INT UN
EC 10

2071

E C O N O M I C COMMISSION F O R L A T I N A M E R I C A

ECONOMIC BULLETIN
fi^

:

I

Vol. XVI, No. 2, second half of 1971

UNITED NATIONS
New York, 1972

I
E

*043400032*
Economic Bulletin for Latin
America, Vol. XVI
2 1971

UNITED N A T I O N S

PUBLICATION

Sales No.: E.71.II.G.6

Price: $U.S. 3.00
( o r equivalent in other currencies)

CONTENTS
Page

Financial intermediation in Latin America

1

Some regional development problems in Latin America linked to metropolitanization
57
Agricultural policy in the countries signatory to the Andean Subregional
Integration Agreement
91

11
1

The Economic Bulletin for Latin America has been published by the secretariat of the
Economic Commission f o r Latin America twice yearly since 1956. The essential purpose of
this periodical is to provide a résumé of the economic situation of the region designed to
supplement and bring up to date the information published in the Commission's annual
economic surveys. Apart from this summary, which is to appear in every issue, special
articles on different subjects related to the economy of Latin America are included, as well
as informative and methodological notes.
The E C L A secretariat assumes entire responsibility for the Bulletin. Its content—
intended f o r the information both of public officials and of the general reader—was not
submitted to the Commission's member Governments before publication.
Since October 1958 the Bulletin has regularly included a Statistical Supplement. This
subsequently became large enough to warrant separate publication, one issue being
published in 1960, another in 1961 and two in 1962, each being bilingual with the corresponding table of contents. Since 1964, a new pubUcation, the Statistical Bulletin jar
Latin America, has been issued twice a year, to provide the public with a regular flow
of statistical data on economic matters.

EXPLANATION

OF S Y M B O L S

Three dots ( . . . ) indicate that data are not available or are not separately reported.
A

dash ( — )

indicates that the amount is nil or

negligible.

A minus sign ( — 3 0 0 ) indicates a deficit or a decrease.
A stroke ( / )

indicates a crop year or a fiscal year, e.g.,

A n asterisk ( * )

1954/55.

is used to indicate partially or totally estimated

figures.

' T o n s " and "dollars" are metric tons and United States dollars, respectively, unless otherwise stated.
Minor discrepancies in totals and percentages are due to

iv

rounding.

FINANCIAL INTERMEDIATION IN LATIN AMERICA
INTRODUCTION

The present study aims at continuing to explore the topic of financial development as part
of the wider issue of the mobilization of resources by expanding on a number of points
discussed in an earUer article. ^ The purpose is
to shed light on certain theoretical aspects of
the general functions of the financial sector
and its possible relationships with the pattern
1 "Mobilization of domestic resources",
Economic
Bulletin for Latin America, vol. X V , N o . 2, second
half of 1970.

I.

of economic development; and also to look
more deeply into the problems of recent financial development in Latin America. After
outlining the various stages through which financial intermediation in Latin America has
passed, the study takes a general look at the
different types of institution and their function
in the new phase of Latin America's development and considers recent trends of financial
development in certain countries for which
detailed data are available. The study ends
with a number of conclusions and options relating to systems of financial intermediation.

N A T U R E A N D FUNCTIONS O F F I N A N C I A L

It is fairly generally assumed that the formation of a capital market is both necessary and
in itself enough to raise the over-all saving
rate, since efficient financial intermediation
should increase the mobility of community
surpluses and promote their use as investment
in sectors that are of prime importance of
economic development. It is true that, as they
become more diversified, the financial intermediaries provide an economy that is becoming
increasingly "capitalist" with the means of
transferring funds from the surplus to the
deficit sectors, and in so far as their action is
more rapid and efficient than the system of
direct transfers from enterprise to enterprise
or family unit to enterprise, they will improve
the general level of efficiency of the modern
economic sector. But to assume from this
somewhat axiomatic statement that progress in
the field of financing automatically increases
the over-all rate of savings and investment and
channels savings from the actual or potential
surplus sectors to the strategic sectors which
are of greater significance for development in
the long term is not borne out by the actual
facts in most countries, or by studies on the
theoretical bases of financial intermediation.
As far as can be seen from Latin American
experience, it may be assumed that, except in
cases where developmental financing institu-

INTERMEDIATION

tions under the control of the pubUc sector
have been set up for this express purpose, it
is difficult for a country to solve the problems
associated with the transfer of funds to the
more backward sectors, or to new sectors or
regions, through the normal working of financial intermediaries.
Moreover, there is also no clear correlation
between the level of financial development and
the savings-investment ratio, except in Japan,
for reasons that will be discussed below. This
is not to deny that the recent development of
capital markets in Latin America has led to a
certain amount of diversification in the supply
of funds, and in some cases has prevented
personal savings from being rendered unproductive for lack of suitable catchment. But
this is the first stage, where funds flow from
families and enterprises to financial intermediaries. The second stage, where they flow from
the financial system to credit users is obviously
governed by considerations of profitability and
liquidity, and of the risk involved in loaning
the funds requested, and not by developmental
or social goals. Access to the funds of the
financing institutions therefore depends on the
guarantee furnished, which generally means
that the clients operating in the highest profitmaking sectors, who are consequently more
solvent, have the applications approved. In
1

Latin America, many of the applications for
this type of loan are made in order to pay f o r
family consumer durables and to provide
working capital f o r enterprises, and not for
real investment in new activities or in sectors
which are of prime importance f o r development.
The situation on the capital markets of developed countries is not much different.^ There,
too, the main recipients of funds are the large
enterprises that are already established on the
market; small and newly established enterprises find only a limited supply of credit, both
in terms of the size of loans, and in terms of
the financial cost and the guarantees required.
The problem of financing small enterprises,
f r o m which most of the developed countries
have suffered, has been solved, to a greater or
lesser extent, by setting up special financing
institutions, which usually have no connexion
with the regular financial markets. In several
developed countries it has also been found
necessary to create special funds for financing
investment in new sectors of strategic importance for development; these funds are also
not part of the traditional pattern of financial
intermediation and their resources generally
c o m e from the public sector. In addition it has
been common practice to allow liberal deductions in respect of depreciation for certain
activities with good growth possibilities, and
this, together with a high level of retained
profits provided many enterprises with a sizable
domestic source of funds for financing investment and gave them a larger measure of independence from capital markets. Hence, although the financial markets are very highly
developed in the industrial countries, the financial institutions making up the market,
in the usual sense of the term, d o not have a
hand in the financing of a large proportion of
investment.®
The above remarks call for a review of the
functions of financial intermediation which are:
to create credit; to make loans; and to permit
the accumulation and diversification of assets.
The creation of credit means that the various
economic agents (enterprises, government and
family units) are allowed to incur debts, i.e.,
that their total expenditure can be higher than
their current income.
In a rapidly growing capitalist economy, the
growth of funds is more rapid than the capital
2 See United Nations, World Economic Survey 1960
(United Nations publication, Sales N o . : 61.II.C.1),
chapter 1.

