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By Brazzil Magazine
In the United States, real per capita income grew at a long-term rate of approximately
1.5 percent per year in the nineteenth century. Long-term growth at that annual rate for a
period of 91 years (the time interval between 1822 and 1913) implies a cumulative increase
of per capita income from an initial level of 100 to an index of 388 at the end of the
period. By contrast, the data available for Brazil suggest a very different economic
experience in the nineteenth century. Although real output was able to keep pace with
Brazil's rapid population growth (1.8 percent per year), real per capita income seems to
have grown very little between 1822 and 1913. Further, most of the per capita income
growth that took place in Brazil between 1822 and 1913 seems to have occurred in the
period 1900-13. Those years were indeed a period of rapid economic progress. By the same
token, the years 1822-99 seem to have been a long period of disappointing economic
achievement in Brazil.
Disaggregation of these figures in terms of geographic regions is also helpful in
understanding Brazil's economic experience during the nineteenth century. The country's
overall performance masks a significant differential in the pace of development between
regions. In part, the poor aggregate experience of the Brazilian economy during the
nineteenth century reflects the especially dismal performance of the country's large
northeast region, where almost half of Brazil's population resided. A rough estimate
suggests that real per capita income in the northeast fell, by approximately 30
percent between 1822 and 1913. Our first task, then, is to try to understand why the large
northeast region did so poorly. We then proceed to a more general analysis, encompassing
the rest of the country as well.
Exports were the main source of productivity growth in nineteenth-century Brazil.
International trade was important both for permitting higher income from available
resources and for stimulating capital formation, including public-sector and foreign
investment, in economic infrastructure. The northeast's negative economic experience
during the nineteenth century stemmed largely from the poor export performance of the two
products in which the region had an international comparative advantage: sugar and cotton.
In 1822, sugar and cotton accounted for 49 percent of Brazil's aggregate export revenues,
while coffee (produced in the southeast) accounted for 19 percent. In the course of the
nineteenth century, Brazil's export receipts from sugar and cotton showed little long-term
growth and actually declined in terms of receipts per capita. In 1913, sugar and cotton
provided only 3 percent of Brazil's total export revenues. By contrast, real income from
coffee exports increased at a long-term annual rate of approximately 5 percent. By 1913,
coffee accounted for 60 percent of Brazil's aggregate export revenues.
The decline of the northeast's sugar and cotton exports reflected the fact that
nineteenth-century Brazil had a stronger comparative advantage in coffee than in sugar or
cotton. That is, a unit of foreign exchange could be earned with fewer domestic resources
in coffee than in sugar or cotton. Because the domestic-resource cost of foreign exchange
was much lower in coffee than in sugar or cotton, the northeast experienced a nasty case
of the "Dutch disease." As the foreign currency provided by coffee exports grew
as a source of supply in Brazil's foreign-exchange market, the country's overall exchange
rate increasingly reflected the importance of coffee and its pressures for real-currency
appreciation. Revenues of the producers of Brazil's various export commodities and the
volume of output that they supplied varied in function of changes in the mil-réis
(the Brazilian currency) price that producers received. Mil-réis prices for
individual commodities, in turn, varied both with changes in the specific commodity's
international price and with changes in Brazil's overall exchange rate. In fact, much of
the variance in the mil-réis prices for Brazilian cotton and sugar resulted from
changes in the mil-réis sterling exchange rate. Therefore, the coffee-dominated
exchange rate squeezed factor returns and priced ever-larger quantities of the northeast's
sugar and cotton out of the world market.
In introductory economics textbooks, when a new export activity emerges with a stronger
comparative advantage than that of the country's traditional export activity, factors are
reallocated to earn the higher returns available in the new activity, and income rises. By
contrast, in the Brazilian historical context, the northeast's adjustment was constrained
by some rigidities imposed by geography. The northeast's specific types of land (arid
climate) were not well-suited to coffee production and were therefore not reallocated to
coffee. Consequently, transfer of other productive factors from sugar and cotton to coffee
required interregional migration. The large distances between Brazil's regions, however,
meant high transportation costs, such that migration involved an investment. Brazil's
slave market financed the transfer of slaves, and most of the northeast's stock of slaves
was indeed bid away to the southeast. But much of the northeast's labor force was free,
and large-scale transfer of free labor was precluded by the absence of a capital-market
institution to finance free workers' investment in interregional migration.
