arbor, Michigan, and then attended Swarthmore College. Interested in economics, he enrolled in the University of Chicago’s graduate program, where he took classes with Milton Friedman, who wasn’t nearly as famous then as he was to become. Frank’s doctoral thesis was a critical examination of Stalin’s collectivization of agriculture in Ukraine. After completing it, he got a job as an assistant professor at Michigan State University. In 1959 he spent some time at MIT’s Center for International Studies, where he met Walt Rostow, the economic historian and staunch Cold Warrior, who was working on his book Stages of Economic Growth: A Non-Communist Manifesto. Frank would later recall Rostow saying his life’s work was providing the world with a better alternative to Karl Marx.33 Frank was already starting to move in the opposite direction.

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Radicalized by the Cold War and the baleful effect it was having on the social sciences in the United States, he resigned his job at Michigan State and went traveling. In 1962 he journeyed through Mexico, Guatemala, Venezuela, Peru, and Chile. He wanted to move to Cuba and see the aftermath of the revolution, but that didn’t work out. In Santiago, he met a Chilean woman named Martha Fuentes, and the two quickly got married. At the start of 1963, they moved to Brazil, where Frank taught a class at the new University of Brasília. Latin America fascinated Frank. In a 1963 book review for Monthly Review, the New York–based journal coedited by Paul Sweezy, he took issue with the novelist Carlos Fuentes’s description of the region as a “decrepit feudal castle with a cardboard capitalist facade.” Latin America could “better be called a decrepit capitalist castle with a feudalseeming façade,” Frank wrote.34 “Latin American societies resulted from the worldwide expansion of ‘Western’ mercantilism, capitalism, and imperialism,” he went on, and the only way to understand them was as products of “the dialectic development of a single capitalist system.”35

As Frank moved on to expand this argument in other articles and individual country studies, he would freely acknowledge the influence of a fellow American leftist, Stanford’s Paul Baran, who in a 1957 book, The Political Economy of Growth, had argued that rich capitalist countries contrived, through a variety of methods, to prevent the independent development of poor countries. Baran had a cosmopolitan background. Born in 1909 in the Ukrainian city of Mykolaiv, which was then part of the Russian Empire, he received his PhD from the University of Berlin in 1933, shortly after Hitler took power. To escape the Nazis, he moved to France, Lithuania, and Russia, before immigrating to the United States at the start of World War II. After enrolling in the graduate economics program at Harvard, he befriended Sweezy, who was then working on his 1942 book, The Theory of Capitalist Development. When the United States entered the war, Baran worked at the Office of Price Administration and the Office of Strategic Services, the forerunner of the CIA, which employed many European intellectuals. Once the war was over, he got a job at the Federal Reserve Bank of New York. But he wanted to be an academic, and in 1949, Stanford hired him.

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In 1952, Baron published an article in a British economics journal, The Manchester School, which examined why so many colonies and former colonies remained poor despite being integrated into the capitalist system. In his articles on India, Marx had described colonialism as a battering ram that would break down feudal traditions and stimulate economic development. The reality, Baran argued, was that the “superimposition of business mores over ancient oppression by landed gentries resulted in compounded exploitation, more outrageous corruption, and more glaring injustice.”36 The key to this development, Baran said, was that in many developing countries the members of the middle class, small business owners and professionals, had joined “into an alliance with the aristocratic and monopolistic reaction”—big landowners and big business—and set up governments that existed primarily to “safeguard and to abet the existing property rights and privileges.” In this manner, the native bourgeoisie in the periphery had failed to carry out the historic task that Marx and Engels had allotted to it: maximizing the pace of capitalist development. The only way to promote genuine social and economic development in these places, Baran argued, was to rupture the “alliance between feudal landlords, industrial royalists, and the capitalist middle classes.” If the bourgeoisie failed to “rise to its responsibilities,” he remarked, then the “backward countries of the world will inevitably turn to economic planning and social collectivism.”37

Baran expanded these arguments in The Political Economy of Growth. He also introduced a new economic concept, the “potential economic surplus,” which he defined as the difference between an economy’s maximum level of output, given its technology and natural resources, and the minimum level of consumption its citizens needed to survive and reproduce. The essence of colonialism, Baran argued, was extracting some of this surplus from poor countries and transferring it to the capitalist core.

As an example of extractive colonialism, Baran pointed to the British in India. Citing authorities as varied as Thomas Macaulay and the Indian historian Romesh Dutt, he said that British rule under the East India Company had “systematically destroyed all the fibres and foundations of Indian society,” including its village economies and its artisan cotton spinners, while “creating new classes and vested interests who were tied up with that rule and whose privileges depended on its continuance,” such as client princes, landowners, and tax collectors.38 Baran contrasted India with Japan, where the Meiji Restoration “succeeded in creating the political and economic framework indispensable for capitalist development,” including a centralized state that protected property rights, invested in public infrastructure, and provided credit and contracts to Indigenous capitalists.39 The modernization of Japan was a complex process, Baran conceded, but it was also “simple” because “reduced to its core, it comes down to the fact that Japan is the only country in Asia (and in Africa and in Latin America) that escaped being turned into a colony or dependency of Western European or American capitalism, that had a chance of independent national development.”40

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