3 Ihid., p. 54.

formation. Therefore, the direct indebtedness
of the spending agents, plus the indebtedness
incurred indirectly by the intermediaries, accounts f o r an even larger proportion of national income and wealth.^
Credit can be used to help finance real
capital formation, current production, consumption and the purchase of existing real or
financial assets. Only in the first of these cases
is the creation of financial investments directly
related to the increase of a country's productive capacity and, consequently, to its growth
in the long term.
T h e importance of this function depends
on the level of self-financing by enterprises:
it is less important when this is high (as in
the United States and the United Kingdom)
and more important when it is low (as in Italy
and most of all in Japan). On the other hand,
this function may play a very important role
in financing increases in public spending
(United Kingdom and virtually all the Latin
American countries), and it will also promote
economic growth, provided that there is a
positive correlation between the use of credit
and public sector investment.
T h e second function—the financing of current activity—is the basic function of the
traditional financial intermediaries, particularly
the banking system, and is common to all
countries without exception (irrespective of
whether they are capitalist or socialist). This
function is related to the maintenance of a
given level of economic activity and, for it to
be effective, the financial instruments involved
in the debt-credit process have to grow more
rapidly than the gross national product as economic activity gradually becomes more monetized and decentralized both at the sectoral
level and in spatial and institutional terms.
The development of a dynamic banking system
capable of guaranteeing a suitable degree of
liquidity has over the years been an essential
component in financing an expanding economy.
The third function—the financing of c o n sumption—is more directly linked to the maintenance or expansion of a level of efliective
demand, which is of particular significance in
at least two situations. The first, which is of a
continuing nature, involves covering expenditure on consumer durables of high unit value,
the sales prices of which may not be in line
with the average current income of the popula* See Curley and Shaw, "Financial aspects of development", The American Economic Review, vol. X L V ,
N o . 4, September 1955, Stanford. California.

tion. The second occurs when it is wished to
raise the level of effective demand if demand
has contracted because of temporary phenomena or is depressed because income is concentrated at the very top of the income scale.
In this latter case, increasing the size of loans
for consumption and their repayment periods
may expand the effective market to include
the middle-income strata, enabling them to increase expenditure by going heavily into debt.
In the long run, however, greater participation
by these strata cannot be sustained unless their
share of total income is modified. This kind of
credit instrument has been used by banks and
also by agencies outside the banking system to
cope with the first situation in the developed
capitalist countries and both situations in several Latin American countries.
Lastly, financial intermediation can create
credit for purchasing existing real or financial
assets for purposes of speculation or accumulation, in which case it does not have a functional relationship with actual production, consumption and investment flows. As the return
on such operations depends to a large extent
on prevailing institutional conditions, it tends
to fluctuate violently and amplifies the normal
cycles of the capitalist economy. It should be
remembered however, that this kind of financial accumulation gave birth to and promoted
the capital markets, and its main purpose was
therefore not to finance fixed capital formation;
although this is not to say, that it has no direct
or indirect effects on the rate of real investment. In actual fact, inasmuch as financial
accumulation yields healthy profits it stimulates
economic activity, boosts demand and strengthens or steps up the expansion of the economy.
This, in turn, may raise real investment to
levels higher than can be financed out of financial expansion alone. On the other hand, a
drop in the rate of return on financial accumulation may, through a crisis in demand, bring
about a more depressed situation in which
opportunities for profitable investment disappear, for a while at least.
The sharp fluctuations characteristic of open
capital markets, in which the stock market is
the keystone, have tended to disappear (particularly in the post-war period) as a more
stable iBnancial market has emerged, because
of institutional changes and official intervention, and also because of the control exerted
by the major national and international financing houses. Institutional investors, such as
the large insurance companies, mortgage societies, mutual funds, and in particular the

investment banks operating on a world-wide
scale, have provided a greater degree of stability in national and international financial accumulation and have brought about a more
functional relationship between accumulation
and the real expansion of national economies
through their search for fresh investment opportunities and the expansion of markets.
Another major purpose of the financial system is to transfer loan funds, which is an inherent part of its function as intermediary
between creditor and debtor economic units.
Instead of the surplus spending units supplying
financing directly to the deficit spending units,
the intermediaries act as a link mechanism that
makes the channelUng of funds more efficient
and permits a much larger number of debits
and credits in the economy as a whole.
Under a direct financing system, the deficit
spending units borrow resources by issuing
primary liabilities (shares, bonds, commercial
paper, mortgages) that are purchased by the
surplus spending units either directly or on the
open securities market. Under an indirect financing system, it is the banking system and
all the various specialized financial institutions
that purchase the primary liabilities issued by
the deficit spending units (direct debt) and
then issue their own liabilities (indirect debt)
which are purchased by the surplus spending
units. This process of separating out the direct
debt and the indirect debt helps to expand
credit and at the same time helps to compatibilize a liability structure containing all the
various repayment periods, risks and guarantees
that correspond to the different types of expenditure to be financed with a financial asset
structure that is suited to the interests of savers.
This means that there must be a wide variety
of financial assets that can be used by the
surplus spending units—and this is essentially
the third basic function of the financial system.
Certain spending units (generally families
and enterprises) have surpluses on their current budgets that cannot be used inmediately
within the unit, nor can they be used directly
for the purchase of real assets or in new activities because the amounts involved are too
small and the units are not in a position to
take on the risk of investment. Given that
real assets are indivisible, and given the scale
of operation of new activities, the lead time
of investment and uncertainty regarding its
economic return, many "savings" might lie idle
were it not for the possibility of placing them
in financial assets. This is precisely the purpose

of the financial system since its role is to diversify assets and provide the divisibility, liquidity,
profitability and security required by savers. It
is also necessary for the system to be easily
accessible to surplus spending units or sectors
and for there to be a certain level of specialization and competition among the intermediaries, as long as this does not build up too
much pressure on the sources of funds themselves.
The operation of the financial sector reconciles the interests of the economic agents involved: namely the users of credit in deficit
spending units, who need resources suited to
the structure of expenditure they have to finance; the surplus spending units, which are
the source of the resources used; and the
financial intermediaries, whose function is to
make credit available at the lowest possible
risk and the highest possible return. When
the interests of these three agents are all met,
which happens when the financial instruments
help to increase both assets and liabilities, it
can be said that the system is functional, quite
apart from whether it is efiicient in the microeconomic or macroeconomic sense. It is functional in what may be termed a "neutral"
sense, i.e. it is a system that is capable of
meeting with a reasonable degree of flexibility
an the short-, medium- and long-term needs
of the dominant growth sectors, even though
it may achieve neither peak microeconomic
efiiciency (minimum operating costs or optimum scale of the financing units) nor peak
macroeconomic efficiency (optimum distribution of real resources or maximum economic
growth rate).
In this connexion, it may be worth while recalling what is generally understood from the
theoretical standpoint by the optimum structure of financial development, namely a structure which "within a framework of specific
circumstances uses factors of production up to
the point at which the marginal social cost of
the factors is equal to the marginal social
benefit of their use, and in which the factors
of production are used in the most efficient
way and in a manner that minimizes marginal
costs at all levels of the product".® This definition assumes a theory of general equilibrium
and takes as parameters " a given level of
decentralization in decision-making, a given
BSee John G. Curley, "Hacia una teoría de las
estructuras financieras y el desarrollo económico",
in
Estructura financiera y desarrollo económico
(Editorial del Instituto Torcuato di Telia, Buenos Aires,
1968), p. 89.