Economic theory points to a key condition that must be satisfied if the integration of
multiple geographical regions in a single political unit is to constitute an economically
optimal currency area, That condition is inter-sectoral factor mobility. As we have seen,
nineteenth-century Brazil did not satisfy that condition. Under these circumstances, one
may wonder whether the northeast might not have been better off economically as a separate
political entity, with its own exchange rate. The northeast's trade and development would
then have been governed by its own (rather than by Brazilian) comparative advantage. In
fact, the northeast's political elite did attempt to secede from Brazil during the
nineteenth century, but maintenance of the country's territorial integrity was a key
priority for Brazil's political leadership, which used military force to repress
secession. The northeast therefore remained within Brazil, and the region's monetary and
trade conditions were greatly aggravated by its being part of a political entity that did
not meet the conditions for an optimum currency area. The northeast's dismal economic
experience was an important part of Brazil's overall poor record in the nineteenth
century.
The Elastic Supply of Labor
In the southeast, coffee exports grew rapidly, with major linkage effects on the
regional economy. But long-term increase in real wages, and hence in income for much of
the population, was constrained by two labor-market institutions that provided an elastic
supply of labor to Brazil's "advanced" sector throughout the nineteenth century.
Accordingly, output and the demand for workers in the Southeast coffee region could
increase rapidly without generating an increase in real wages.
First, importation of slaves from Africa enabled Brazil's plantation owners to satisfy
their growing demand for labor with relatively little utilization of workers from the
country's domestic agricultural sector. Consequently, the export activities could expand
their output substantially without bidding up wages within the Brazilian economy. In the
first half of the nineteenth century, the British government attempted to stop the
importation of slaves from Africa. The economic advantages that importation afforded
Brazil's planter class were so great that the Brazilian state resisted British
interventionism for half a century. Between 1800 and 1852 (when the British navy finally
forced suspension of slave imports), approximately 1.3 million slaves were imported to
Brazil. This amounted to more than one-fifth of the growth of the country's total
population and an ever larger share of the increase in the Southeast's labor force.
The increase in the supply of slave labor to the coffee sector seems to have been
sufficiently great that the real cost of labor did not rise over the century. Pedro
Carvalho de Mello has collected data on nominal slave purchase prices and rental rates
between 1835 and 1888. (the year of abolition) in Rio de Janeiro. Regression equations
estimated with Mello's undeflated data show an annual trend rate of increase of 2 percent
for the slave-purchase time series and an annual rate of increase of 1.8 percent for the
slave-rental series between 1835 and 1888. Deflated with observations for the price of
coffee, Mello's time series can be regressed against a time trend to ascertain the rate of
change of real labor costs in nineteenth-century Brazil's "advanced" sector.
Over the years 1835-88, the regressions show an annual trend rate of change of - 0.1
percent (with a t-ratio of 0.39) for the deflated purchase-price series, and an
annual trend rate of change of - 0.3 percent (with a t-ratio of 1.43) for the
deflated rental-rate series.
These regressions, in which coffee prices are used as the deflator, indicate that real
labor costs for Brazil's coffee producers did not increase in the half century between
1835 and 1888. We lack an annual index of consumer prices that could be used to deflate
the nominal slave price and rental series in order to assess rigorously the time trend in
real consumption wages for coffee workers. As discussed elsewhere, however, data on the
medium-term rate of increase of consumer prices in Rio de Janeiro suggest that consumer
prices rose at least as rapidly as the current-price series for coffee labor. Thus despite
the great growth of coffee production and the rapid expansion of the southeast's economy,
the supply of labor apparently kept pace with the demand for labor, obviating upward
pressure on labor costs or worker incomes.
The second labor-market institution involved immigration. As noted, in 1852 the British
government stopped Brazil's importation of slaves from Africa. Following a long-term
interaction between domestic economics and politics, slavery was abolished within Brazil
in 1888. From the view-point of maximizing coffee-planter returns, the mounting pressures
for abolition posed a potential problem. Unless accompanied by other changes in the labor
market, abolition would bring a sharp rise in labor costs. Accordingly, some of the coffee
sector's political leadership sought a monopsonistic, class solution to protect planter
interests. Their approach to the impending problem was, in effect, to shift downward the
supply schedule of labor in anticipation of the planters' growing demand for workers. To
achieve this objective, they developed a new labor-market institution that would maintain
an elastic supply of low-cost labor from overseas.
To endogenize the supply of labor, the coffee planters pressed Brazil's central
government and the government of São Paulo province to pay the transportation costs of
immigrants from southern Europe. Such subsidies had two important consequences for
potential European immigrants. First, without raising Brazilian wages, transportation
subsidies increased the net private returns from immigrating to Brazil. In addition, the
subsidies overcame the capital-market imperfection that might otherwise have prevented
destitute Europeans from immigrating at all. By paying transportation costs, Brazil could
attract immigrants who, if they could have financed their own immigration, might have gone
to the United States or to Argentina, where wages were higher.