income distribution and a given rate of unemployment".® A financial structure may be
optimum, therefore, without being capable of
sustainmg or raising the growth rate of the
gross product or investment to the level desired
by the State or society.
It might be maintained, therefore, that the
sole purpose of a functionally neutral financing
system is to permit and facilitate the accumulation of just the amount of investment actually
required by the economic agents, and to promote the channelling of funds to—and, most
probably, their concentration in—the most
important sectors or activities from the point
of view of their profitability and sure prospects
of dynamic growth, given the structure of
demand. If the sector is viewed in this light,
it can hardly be expected to assume such
responsibilities as that of correcting the intrinsic features of a specific pattern of development, channelling allocations of real resources
in a specific direction, or even of raising the
real investment rate.
Financial intermediaries may, of course, be
conceived to have a development function,
i.e., to be institutions that play an active role
in the allocation of resources. In this case,
the intermediaries channel resources in a different direction from that in which they would
flow if the intermediaries had a neutral function:
they direct the flow to the fields considered to
be of prime importance to the economy because they act as a spur to economic and social
development, and these fields will mostly be
different from those that would be selected
purely for reasons of private profit.
When financial intermediation has a development function, it may have two other
avowed objectives as well: first, to raise the
savings and investment rate of the economy
and increase the flow of financing that goes
through the intermediaries; and secondly, to
spread the allocation of funds. This is the
reverse of what happens when the intermediaries are neutral in function because, on the
one hand, the conventional standards of private
profit and guarantees for channelling funds
(which implicitly tend to favour the large
enterprises, most of them monopolies) are
discarded and, on the other, a conscious effort
may be made to encourage productive units
other than those which have always received
financing or that have already consolidated
their position, i.e., to favour units which for
6 Ibid., p. 90.

various reasons deserve priority attention, such
as export firms and small- and medium-sized
enterprises.
Among the forms that the system of intermediation may assume to fulfil the function of
promoting economic and social development,
two separate possibilities may be considered.
The first consists, essentially, in readapting
and restructuring the intermediation that is
functionally neutral, that is, in linking intermediation with an explicit development strategy and imposing on it a strict and effective
government policy with proper co-ordination
and central control. This means that the State
should have effective means of influencing the
quantity and quality of the system as a whole
and of each individual intermediary, whether
public or private.
The second alternative, which is followed in
most centrally-planned economies, is for the

financial intermediaries to be entirely State-run
and to meet directly the applications for financing to mobilize real resources in accordance with the current development plan. In
other words, the flow of financing conforms
strictly to the directives and controls of the
central planning authority.
Obviously, there are many intermediate positions between these two model alternatives for
the organization and operation of a neutral or
developmental financing system. There is ample
evidence of this in the world context, and
clear examples exist even in the experience of
different Latin American countries, as will be
shown when consideration is given to the development of the system in selected countries
and, in the final section of this paper, to the
chances of success and possible features of a
system of intermediation that would serve the
general purposes of development.

II. R E L A T I O N S BETWEEN E C O N O M I C D E V E L O P M E N T
T H E G R O W T H O F T H E F I N A N C I A L SYSTEM
The relationship between the real and financial components of the development process is
decisively influenced by a number of factors
that create a wide variety of symmetrical and
asymmetrical relationships between them.'' They
include factors affecting financial growth whose
relationship with economic development is very
difficult to pinpoint, for example the degree
of centralization of the economy, international
relations, method of financing the public debt,
and the existence of chronic or acute inflation.
Another set of factors affects the structure and
modus operandi of the economy and the financial system and includes the size of the
subsistence economy, degree of sectoral and
spatial diversification, patterns and level of
urban consumption compared with average disposable income, prevailing habits and forms of
saving by the economic agents, etc. Lastly, it
^ One of the writers w h o has been most concerned
with establishing a theoretical relationship between the
growth of the financial system and economic development, namely Raymond W . Goldsmith, argues that
there is not necessarily a close correlation between the
two. In La estructura financiera y el crecimiento
económico ( M e x i c o City, Centro de Estudios Monetarios
Latinoamericanos, 1963), p. 47, he states that the
aspects of economic growth that seem to have the
greatest influence on the nature of the financial structure in a country and the rate of financial development
are not the same aspects that are considered of primary importance in explaining economic growth itself.

AND

must be remembered that the method of operation of the financial institutions and the way
in which agents and functions are speciahzed
depend to a great extent on the characteristics
of each country, especially its economic policy
guidelines, relations between the public and
the private sector as regards financial matters
and the level of openness or self-financing of
the dominant enterprises in the main sectors.
T o iUustrate the first set of factors, it may
be useful to look at the sociahst economy in
which a very high level of centralization goes
hand in hand with a not very diversified financial system. Even with the recent efforts at
economic decentralization and the emergence
of a greater number of surplus and deficit
spending units, financial intermediation continues to be undertaken by only a few central
pubUc agencies. The financial sector is virtually
nothing more than a simplified monetary system with the basic functions of regulating
liquidity and ensuring that financial flows are
in tune with real transactions, without neglecting transfers by the State for investment purposes. The system does not create debt in
order to sustam a given level, composition or
rate of growth for effective demand. The financial system (and the taxation system as
well) simply fulfils the function of adapting

In the United States, for example, the financial agents outside the banking system began
to specialize quite some time ago, and the
share of the various private savings and insurance institutions in total financial assets,
which was already large at the beginning of
the century, steadily increased until the 1960s.®
Given the growing volume of savings normally
tapped by these institutions, the financial system basically focused on seeking opportunities
for profitable investment. This led to the formation of conglomerate companies, in which
the interests of producers and financial enterprises were merged, with the function of providing greater flexibility and fluidity in the
channelling of resources among the various
sectors.

over-all and sectoral levels of demand to production targets.
At the other extreme, where the financial
system has developed to the maximum, are
countries with highly interrelated financial systems such as the United Kingdom and Switzerland, because of their position as international bankers, and in the case of the United
Kingdom, because of the size of its external
debt and its method of financing it on the open
market; and also the United States, because
of its international position as a net exporter
of capital, the size of its public debt, and the
habits and forms of personal and institutional
saving.
In the two English-speaking countries, the
level of self-financing in goods-producing enterprises, particularly the major enterprises, is
among the highest in the world, and hence the
development of their financial markets is not
linked in the first instance with real capital
formation in the main sectors of the domestic
economy (see table 1 ) . In actual fact, the
basic function of the financial intermediaries
in the mature capitalist countries is not to
collect resources to finance the real expansion
of the economic system but, on the contrary,
to seek alternative uses for net surpluses and
thus maintain a rate of return on total capital
that will sustain anticipated expansion and
maintain the rate of accumulation.

This new manner of directing the allocation
of resources is not subject to any great degree
of intervention by public financial institutions,
either as regards resources or as regards control or management policies. The conglomerate
has two basic functions, both of which have
a key role in sustaining the accumulation process set in motion by the major national and
international enterprises. The first is to diversify portfoUos in order to minimize the risk
of holdings and guarantee a reasonable level of
return. T^e second, and the most important, is
to seek out the sectors, activities or enterprises
8 See Goldsmith, op. cit.

Table 1
T R E N D S IN T H E R A T E OF
{Percentage
Country
United States"

1961

1962

1963

1964

1965

1966

Average

102.0

106.5
122
77
82
68

112.0

112.4
142
104

106.0
138
116
80
83

99.6
136
113
72
82

95.5
121
99

104

113
83
77
67

—

78
77

65
69

68
71

67
70

67
71

38
40

62
58

81
65

—

—

Federal Republic of Germany»
b

93
82

France»
b

—
—

67
74

71
73

Italy»
b

56
19

51
59

38
41

74

63
53

69
49

..

formation)

1960

United Kingdom»
b

Japan»
b

SELF-FINANCING

of gross fixed capital

—

SOURCE: Léopold Jeorger, "Etude comparée du financement des entreprises dans six pays industrialises", in Economic Appliquée, Archives de ITnstitut de
Science • Economique Appliquée, vol. X X I , 1968,
Nos. 3-4, Geneva, p. 568.