The Brazilian policy intervention to attract European immigration achieved its
objective. Immigration, mostly from Southern Europe, accelerated sharply. The increase was
most dramatic in the case of the province where coffee production was expanding most
rapidly, São Paulo. Between 1880 and 1885, an average of 4,300 immigrants entered São
Paulo annually. In 1886, the figure was 9,500, and in 1887, the year before abolition, the
figure was 33,000. Overall, between 1885 and 1909 some 2.8 million European immigrants
entered Brazil. Almost all of these people went to the southeast. Between 1890 and 1913,
the stock of coffee trees in São Paulo province (a proxy for the demand for labor)
increased at a rate of approximately 6.5 percent per year. In addition, the demand for
workers also rose in manufacturing as well as in other activities in the booming
southeast. Despite these pressures on the demand side of the labor market, however, real
wages apparently did not increase.
One may wonder why the supply of labor to the advanced sector in the southeast came
from overseas rather than from within Brazil. In principle, workers from within Brazil
might have come either from the domestic agricultural sector in the southeast or from the
declining northeast. The inability to attract many workers from the domestic agricultural
sector in the southeast is not surprising. Incomes earned in that sector made for an
opportunity cost that was apparently well above the labor costs offered by subsidized
immigration.
The failure to draw on labor supply from the northeast is more puzzling. It seems
unlikely that transportation costs for would-be immigrants from the northeast to the
southeast exceeded the cost of transporting workers from Southern Europe to Brazil.
Another possibility is that supply constraints (perhaps reflecting sociocultural
rigidities or political restrictions) limited labor mobility in the northeast. In fact,
supply constraints do not seem to have been a problem. There is evidence of considerable
labor-mobility in the northeast. And as regards extraregional labor mobility, between 1872
and 1910 hundreds of thousands of northeasterners emigrated to the booming Amazon region.
Migration to the southeast, however, involved greater distances, higher costs, and a
larger investment. As noted earlier, the absence of a capital-market institution to
finance those investments seems to have been important in limiting migration from the
northeast to the southeast during the nineteenth century. Hence, our question reduces to,
Why were the coffee planters in the southeast more willing to finance immigration from
Europe than from the northeast? Part of the answer may have been then prevalent racial
attitudes on the part of the coffee planters, which led them to prefer European to mulatto
workers.
The consequences of large-scale subsidized immigration from overseas are clear. The
program continued through the beginning of the twentieth century the economic structure
that importation of slaves from Africa had provided earlier. The highly elastic supply of
labor from overseas meant that output could expand at a rapid pace in Brazil's advanced
sector without raising the wages of workers in the rest of the economy. The similarities
between Brazil's historical experience in the nineteenth century and W. A. Lewis's
celebrated model, "Economic Development with Unlimited Supplies of Labour," are
evident. There were, however, two important differences between Brazil's historical
experience and the Lewis model. In the Brazilian case, the elastic supply of labor came
from overseas. Also, in Brazil the elastic supply of labor continued
"forever"—with ensuing long-term consequences for capital-labor ratios,
wages, and technical progress. Continuing importation of labor from abroad enabled
Brazil's planters to maintain their returns but had adverse effects on the rest of the
population. This experience suggests that conclusions concerning the welfare effects of
population growth in nineteenth-century Brazil may be a function of the observer's class
perspective. Explicitly or implicitly, historians often discuss welfare effects over time,
and their unit of study is usually "the nation." In the Brazilian case, class
interests were so obviously disparate that it raises questions concerning the validity of
using the nation as the unit of analysis.
The Domestic Agricultural Sector
Like most studies of Brazil's economic history before the twentieth century, we have
focused thus far on conditions in the country's export activities. The greater
availability of data for those activities should not lead us to exaggerate their
quantitative importance. In fact, most of Brazil's labor force was engaged in the domestic
agricultural sector: the production of food for local consumption and the internal
market." Brazil's domestic agricultural sector in the nineteenth century has been
little studied. In the words of two scholars (Reigelhaupt and Forman), the sector usually
appears only "between the lines" of the country's historiography. Consequently,
detailed information on this sector is scanty. Nevertheless, the domestic agricultural
sector was too important a feature of Brazil's economy during the nineteenth century to be
ignored. As a first approximation, the following statements can be advanced concerning the
sector's size and composition.
Socially, this sector comprised many of the people in Brazil's population who, in the
words of historian Caio Prado, "were not slaves, but could not afford to be
masters." This observation suggests one way of forming an impression of the
quantitative importance of the domestic agricultural sector in the Brazilian economy: an
examination of the proportions of free people and of slaves in Brazil's total population.
This procedure obviously provides only a very approximate picture. All of Brazil's slaves
were not engaged in exports or in urban-based activities; many free people did work in
those activities and in roles other than plantation owners. Bearing this caveat in mind,
let us see what analysis of the population in terms of its slave and free portions
suggests.