79
77
65
69
34
36
74
66

82

74

—

73

—

129
99

47
55
74
58

a F o r United States and United Kingdom: annual
financial accounts; for other countries: company balance sheets.
b Corrected average: estimated average figure, taking account of the corrections that have to be made
to each country's figures to make them comparable.

with the greatest growth potential, in either
the domestic economy or abroad, so as to be
able to invest in such a way that they will be
able to control the future rate of accumulation
of their enterprises and thus ensure the growth
of the conglomerate over the long term.
The situation in Italy and Japan is not the
same, even though the financial system in these
countries had developed rapidly in recent
decades.® Because these countries are in a rapid
process of expansion and modernization and
undergoing radical changes in patterns of industriaUzation and forms of economic organization, both of them, and particularly Japan,
have problems in financing their economic
activity that are completely diiferent from those
of the mature capitalist countries. Their enterprises are more dynamic and have a low level
of self-financing and a high rate of dependence
on external sources of funds (see table 2 ) .
Moreover, since average income in both countries is somewhat lower than in the majority of
developed countries, financing requirements for
domestic consumption are more acute given
that the mass market is expanding—the mass
market having already become relatively stabilized in the "affluent" societies. On the other
hand, these two countries do not possess private savings institutions (insurance companies,
etc.) of the scale and significance of those in
the English-speaking countries. The third difference lies in the level of public intervention
in the direction of the economic development
process, which in the financial sphere takes the
form of greater participation by public financial institutions in the collection, supply and
channelling of financial resources to certain
priority sectors or enterprises. The fact that
the banking system plays a more important
role in financial intermediation also makes it
possible for the central bank and other centralized financial agencies of the public authorities to play a more significant role and exercise
a greater degree of control.

0 If the indicator of over-all financial development
is taken to be the ratio of financial liabilities to national income, Japan and Italy have one of the highest
coefficients in the world, immediately after Switzerland
(see Leopoldo Solis, "El sistema financiero en 1980",
in El perfil de México en 1980, Editorial Siglo X X I ) .
The situation would appear much the same if the indicator used was Goldsmith's coefficient of financial interrelations (total financial assets: tangible assets, at
current values). See also R. W . Goldsmith, "The determinants of financial structure", document N o . l / I I
of the Eighth Meeting of Officials of Central Banks on
the American Continent, Buenos Aires, 7 November
1966.

Lastly, in the case of Japan, conglomerate
companies were formed at a much earlier stage
than in the other capitalist countries, although
with very different forms of organization and
operation. From the outset, the keiretsu organized in the post-war period to replace the prewar zaibatsu established a much more functional relationship between the major producer
enterprises, private financial agencies and
major private banks as regards the strategy
for expansion. Furthermore the Central Bank
of Japan plays a decisive role in supplying the
conglomerates with funds.^" The question is
not, as it was in the United States, of moving
from a structure in which the major vertically
integrated producer enterprise coexisted with a
certain degree of freedom with the major financing savings-investment finance companies
towards a more flexible structure in which the
conglomerate disregards the traditional links
between sectors that are interconnected by type
of activity and seeks a diversified interrelationship between real and financial capital,
under the umbrella of financial capital. Right
from the beginning in Japan, the keiretsu
leaned heavily on a bank with its ancillary
financial enterprise, which constituted the central supply point for a constellation of producer enterprises situated in the major dynamic
sectors of Japanese industry. The form of
organization, therefore, is not vertical and production by the enterprises in each group is
not integrated. The seven principal keiretsu,
apart from being supported by the seven major
banks (from which each groups takes its
name) compete fiercely amongst themselves in
the same highly modern sectors, such as metaltransforming, industrial chemicals, paper and
electrical equipment. Consequently, the conglomerate is not basically looking for economies
of scale and specialization, as the United States
joint-stock companies were, but rather to "internalize" external economies, especially those
relating to financing, technology and marketing.
The high level of competition among the various groups and even among enterprises within
the same group has had the effect of orienting
growth towards maximizing sales rather than
profits.
This style of development has been supported by the Japanese public sector by means
of a series of industrial and foreign trade
policy measures, including a policy of "equal
treatment" for all keiretsu, under the Bank of
10 See "Rapid economic growth in post-war Japan",
in The developing economies,
vol. V , N o . 2, June
1967.

7

00

Table 2
C O M P O S I T I O N O F S O U R C E S A N D M A I N USES O F C O R P O R A T E

FINANCING

{Percentages)
Federal
Republic of
Germany
(A)

United
States
(A)

(B)

France

United
Kingdom

Japan
(A)

(A)

(B)

(A)

25.2

73.5

55.4

73.1

29.8
22.3

68.3

Amortization
Undistributed profits
Capital transfers
Other

62.8

66.8

52.9

55.9

30.8

43.6
19.7
4.8

D o m e s t i c financing

47.4
9.7
2.5
3.2

22.9
43.9

—

—

—

—

—

—

—

—

—

—

—

—

—

—

44.1

69.2

74.8

10.3

7.3
2.4

10.31
1.6¡
14.61
48.3J

—

31.7

External financing
Stocks and shares
Liabilities
L o n g - and medium-term loans . .
Short-term loans
Other
TOTAL

37.2

33.2

44.4

4.1
1.4
11.2
6.8]
8.2

11.3

1.5
7.6
3.6
5.6
14.4

6.7
3.6|
16.7Í
3.31
17.0j

100.0

12.8
13.1
100.0

100.0

100.0

^

18.51
3.4|

0.4
3.3

59.5

18.5
100.0

100.0

100.0

—

26.5
10.61

(B)

—

3.3
44.6
11.6
11.5

15.9
100.0

7.3
14.0
100.0

Uses
F i x e d investment
Stocks
Financial issues
L o n g - t e r m issues (shares, e t c . )
Liquid assets
C o m m e r c i a l credit

54.1

80.8

74.6

64.3

78.1

59.0

41.8

43.4

55.7

6.3

8.1

8.1

6.3

15.1

7.7

9.1

13.6

13.5

12.8

17.3

23.1

15.6

—

50.5

47.5

31.7

32.4

—

22.8

18.0

—

—

—

—

7.2
11.2
23.7

—

—

5.8"
3.8

11.5

9.6
13.5

SOURCE: L é o p o l d Jeorger, o p . cit., p. 565.
Note:
T h e figures given are averages f o r 1959-1965 o r 1960-1966.

(A) Figures taken f r o m financial accounts.
( B ) Figures taken f r o m balance-sheets.