Brazil's social structure has often been conceptualized in terms of a master/slave
dichotomy. That approach ignores the presence of a very large intermediate stratum of
squatters, sharecroppers, and small farmers. At the very beginning of the nineteenth
century, at least one-half and perhaps as much as two-thirds of Brazil's population was
free. Relatively few of these people—poor whites, mulattoes, freedmen, and caboclos
(peasants of mixed Indian and white ancestry)—were large slave owners engaged in
production for the export market. Lacking alternative opportunities in a predominantly
agrarian economy, many people in this intermediate social stratum were engaged in
production of food for domestic consumption.
In 1820, some 70 percent of Brazil's population was free. Until 1852 (when importation
of slaves from Africa was stopped), only a small percentage of these people was employed
in export activities, which relied heavily on slaves for most occupations. With the
decline of slavery, free people were increasingly employed in export activities, but by
that time the free population had grown rapidly as a result of high rates of natural
increase. Consequently, the number of people in the domestic agricultural sector remained
large relative the country's total labor force.
The impression that much of Brazil's labor force was not engaged in export production
is corroborated if we consider disaggregated population surveys for specific locales
during the nineteenth century. Further, the limited information available on the sectoral
composition of Brazilian output also suggests that a large fraction of the labor force was
engaged in the domestic agricultural sector. In 1911-13, exports accounted for
approximately 16 percent of gross domestic product (GDP) in Brazil. During the nineteenth
century, exports had grown at a higher rate than output in the rest of the economy.
Consequently, earlier in the century, the share of exports in aggregate economic activity
had been even lower than 16 percent. Further, labor productivity was generally higher in
exports than in other activities of the Brazilian economy. Hence, the export sector's
share in the total labor force was even smaller than its share in GDP. There were of
course other activities in this economy besides exports and the domestic agricultural
sector. In absolute terms, many people were employed in transportation, commerce, crafts,
manufacturing, and government. Those activities were located to a great extent in the
cities, however, and as late as 1890 only 11 percent of Brazil's population resided in
urban centers of 10,000 or more inhabitants. These considerations suggest that a large
fraction of Brazil's labor force was engaged in the domestic agricultural sector during
the nineteenth century.
This sector seems to have consisted of two parts. First, there were people who lived as
sharecroppers, smallholders, or squatters in or near the areas of export production.
Because of factor-market imperfections, these people rarely engaged in production of the
principal export crops. Their main products were such foodstuffs as manioc, beans, and
maize. In addition, the observations of contemporaries suggest that these people took much
of their total income in the form of leisure. Second, part of the labor force in the
domestic agricultural sector was engaged in farming on the abundant lands in Brazil's
interior, relatively far from the areas of export production. Output consisted mainly of
cattle ranching and of semisubsistence agricultural cultivation. In the latter case,
production was mainly in the form of small-scale family farming under the overlordship of
a large local landowner. With labor scarce relative to land, cultivation was
land-extensive. Population in this sector was increasing rapidly, while abundant lands
existed further in the interior. Consequently, the production frontier shifted ever
farther from the markets and centers of consumption. As marginal physical productivity
fell with soil depletion on the intensive margin, incremental production shifted, with
rising transport costs, to the extensive margin. Until the end of the nineteenth century,
it is hard to believe that the value of output per worker in the domestic agricultural
sector was more than, at best, constant over time.
Transportation Costs and the Slow Pace of Economic Development
Because a large portion of Brazil's labor force was employed in the domestic
agricultural sector, the modest rate of per capita output growth in that sector weighed
heavily on the pace of aggregate development. We noted earlier that exports were the main
avenue to economic development in nineteenth-century Brazil. The central importance of the
export activities reflects a default, the poor performance of the rest of the economy.
High transportation costs affected both the level and the growth of productivity in
Brazil's domestic agricultural sector, limiting the access of many agricultural producers
to markets beyond their immediate locale. As a result, the volume of intraregional,
interregional, and international trade was curtailed. Because of the high ratio of land to
labor, cultivation was land-extensive, and distances to the markets were large. Low-cost
transportation facilities were therefore crucial for developing a high-productivity
agriculture. Unfortunately, the country's geographical and topographical conditions made
for relatively high transport costs from the production areas to the market centers.
Rivers and coastal shipping were used for transportation, but some of the country's
rivers (the Amazon, for example) were poorly located from the viewpoint of promoting
economic development. Other rivers flowed in a direction that was not advantageous from
the perspective of production for markets. Geographical conditions also imposed another
problem that hampered low-cost shipments of bulky commodities from deep in the interior.
Unlike the United States with its Mississippi and Great Lake systems, Brazil did not have
an extensive network of navigable, interconnecting waterways. Further, road
conditions were also poor, to the extent that at the beginning of the period wheeled
vehicles could seldom be used in the interior. Transport costs were so high that they
absorbed a third of the value of coffee shipments during the prerailroad era. Similar
conditions prevailed in the northeast. Thus the cost of shipping cotton from the São
Francisco Valley to Bahia in the 1850's amounted to some 50 percent of the prices
received. Under these conditions of high-cost transportation and poor access to markets,
abundant land was not associated with a high value of output per worker in agriculture.