—

14.4

Japan's policy of increasing credit in virtually
the same proportions to each of the main
private banks headmg each group.
These features of financial intermediation in
Japan are not usual in the other developed
countries, even in countries in which the public
sector plays an important role in the financial
sector, such as Italy and France. In no other
capitalist country is there this institutionalized
economic and financial solidarity in activities
by the Government and large-scale enterprise. ^^
Even in France, where the State holds a t i ^ t
rein over the banking system, and financial
institutions are in the main pubHc or semipublic, the large-scale enterprise, either because
of its high level of self-financing, or because
it has recourse to the open financial market
outside the banking system, does not depend
very much on public credit, which flows to
medium-scale and small enterprises, to the
large nationalized enterprises, or to financing
specific sectoral or regional development
objectives.
In developed and developing countries where
developmental public institutions have become
more important and there is a great deal of
control over the banking system (Italy, Mexico,
Chile and Brazil, for example), two types of
financial intermediation coexist with different
functions and a modus operandi and institutional organization which correspond to the
particular roles assigned to the pubhc and the
private sectors. Thus, there is not the same kind
of integration and solidarity that is so evident
in the operation of the over-all financial system
in Japan. A n important factor in financial
intermediation in the private sector is, inter
alia, the degree of "de-nationalization" or
financial dependence on foreign sources of the
key sectors or enterprises in the economy.
Foreign penetration into the key sectors of
national economies has been accompanied in
recent years by a form of domestic financial
development controlled from outside, which
represents a new form of international financial
capitalism without the classic features of the
open movement of capital. A t present, the
level of financial, commercial and technological
dependence of subsidiary and associated companies on direct foreign investment is growing,
in the countries at the centre and in those on
the periphery. All the mutual funds, investment banks and other financing houses asso11 This may be attributable t o the fact that in n o
European country is large-scale enterprise so dominantly "national" as in Japan, owing to the greater
level of penetration into the European economies by
United States o r multinational companies.

ciated with the multinational enterprises are
gradually replacing the traditional form of
direct control with majority shareholdings in
the capital of enterprises. Even the foreign
commercial banks are gradually losing their
role as the main instrument of international
financial capital for penetration and control
since the banking system has been nationalized
in a number of countries, or is under the strict
control of the central banks.
The role and functions of public financial
intermediation have been changing over recent
decades in line with the style of economic and
social development adopted in each country.
In the countries with mature economies and
a comparatively greater degree of financial
stability, one of the prune functions of the
major public agencies is to regulate the money
supply and the general liquidity of the financial
system and to maintain an open securities
market in balanced operation. These agencies,
however, are not greatly involved in financing
economic development and do not play an important role in directing or controUing the
resources of the private financial enterprises.^'^
The developmental public financial institutions were formed in the European countries in
order to undertake the task of post-war reconstruction, and in the developing countries for
a wide range of purposes, ranging from
financing infrastructural projects and the basic
industries to taking over responsibility for
directing and financing programmes for industrial or regional development. The public institutions concerned exclusively with the first
task (for example the Bank for Reconstruction
in West Germany) have gradually lost their
functions. Similarly, severd of the development agencies that were operating only with
specific projects or without regular means of
collecting resources also declined in importance.
Among the public agencies that continued
to grow or at least to maintain thehr relative
importance are the financial institutions specializing in credit to particular sectors (agriculture, processing, construction) or regions, to
small- and medium-scale industry and to foreign trade. Among the European countries, the
most striking examples of this type of financing
are in France and to a lesser extent, Italy,
and, among the Latin American countries, in
Mexico, Chile, Argentina and BrazU. Certain
public financial institutions as well as engaging
12 This is not to ignore the ^ e a t influence and
weight of public spending and subsidies in the development of key sectors, often those of military significance.

in financing activities are responsible for
regulating the private financial market and issue
government bonds (in addition to the Central
Bank), noteworthy examples of these being
Nacional Financiera S.A. in Mexico, the
Istituto Mobiliare Italiano ( I M I ) in Italy
and—^for a short time in the post-war period—
its Argentine copy.
It is irrefutable that within Latin America's
experience the existence of inflation in certain
countries and at certain periods has had an

III.

F I N A N C I A L I N T E R M E D I A T I O N A T SIGNIFICANT
IN L A T I N A M E R I C A ' S D E V E L O P M E N T

This chapter wiU examine the way in which
financial intermediation has grown in Latin
America in response to the need to diversify the
internal productive structure of the region. The
analysis will cover the relatively more developed Latin American countries in which two
well-defined stages of development are observable: up to the 1930s, with the emphasis on
primary exports, or outward-directed growth;
and from the Second World War onwards, with
the emphasis on import substitution as a form
of inward-directed growth.
1. Financial intermediation during the
primary export stage
. Applications for financing in
outward-directed growth came
clusively from the export sector,
to finance the production and
primary activities, or indirectly
expansion of the infrastructure.

the period of
virtually exeither directly
marketing of
to finance the

A s regards capital accumulation, although
the productive capacity of the agricultural
sectors was expanded mainly out of real and
financial domestic resources, these resources
were largely the result of the high returns
accruing on foreign trade. Furthermore, investment in the most capital-intensive sectors, such
as mining, transport, energy, etc., was financed
virtually completely with foreign capital, either
through direct investment or, in the case of
government financing, through issuing government bonds on foreign capital markets.
The largest financial houses were principally
engaged in export and import activities and
most of them were formed by foreign banking
houses, some of which were subsidiaries of
the major world banks. Completely national
financial intermediaries, which were rather

10

appreciable impact on financial development.
This aspect will be taken up when considering
individual coimtries. Nevertheless, it can be said
immediately that recent trends in Chile and
Brazil have shown that when the stage of
development makes it necessary the hurd^le of
inflation can be overcome and machinery can
be created (such as monetary readjustment)
to provide an institutional footing for financial
instruments that are acceptable to the broad
mass of savers.

STAGES

small in scale and not very well organized,
were formed to deal with the flows of
domestic trade and to finance farmers by
issuing mortgage credit instruments or urban
activities by issuing direct debt commercial
paper.
Stock markets have been operating for
quite some time in Latin America, and in
some countries (Argentina, Chile, Brazil) they
were more important during some periods of
the primary export stage than during the
domestic industrialization stage that followed it.
This was attributable not only to an increase
in financial operations based on foreign trade
and exchange speculation but also, and sometimes to a very large extent, to the formation
of a multitude of private joint-stock companies
which offered shares on the financial market
and thus gave rise to a great deal of speculation.
The emergence of banking institutions with
the right to issue money, together with sharp
fluctuations in the exchange market, speculation in real estate and in the stock market, led
to a marked degree of instability in Latin
America's financial markets, which were as yet
in their infancy and not well organized.
Towards the end of the last century, many
countries
experienced
violent
fluctuations
which accompanied and amplified the trade
cycles, with rapid inflows and outflows of
external capital, periods of runaway inflation,
devaluation of national currencies and considerable losses in public and private financial
securities.
Owing to this crisis in financial activity,
government intervention was increased in the
exchange market and public banks were
established with exclusive rights to the issue

of paper money and began to exert a degree of
control over the expansion of the banking
system.
However, national banking systems proper
with separate financial, commercial and speculative functions, did not appear until much
later. As a result of the Great Depression, when
many international financing houses went out
of business and the gold standard was finally
abandoned, the major State banks began to
meet the needs of the public sector by acting
as the main heads of the banking system,
although not necessarüy with functions different
from those of the central banks.
The main features of financing during this
period can be summed up as follows: in the
private sector, the banking system operated by
tapping resources from the surplus spending
units in agriculture (chieñy for export) and in
rapidly expanding urban activities (commerce
and construction), and transferring these
resources to the deficit spending units in these
same sectors. The surpluses generated by
export-oriented agriculture to finance capital
accumulation in the major urban centres d o
not appear to have been transferred at this
stage through the price mechanism nor in many
cases through taxation, but by transferring
the profits accruing from exports to urban
investment, either directly as in the case of
civil construction, or indirectly through the
financial system. All this accumulation was
based on an infrastructure of basic economic
services financed, as noted earlier, directly or
indirectly by foreign capital.
At this stage, industry was just begmning
and it did not benefit from the transfer of surpluses in any appreciable scale. Generally
speaking, it financed itself on the basis of its
artisan-type activities and took advantage of
improvements in relative prices resulting from
temporary balance-of-payments problems and
the prospects of expansion offered by the
diversification of urban demand for goods and
services. Industry's most prosperous moments
were associated with the foreign trade crisis
or with periods of great financié activity when
credit was expanding and speculation was on
the rise. When the financial situation stabilized
owing to the recovery of the export sector,
industry's prospects
for expansion
were
weakened and it again experienced a setback
in its prospects for growth and serious c o m petition from imports. Over the long run,
however, the internal accumulation of healthy
profits in times of prosperity, together with a
cheap and relatively skilled labour market