The combination of high transportation costs and a large domestic agricultural sector
also had other consequences for the Brazilian economy. Because of Brazil's poor internal
transportation facilities, food produced on more distant land involved higher supply
prices. Inelasticity in the supply of foodstuffs meant that when income and demand in the
economy's advanced sector increased, prices rose. Unlike many other countries, Brazil
experienced a long-term inflation during the nineteenth century. Price inflation was a
feature of the Brazilian economy that had its own welfare costs, both direct (higher
uncertainty) and indirect (presumably, lower cash balances and lower investment). In
addition, conditions in the domestic agricultural sector constrained Brazil's industrial
development. Low income levels and high costs for transporting goods to the hinterland
limited the size of the market for manufactured goods in Brazil. The Brazilian government
imposed protective tariffs on many industrial products during the nineteenth century, but
protection against imports could not assure would-be Brazilian industrialists access to a
market that did not yet exist. Industrialization based on the internal market clearly
required the prior emergence of a domestic market.
More generally, high transport costs diminished the net receipts that producers
obtained from shipment of bulky, low-value foodstuffs to the market. As a result, income
in the domestic agricultural sector was reduced—both because of the low value
received for output and because of the disincentive effect that unfavorable relative
prices had on the quantities produced. Low prices in the domestic agricultural sector were
reflected in a small marginal value product for labor and, as a consequence, in widespread
substitution of leisure for monetary income. Finally, high transport costs for foodstuffs
also had an important intersectoral effect. The country's steep price-distance gradients
in regional markets meant rising incremental costs for food, the economy's wage good, in
the face of buoyant demand conditions. Expanding aggregate demand therefore reduced the
returns to capital and the rate of expansion in the advanced sector, with little impact on
higher real output levels in the economy's backward sector.
Efforts at modifying geographical conditions and lowering costs by construction of
transportation infrastructure were slow to materialize in nineteenth-century Brazil. In
contrast with the United States, there was virtually no canal construction. The country's
rivers also remained largely without improvements. Consequently, the boats used for
internal transportation were small and entailed high unit costs. The country's first
railroad legislation was promulgated in 1835, but actual railway construction was late in
coming to Brazil. The country's earliest railway, extending some 15 kilometers, was built
in 1854. Ten years later, approximately 424 kilometers of track were in operation. As late
as 1890, however, the country had only 9,973 kilometers of operating trackage. This did
not amount to much in terms of Brazil's overall expanse of some 8.1 million square
kilometers. Furthermore, the country's road network was extremely limited. As late as
1923, São Paulo state, one of the largest and most developed in the country, had only 1,025
kilometers of highways (of which 55 kilometers were macadamized) suitable for automobile
use.
Railroads might have helped this situation by lowering transportation costs. This would
have provided a necessary condition for linking part of the domestic agricultural sector
with the rest of the economy and permitting it to shift from subsistence to
market-oriented production (for the domestic market or for exports), whether in the family
farms or in large-scale agriculture. Lower transportation costs would also have provided
producers with the stimulus of market demand and might thereby have induced higher output
levels. On the supply side, producers would have been able to reap the gains from
specialization and local comparative advantage. Hence even with unchanged physical
productivity, lower transport costs might have raised the value of production in the
domestic agricultural sector, both by increasing the quantities produced and, with new
relative prices, by altering the composition of output.
Notwithstanding these potential benefits, nineteenth-century Brazil was late in
initiating large-scale railroad construction. Thus despite Brazil's vast territorial
expanse, as late as 1884 the country had only 6,240 kilometers of track. This amounted to
approximately 0.7 kilometers of track per 1,000 square kilometers of territory. Further,
in terms of timing, the great increase in railway construction toward the interior began
only in the 1890's. Indeed, the largest absolute rise in railway track occurred only in
the twenty years before 1914. To gain some comparative perspective, note that in 1900,
railway trackage in the United States was almost 20 times as great as in Brazil. Even
after the large post-1900 increase in Brazil's railway construction, in 1914 the country
had only 26,060 kilometers of track. This was a figure that the United States had
surpassed by the 1850's.
Why were the railways built so late in Brazil? The difficult terrain often led to high
construction costs, but these would have been no obstacle if the railroads had also
generated substantial benefits. Capital immobilities were also a problem. Although some of
the first railroads in the coffee region were built with local capital participation,
construction of Brazil's railways in general depended heavily on foreign investment. In
the nineteenth century, this was largely British, and British investment was directed away
from Brazil by such non-market considerations as imperial policy. In addition, private
rates of return on Brazilian railway investments were apparently not high enough to
attract substantial British capital from its alternative opportunities during most of the
nineteenth century.
Brazil's limited attractiveness to foreign investors, however, is not a sufficient
explanation of the long delay before large-scale railway construction began. If private
returns were low but investment in low-cost transportation facilities were justified in
terms of external economies and high social returns, another approach might have been
followed. In principle, the task of providing Brazil with an adequate transportation
system might have been undertaken by government—central, provincial, or local. That
was the course followed with many of the "public improvements" that were
supplied in the nineteenth-century United States. In fact, Brazil did not follow that
approach until the end of the period. For reasons discussed below, during most of the
century Brazilian governments failed to provide on a sufficient scale the infrastructure
investment needed for the country's economic development.
Railroads and the Acceleration of Economic Development
Once the railways were extended, economic development seems to have proceeded along the
lines outlined above. Even with unchanged output levels, the higher ex-farm prices made
possible by low-cost transportation would have raised producer incomes. In addition,
producers in the domestic agricultural sector responded to the new market opportunities
opened by lower transport costs. Producers increased the volume of their output for the
market, while the fall in transportation costs also led to new patterns of intraregional
specialization. Another feature was a rise in the price elasticity of the food supply.
Some numerical information on these developments is available for Minas Gerais. This
large state had approximately 21 percent of Brazil's population in 1900. Despite its
geographical proximity to São Paulo and that province's large regional market, Minas
Gerais was not economically well-developed. In the 1890's, however, the province
"caught railroad fever": half of Minas Gerais's pre-1899 trackage was laid in
that decade.
The process through which railroads promoted economic growth in the domestic
agricultural sector had some special features. The railways helped domestic agricultural
producers not only by reaching the distant interior, but also by existing in the zones of
export production. Part of the country's food supply was produced in and around the
plantation areas.
Food producers in those areas benefited directly from the new availability of low-cost
transportation to the regional market. In addition, the lines opened in the export zones
lowered the cost of shipments that originated in the far interior and proceeded, via the
railroad, to the markets. Under these conditions, even railways that had been built
primarily to carry export commodities came to transport large volumes of products from the
domestic agricultural sector.
The growth in shipments of domestic agricultural products was facilitated by the
Brazilian government's tariff and rate-setting policies. Brazil experienced considerable
price inflation in the decades before 1913. As a consequence both of normal regulatory lag
and of hostility to the foreign railway companies, however, the government's rate-setting
authorities resisted efforts to raise transportation charges to keep pace with the
country's inflation. Thus, not only did shipping costs fall when the railways were opened
but, in addition, the price of railway transportation declined thereafter relative to the
general price level. This rate-setting policy led to government subsidies for the railways
and, eventually, to nationalization. What is important in the present context is that
government regulation further lowered real freight charges for producers in the domestic
agricultural sector.
The structure of railway rates also discriminated in favor of the domestic agricultural
sector. Between 1874 and 1900, the rates charged for shipments of foodstuffs on the
railways ranged between 26 and 49 percent of the rates charged for coffee. For livestock
and timber the rates were even lower. Moreover, in 1899 the government implemented a
general policy that obliged the railway companies to lower their charges on domestically
produced foodstuffs. As a consequence, the domestic agricultural sector drew special and
disproportionate advantage from the fall in transport costs that the railroads made
possible. For this reason, it is difficult to make meaningful comparisons with shipping
costs in the prerailroad era, which might serve as a basis for comparative welfare
analysis. In the earlier period, freight charges for the domestic agricultural sector's
highweight/low-value commodities had often been so high in many areas that these products
had not been shipped at all.
The government's policy with respect to import duties also promoted economic growth in
the domestic agricultural sector. At the turn of the century, the government imposed
protective tariffs on many foodstuffs produced in Brazil. The fact that politicians from
Minas Gerais took a prominent role in this policy initiative suggests that the new
measures should not be viewed as determined randomly or by a process that was completely
exogenous. The advent of low-cost transportation had greatly increased the potential
economic returns that protective tariffs offered to domestic food producers. Political
returns rose correspondingly for the political entrepreneurs who would implement the
necessary policy measures. From this perspective, provision of the import tariffs can be
regarded almost as endogenous to the process.
The economic consequences of the new import duties were clear-cut: reduced uncertainty
and a larger market for the domestic agricultural sector. Moreover, the fact that part of
the sector's market growth came at the expense of imports helped avoid a potential
pitfall. That would have been a situation in which large increases in domestic food supply
pressed on stationary, price-inelastic demand and thus reduced aggregate revenues for
producers. The policy initiative also had broader economic effects. As noted, the new
tariffs were implemented in conjunction with the heightened domestic supply response that
low-cost transportation made possible. Under those conditions, the import tariffs led to
import substitution in many food products and intensified intersectoral linkages within
the Brazilian economy.