(often swelled by immigrants) enabled industry to be self-sufficient, although for long
periods it remained stationary as for example
in the period between the First World War
and the Depression.
2.
(a)

Financing and financial intermediation
during the import substitution stage
The transitional stage

During the transitional stage—from the
Great Depression until after the Second World
War—the export sector continued to be a
generator of surpluses and to make net
transfers of resources to domestic development through such instruments as the manipulation of exchange rates and taxation. Nevertheless, the external bottleneck and the resulting
sharp rise in domestic relative prices provided
very lucrative prospects for established industry
with idle capacity which was automatically
protected from foreign competition. This helped
to raise the level of self-financing in industry.
Moreover, the inflow of foreign capital dried
up completely, and the flight of capital during
the Depression was counterbalanced by the
moratorium on the external debt and the exchange controls that Governments were forced
to introduce to stem the drain on the balance of
payments. In the process, the subsidiaries of
foreign companies established in the sectors
producing goods for urban consumption found
themselves forced to participate in domestic
capital formation by retaining and ploughing
back a large proportion of their profits, since
they could not remit them abroad.
Furthermore, the foreign banking houses lost
their preponderant role in financial flows and
a national banking system sprang up and
gradually acted as the intermediary between
surplus and deficit spending units by providing
the financing required for marketing domestic
production, which during this period increased
in importance relative to export and import
activities.
Investment in the economic infrastructure
ceased to receive fresh resources from abroad;
and the majority of foreign holders of public
utility concessions did not show any great
interest in expanding productive capacity out
of their profits, both because profits ceased to.
be high comparatively speaking, and because i t
was difficult for them to remit their profits-,
abroad or finance the imports they needed"..
Hence, programmes to expand the infrastruc-ture became an increasing burden on the p u M c ;
sector which as a general rule did not. have;
111

fiscal or financial instruments at its disposal to
finance them properly.
In this transitional stage, the traditional
financial markets lost much of their former
vitality, since speculation on the stock market
and
also transfers between
international
financial agencies and the major exportmg
houses were clearly in a downward cycle. On
the other side of the balance-sheet, however,
as noted earlier, a commercial banking system
began to spring up under the umbrella of the
large public banks. In Argentina, because of its
comparatively greater level of urban development, a genuine national market dealing in
public and private securities was in operation,
and public credit institutions were established
in several countries to meet the long-term needs
of various sectors of the economy, such as
agriculture, industry and construction.
The new financial system benefited the
private as well as the public sector, not being
affected by the ñuctuations of iaternationá.
trade and foreign capital flows, and helped to
estabhsh domestic channels for tapping resources to finance production. Although investment in urban-industrial activities appears to
have been financed by the resources of the
enterprises concerned, it is quite clear that it
was bank credit which fuelled marketing
activities in the different sectors and regions
and hence led to an expansion of monetary
markets, which in turn increased profits and
monetary savings and stepped up the accumulation process.
( b ) Industrialization
period

in the "easy"

post-war

The improvement in the terms of trade also
enabled Governments to siphon off some of
the profits of the export sector and increase
their financial resources by fiscal or para-fiscal
means.
Nevertheless, public budgets also began to
feel the pressure of increased investment in
basic services and social welfare costs. This
trend worsened to such an extent that at the
end of the period (around 1954), the financial
situation of the public sector deteriorated in
some countries and moved into chronic deficit,
and this, coupled with the tightening of the
external bottleneck, led to severe inflation.
A s regards the financing of industrial expansion, the main branches of manufacturing
were net requestors of resources from the
financial system, mainly for working capital,
since high profits, the subsidies implicit in imports of equipment, and external suppliers'
credits, provided them with enough resources
to finance fresh investment.
Furthermore, the inflow of
non-compensatory foreign capital was of little significance in financing public and private investment in this stage of extensive industrialization.
The same was the case with foreign private
investment and foreign loans to the public
sector. The external debt increased mainly as
a result of the commercial debts of importers.
Accumulation in many countries had the effect
of worsening the balance-of-payments situation,
even though the purchasing power of primary
goods exports was markedly expanding.^®

By the end of the Second World War, this
domestic capital formation process was already
on quite a scale, without there being transfers
of any great size between sectors, except those
effected by the export sector to domestic
activity. Nevertheless, the possibilities of further
industrial expansion were somewhat limited
with this kind of structure. The wear and tear
on the existing productive apparatus, and also
domestic capacity for financing, appeared to
be such that industrial development was
prevented from moving into a stage of modernization and expanding scales.

Generally speaking, it can easily be shown
that this period of industrialization, closely
linked as it was with the speeding-up of the
urbanization process, had substantial financial
requirements that had to be covered out of
domestic resources. These resources were
basically short- and medium-term funds to
finance the current activities of the private
sector, and came from the commercial banking system. Long-term loans posed a more
difficult problem, particularly as regards the
major mfrastructural projects being promoted
by the pubUc sector and certain types of investment of key importance for development in
basic sectors.

Quite clearly, the recovery or expansion of
the export sector, which continued into the
first half of the 1950s, helped to swell real
investment capacity (imports of equipment)
and to transfer to industry a large part of the
profits of the export sector through the price
mechanism and, in particular, exchange policy.

13 The piling-up of the commercial debt and the
extremely large balance-of-payments deficits in the
first two years of the 1950s were due not only to the
exchange policies prevailing in most Latin American
countries, but basically to the fear that the Korean
conflict would interrupt supplies f r o m abroad, which
led to a considerable expansion o f imports of durable
goods and equipment.

12

A public form of financial intermediation of
a developmental character began to emerge in
several Latin American countries, as a result
either of the formation of new agencies—the
National
Economic
Development
Bank
( B N D E ) and the Nordeste Bank in Brazil,
the Industrial Bank in Argentina—or the
activities of existing agencies—the Chilean
Development Corporation ( C O R P O ) and the
Nacional Financiera in Mexico. These agencies
fulfilled an important function subsequently, as
the industrialization process became more
intensive, as regards both the promotion and
orientation of public and private investment,
and the channelling of domestic and particularly external financing into new activities.
(c)