The northeast also benefited to some extent from a decline in transport costs. In areas
where railways were built, internal freight charges for sugar and cotton appear to have
fallen some 50 percent from their level in the prerailroad era. Railways could promote
economic development only when they were built, however, and because of the poor economic
prospects of the northeast's export activities, little railway construction took place in
the region. In the southeast, however, extension of the railways seems to have opened a
new period of generalized economic development.
Prior to the extension of the railways, a rising value of output per capita in Brazil
had been limited mainly to the export sector. By lowering transport costs in a vast,
land-rich country, railways permitted more rapid growth of income in the large domestic
agriculture sector. The downward shift in internal freight charges also led to other
structural shifts and new intersectoral linkages within the Brazilian economy. Thus the
internal market for manufactured products also expanded. Supported by ample tariff
protection, Brazil's cotton textile industry increased its output at an annual geometric
rate of 11 percent between 1885 and 1915. As noted earlier, Brazil's economic development
proceeded much more rapidly after 1900 than in the preceding century. For the reasons
discussed, the extension of the railways seems to have played a key role in the shift to
the new development trajectory. This experience is also consistent with interpreting
Brazil's slow economic development during the earlier period as stemming largely from an
absence of the external economics that railways would have provided. Because of the
country's factor endowment and geographical features, the availability of low-cost
transportation was of special importance for economic development in nineteenth -century
Brazil.
The Brazilian State and the Public-Finance Constraint on Public Investment
The preceding discussion raises an obvious question. We can well understand the failure
of private entrepreneurs to invest in railways in the Brazilian interior. Much of the
economic benefits of that investment came in the form of external economies, such that the
railroads' social returns exceeded their private returns. But why did the Brazilian state
not provide the resources—either through direct investment or through
subsidies—to equip the country with railways earlier, so that Brazil could have been
launched on its path of long-term economic development much sooner in the nineteenth
century?
One possibility is that the vision of implementing a rational public-investment policy
was distorted by the lens of Brazilian politics. The large landowners had considerable
influence in Brazilian politics during the nineteenth century, and they are generally not
considered to have been a very "progressive" or "development
-oriented" group. In fact, what was needed in this context was not an interest in
development but an interest in wealth maximization. Brazil's landowners displayed ample
evidence of such an interest. Thus, responding to the prospect of favorable returns,
Brazilian planters allocated sufficient resources—even to products with a long
gestation period, for example, cocoa in Bahia and coffee in São Paulo—to make
possible sharp increases in output. Further, far from explaining the failure of Brazil's
governments to provide large infrastructure investments, an interpretation that emphasizes
the role of the large landowners in Brazilian politics only sharpens the question. For,
following Joseph Schumpeter's insight concerning the convergence of monopoly and
socialism, one would expect large landowners to be especially energetic in pressing for
public investment. This is because landowners with extensive holdings and market power can
internalize and appropriate most of the social benefits of infrastructure investment.
Therefore Brazil's internal political conditions should have led to large government
investment in economic infrastructure.
Another possibility is that ideology inhibited a rational public-investment policy. In
principle, Brazil's political leadership may have been constrained by nineteenth-century
doctrines of laissez-faire. Voices of economic liberalism were heard in nineteenth-century
Brazil, but, in practice, Brazilian governments did intervene in the economy, imposing
protective tariffs as well as providing subsidies—for example, for European
immigration and for technological modernization of the northeast's sugar
industry—when these did not require a large financial input. Likewise, the Brazilian
state was so little bound by the canons of nineteenth-century economic orthodoxy that it
ran frequent fiscal deficits and maintained economic policies that led to chronic
inflation and long-term exchange-rate depreciation.
Another possible explanation for the government's lack of support for new railroads
suggests that it would be naive to expect the Brazilian state in the nineteenth century to
demonstrate an interest in promoting economic development. The country's political and
administrative elites are generally considered to have been more interested in self
aggrandizement and bureaucratic expansion than in economic development. Such concerns,
however, are perfectly consistent with a large promotional role for the public sector.
Expanded state investment and subsidy programs would have meant more government jobs and
greater control over society's economic resources. Thus the existence of self-seeking
motives is hardly an adequate explanation of the Brazilian state's failure to pursue a
more active public-investment policy.
One set of conditions does seem to have constrained the Brazilian state's developmental
activity: public finance. Through most of the nineteenth century, the fiscal resources the
Brazilian state had at its disposal to pay for infrastructure investment and subsidy
programs were small relative to the country's development needs.
During most of the century, Brazil's fiscal system was highly centralized. Until the
1880's, the tax revenues of the central government were approximately 4.5 times larger
than those of the provincial governments. The central government's share in total
public-sector expenditure was even larger, for the central government had much
greater access to foreign and domestic borrowing. Likewise, the tax revenues collected by
local governments in nineteenth-century Brazil were a small fraction of total
public-sector revenues.