Intensive

industrialization

Only Brazil, followed by Mexico and later
Argentina, moved during the second half of
the 1950s into the stage of industrialization
corresponding to import substitution in the
heavier branches of industry such as transport
equipment, metal-transforming and other basic
inputs and equipment.
The need for financing expanded considerably as the rate of import-saving industrialization stepped up, while the sectors
associated with exports with transferable surpluses ceased to be net providers of resources
and some even became deficit units. The need
for financing was greater because the productive process had become longer and "internalized", and because the composition of activities
had become more capital-intensive. With the
introduction of a series of links between
primary production and the production of final
manufactures, which enlarged the economic
scale of intermediate production, there was an
automatic rise in the coefficient of direct or
indirect financial requirements per unit of final
product. "Internalizing" the production of
inputs and capital goods involves an increase
in the production costs of the consumer goods
industries and an automatic loss of external
supphers' credits, and this also swelled current
financing needs based on domestic resources.
Lastly, the emergence of new import-saving
sectors meant that, even though the over-all
rate of investment in industry did not rise in
some countries, the fact that the composition
of industry changed to include heavier branches
involving larger scales of production and
longer lead times made it necessary to tie up a
large amount of financial resources.
Much of this investment was effected directly
by foreign companies, but there was still an

increase in the pressure on domestic resources
and in some cases a rise in the share of
external resources in the total financing of
these new sectors. In most of the branches
producing consumer durables or producers'
goods, even though the capital was virtually
entirely owned by foreigners, the inflow of
resources in the form of direct investment or
loans represented only slightly more than the
amount needed to finance equipment imports.
The resulting process of capital accumulation
was attributable, at the investment stage, to the
capacity to attract domestic resources from
other sectors, particularly from the public
sector, by means of exchange, fiscal or financial
subsidies (both overt and covert). Once a plant
entered into operation, the foreign enterprise,
which was virtually always in a dominant position, if not the only enterprise in the sector,
had a broad range of possibilities for selffinancing. It obtained large profits from what
was a virtually completely reserved market
and could easily turn to the national banking
system to finance its current operations. Thus,
if a distinction is made between the ownership
of resources (foreign) and the formation of
resources (domestic market), it may be concluded that an initial injection of external
capital generates a considerable demand for
short-, medium- and long-term funds which is
eventually satisfied by using the actual or
potential surpluses generated by the other
domestic sectors.
The public sector, by expanding its investment expenditure considerably and maintaining
or increasing current transfers to consumers
and to pubUc enterprises with growing operating deficits, without the backing of fiscal
savings, went chronically and openly into
deficit and began to exert considerable pressure
on the financial system for additional resources.
Although many countries made use of such
instruments as earmarked taxes and compulsory rates and loans, and have linked them
to capital expenditure, these were only a
means of guaranteeing the implementation of
public investment programmes. As Governments did not manage to raise current income
at the same time as total spending, there were
always large deficits that usually had to be
financed with resources from the banking
system.
Furthermore, perhaps for the first time on
any scale since the period of inward-directed
growth began, external credit became an important source of resources. Although the
inflow of foreign credit or investment to Gov-

13

ernments created a demand for additional
domestic financial resources, the actual savings
potential and in particular the investment
potential was expanded during this period,
owing to the external inflow, chiefly in those
countries that offered the best prospects for
investment, i.e., a sufficient margin in the
market for import substitution. The fact that
this increase in potential apparently did not
lead to a considerable rise in the actual savings-investment coeflicient appears to have
been due, above all, to domestic difficulties in
the mobilization of resources.
Nevertheless, this increase in demand for
pubUc and private financing was not accompanied by sizable changes in the domestic
financial structure. The capacity was lacking
to tap and transfer voluntary savings in a
volume and manner suited to the financing of
industrial development and also to establish
new fiscal and para-fiscal methods of tapping
resources to replace the traditional methods
and also those methods used to tap the surpluses generated by the export sector. Hence,
most countries began to use inflationary expansion as a means of striking a balance
between the pressures exerted by the private
and the public sectors on the financial system.
In some cases, and for periods which varied
depending on the characteristics of each coimtry, this became an effective means of forced
saving that was an a posteriori confirmation of
investment decisions in the sectors with the
greatest prospects, but over the long term
completely lost its effectiveness. It is no
coincidence that Mexico and Venezuela stand
out among the more dynamic economies because they did not have to resort to inflation.
Under the control of the pubUc sector, Mexico
has managed to build up financial institutions
that can tap the resources generated by most of
the potential surplus spending units and
allocate them to the deficit sectors with the
best growth possibilities, including the decentralized public sector. During this period
in Venezuela, the export sector maintained its
favourable position and this enabled it to function as a standing source of surpluses that
could be transferred by fiscal or para-fiscal
means to other sectors that were modernizing.
The forced saving represented by inflation
only had any degree of effectiveness for fairly
short periods in rapidly expanding economies
where there was no risk of strong pressure for
redistributing income as inflation gradually
eroded the resource tapping mechanism. A s
long as these conditions prevailed during the

14

period 1957-1961, Brazil offered perhaps the
most striking example of this. Inflation was in
effect an instrument for transferring resources
among sectors since it absorbed the potential
surpluses of all the economic agents and
sectors whose capacity for reaction and expansion was not comparable to that of the
more dynamic sectors. The transfer was
effected by monetary means through sharp
changes in the relative prices of the principal
goods and services, to the detriment—naturally
enough—of wages, interest, rent and other
relatively inflexible forms of contractual income.
If inflation continues for a relatively longer
period, all the economic and social agents begin
to react more rapidly and as the inflationary
spiral accelerates the capacity effectively to
transfer resources is lost. Once the price system
becomes highly intermeshed (any price rise in
one sector being propagated virtually instantaneously to the rest), the trend of inflation is
anticipated and extrapolated because prices
are expected to rise, and thus it becomes useless as a financing mechanism. Inflation loses
its functional usefulness once it becomes selfpropagating and uncontrolled.
As a result of these circumstances, which
arose in various countries, fairly radical stabilization policies were instituted that, while usually not eradicating inflation, at least brought
it under control. Thus, it became absolutely
essential to create or develop another type of
financial organization that would be compatible
with a degree of control of inflationary pressures and with the new needs arising out of
the transition towards the new pattern of development that basically characterized the
second half of the 1960s.
Among the relatively more developed countries in the region, Mexico's growth and policies are an exception to the trends and problems of other economies. Above all from
the mid-1950s onwards, Mexico managed to
achieve effective control over inflationary pressures, and was clearly determined to place its
intermediation institutions and machinery in
the service of developmental economic objectives.
( d ) Mexico,
opment

a typical case of financial devel-

The financial structure in Mexico was developed some time before that of the other
Latin American countries.^^ Its most striking
The basic financial structure was set up in 19311936 and still prevails, with the Banco de M é x i c o

feature from 1955 onwards is the key role of
the public sector, both as regards direct participation by governmental financial intermediaries in over-all financing, and as regards
specific action by the Bank of Mexico and
Nacional Financiera in handling a policy designed to develop a market in long-term
securities. The decisions of these two governmental bodies on types and rates of interest,
coupled with the creation of specialized indirect financial assets and the control of private
financial companies, appear to have played a
key role in channelling investment towards
and ensuring a good supply of funds for projects of rather doubtful private profitability over
the short term, but of social value.
The funds available to the governmental financial intermediaries came from fiscal revenue, from the rest of the world and from
sales of bonds to the private sector. Given
the volume of resources obtained from the
public sector itself and from abroad, the public
financial intermediaries began to diversify their
indirect financial assets and to manipulate the
rate of interest charged in order to attract towards themselves the maximum of public
demand. As a means of bridging the gap between the quantity of funds allocated by the
public financial agencies and the types and
rates of interest on the open market, they controlled the private financial enterprises by
subjecting flows of funds within the financial
system to strict qualitative and quantitative
regulations. In this way, it was not only the
preferences of entrepreneurs or individuals for
specific types of indirect asset that determined
the quantity of funds allocated by the financial
institutions; considerable weight was exerted
by the measures imposed as result of government financial policy aimed at channelling
funds towards the sectors considered to be of
priority importance.
The quantitative importance of public financial intermediation can be gauged by the
acting very effectively as the central bank and maintaining control of private credit institutions and Mexico's international finances while being at the same
time the main source of financing for the public deficit. The Nacional Financiera was also created about
the same time, and its methods of operation were
gradually improved right up to the second half of the
1950s.
For a more detailed account of financial trends in
Mexico see Robert L. Bennett, The financial sector and
economic development: The Mexican case (Johns Hopkins Press, 1965); Raymond W . Goldsmith, The financial development of Mexico ( O E C D ) ; and particularly
Dwight S. Brothers and Leopoldo Solís M., Evolución
financiera de México
(Centre for Latin American
Monetary Studies, Mexico City, 1967).