For the first four decades after independence, the central government's expenditures
per capita were well below £1. It was only with the Paraguayan War (1864-70) that per
capita expenditure exceeded £1. And it was not until the first decade of the twentieth
century that central-government expenditure in current prices approached £1.5 per capita.
Different measuring rods may be used to assess these expenditure levels. In the present
context, the most pertinent comparison is with the magnitude of the development task that
Brazil faced in the nineteenth century. As noted earlier, the country's initial conditions
with respect to social overhead capital were poor. In addition, difficult geographical
conditions meant that the costs of providing the country with a low-cost transportation
system were high. Viewed in terms of providing infrastructure investment adequate for the
country's development needs, the fiscal resources available to the Brazilian state until
the end of the nineteenth century seem to have been relatively small.
The central government's low expenditure levels reflected basic features of the fiscal
situation that confronted the Brazilian state in its efforts to raise tax revenues. Public
finance was constrained by the paucity of tax bases that would yield revenues commensurate
with the costs of tax collection. Consequently, government expenditure levels did not
reach the scale that would have been socially optimal if such transaction costs did not
have to be considered. As noted earlier, the Brazilian state had major incentives (if only
for its own self-aggrandizement) to enlarge the volume of economic resources at its
disposal. The country's landowners, who would have appropriated most of the benefits of
expanded public investment, also stood to gain. But a large increase in fiscal penetration
(increase in the size of the tax base) within the broader society also involved
significant economic costs. The net marginal social benefits of public-finance expansion
were thus low. As a result, such fiscal expansion understandably (and rationally)
encountered resistance on the part of Brazil's socioeconomic elites.
Because of the great distances, poor communications, and low literacy rates present in
nineteenth-century Brazil, the costs involved in tapping most potential tax bases were
high. By contrast, the administrative costs of collecting taxes on imports and exports
were relatively low. Accordingly, the Brazilian state's revenues and expenditures depended
heavily on foreign-trade duties. Between 1830 and 1885, some 70 percent of the
government's revenues came from taxes on imports and exports. As this number indicates,
generalized taxes on agricultural land were not an important source of government revenue
in nineteenth-century Brazil. In this respect, Brazil contrasted notably with countries
otherwise as diverse as India and Japan in the nineteenth century. Not only would the
administrative costs (including a cadastral survey) of generalized land taxation have been
high, but the revenue prospects of such an effort were meager. An important difference
with India and Japan was Brazil's abundance of land and the ensuing low ratios of labor to
land in the domestic agricultural sector. With little pressure of population on land,
Ricardian rent, the basis for land taxation, was small. These conditions, which made for
high transactions costs and a low economic surplus in the domestic agricultural sector,
meant that the net fiscal yield of generalized land taxation would have been small.
Fiscal prospects in Brazil's foreign-trade sector were more attractive. There,
transactions costs were not so large relative to the size of the economic surplus as to
lower sharply the net social gains of taxation. Because of these differences between the
foreign-trade sector and the domestic agricultural sector, government revenues and
expenditures depended heavily on the value of Brazil's foreign-trade receipts. The tax
rates imposed on this base, however, could not be set at arbitrarily high levels lest
exports and imports diminish to the point where tax revenues would fall. Unfortunately,
through most of the nineteenth century, Brazil's foreign trade volume was too small to
provide the fiscal resources needed to finance infrastructure development. A comparative
perspective from the United States is useful in this context. The central government in
the United States also relied heavily on foreign-trade duties as a source of tax revenue
in the nineteenth century, but foreign trade provided a much larger tax base in the United
States. From the 1820's through the 1850's, U.S. export receipts were approximately five
times larger than those of Brazil. In the subsequent four decades, the ratio was even
higher, 6.8 to 1. As these numbers indicate, the central government in the United States
could draw on a much larger tax base to support its expenditure programs.
The Brazilian state attempted to supplement its revenues by borrowing, both at home and
abroad. In 1864, before the sharp rise in government expenditure that came with the
Paraguayan War, government debt (including money issued by the government) amounted to
£5.5 per capita. Moreover, the Brazilian state's borrowing was not limited to foreign
sources. Between 1841 and 1889, the share of domestically held obligations in the
government's total debt-service payments ranged from 42 to 62 percent. Although borrowing
afforded the Brazilian state a welcome short-term addition to its fiscal resources, it did
not solve the country's public-finance problem. The scope for borrowing was set ultimately
by debt-service capacity and hence by tax revenues. Until the end of the nineteenth
century, the volume and growth of Brazil's foreign trade were too small to permit a high
level of government expenditure.
This text was excerpted from How Latin America Fell
Behind—Essays on the Economic Histories of Brazil and Mexico, 1800-1914, Edited
by Stephen Haber, Stanford University Press, 1997, 316 pp
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