fact that 30 per cent of all new financing for
the private sector between 1945 and 1953
came from Government sources.^® This did
not mean, however, that external financing
sources accounted for a large proportion of
investment in enterprises, since during the
period 1940-1960 between 70 and 90 per cent
of gross private investment was financed out
of own resources.^®
Another striking feature is that monetary
expansion in favour of the public sector, which
in several countries automatically led to a
secondary expansion in favour of the private
sector, was offset in Mexico by requiring 100
per cent reserves on all increases in deposits
in the financial system in general.^^ Monetary
and financial controls, which were stepped up
following the 1954 devaluation, prevented first
the commercial banking system and later the
other financial institutions from operating as
propagating agents for the pressure on liquidity
exerted by the public sector. Moreover, selective controls on credit forced private financial
institutions to finance economic development
by obliging them to purchase specified bond
issues and to grant development credit to
priority activities.
The public bonds that were a compulsory
component of the portfolios of the private
financial institutions accounted for a growing
proportion of their net marginal deposits and,
furthermore, yielded a much lower return than
the current rate of interest. As a result, the
Government turned in the first instance to
these institutions, and this made it possible
for it to implement public financing policy and
at the same time a heterodox policy of monetary stabilization.
The way in which the financial institutions
operated was certainly an important factor in
preventing inflationary pressures (of the kind
common to an intensive process of urbanization with marked changes in the composition
of demand and the productive structure) from
creating financial mechanisms that would propagate inflation. Mexico was thus able to curb
a chain reaction in pressure for financing from
the private and the public sectors by practising
a selective credit policy that brought growth
13 See Robert L. Bennett, The financial sector and
economic development: The Mexican case, op. cit. The
figure f o r new financing does not include short-term
credit f r o m the traditional financial system, depreciation reserves, retained profits, and direct investment of
accumulated savings.
16 See Evolución financiera de México, op. cit.
IT E C L A , Economic Survey of Latin America, 1969
(United Nations publication, Sales N o . : E.71.ILG.1).

15

requirements of the priority sectors into line
with the need to maintain a high level of stability in the financial system.
At the same time, the financial authorities
encouraged and controlled the expansion of
non-monetary financial intermediation by stimulating the diversification of private financial
assets. With this aim in view, the Banco de
México backed the quotations for a wide range
of fixed-interest securities and guaranteed virtually all credit supplied by the financial institutions. In order to provide bond-holders with
a hedge against inflation, it also authorized
private and public financial bodies to receive
deposits in foreign exchange. Although this
measure did mean a loss to olBcial foreign
exchange reserves, for the country as a whole
it does not appear to have led to a substantial
loss in over-all exchange reserves, since the
foreign currency inflows to deposit accounts
were not used on any very large scale for purchasing drafts on financial institutions abroad.
In other words, given the relative financial
stability that prevailed after 1956, coupled
with the confidence existing in domestic securities, the control exercised over virtually the
entire market by the Banco de México and
competition from public intermediation, there
were no transfers of funds on any large scale
to foreign financial markets.
Private non-monetary financial intermediation (outside the banking system) developed
very rapidly during the post-war period and
picked up pace after 1955 as a result of the
measures described above. The share of the
Banco de México in all fixed-income securities
in circulation fell from 51.5 per cent in 1942
to 10.6 per cent in 1960, while that of the
private institutions rose from 5.3 to 28.3 per
cent over the same period.
Between 1956 and 1960 the assets of the
private non-monetary institutions increased
very rapidly, eventually accounting for onethird of the total increase in the assets of the
financial system. The most important type of
non-monetary private credit institution was the
financiera, whose share in the total resources
of this financial subsector rose from 4.5 per
cent in 1940 to 37.9 per cent in 1950, 37.6
in 1955 and 60 in 1960. More than 70 per
cent of the growth in the total resources of
all financial institutions during this period was
accounted for by the financieras.^^
The resources of the financieras were used
mainly for loans and credit to private enter18 See Evolución

16

financiera de México,

op. cit.

prises and other financial institutions and also,
owing to the fact that selective credit controls
were made applicable to them from 1958 onwards, they were forced to increase credit
to the Government considerably.
The operation of this framework of institutions enabled the Mexican economy to develop
with a reasonable level of liquidity and with
a regular supply of domestic medium- and
long-term domestic financial resources consonant with the needs to diversify the structure
of production, and this at a time (1956-1961)
when several Latin American countries were
already experiencing growing difliculties in
their domestic financing, both private and
public.
There are no signs that these financial trends
in Mexico have had the effect of raising the
gross domestic savings rate of the economy
as a whole which, until recently, was not
amongst the highest in Latin America.^® Moreover, over the period 1956-1960, as in virtually all the Latin American countries, what
did increase was the share of external savings,
owing to the increasing deficit in the balance
of payments. Nevertheless, public financial
operations appear to be responsible both for
the relative stability of the Mexican economy
and for the fact that it was possible to maintain the rate of investment without increasing
the direct participation of the Government in
capital formation, which remained around 40
per cent between 1940 and 1960 (including
the investment costs of public enterprises whose
relative share increased).^®
One decisive factor that enabled the Government to retain its freedom of manoeuvre in
channelling and financing investment in priority
areas without any great increase in its direct
share or in the fiscal burden was the creation
of Nacional Financiera and of certain public
non-monetary financial agencies. Nacional Financiera is Mexico's largest financial institution
after the Banco de México. It operates principally as a development bank and is the
largest supplier of funds for financing industrial
investment, and also a major issuer of securities. The terms on which it offers its securities
to the public tend to determine the structure
19 During the period 1950-1960 it ranged between
13 and 14 per cent of the gross national product. See
Evolución financiera de México, op. cit.
20 See Raymond W . Goldsmith, The financial development of Mexico, op. cit. The proportion of 40 per
cent is valid f o r the old estimates of national accounts;
in the new estimates it is probably much lower, close
to 30 per cent.

of interest rates and repayment periods for
the market as a whole. Moreover, it acts as a
fiscal agent for the Federal Government in
the sale of government bonds and as a government agent in the management and administration of external loans. Although no cash
flow statements show Nacional Financiera's
share in the total resources of the financial
mstitutions, it is estimated that during the
1950s its resources represented between 30
and 40 per cent of the combined resources
of all national non-monetary credit institutions,
excluding the Banco de México. Owing to
Nacional Financiera's sound financial reputation, the Government has been able to sell
bonds in the foreign as well as the domestic
market.
Nacional Financiera's funds were used mainly to finance expenditure on the infrastructure
(thus preventing an increase in the tax burden)
and other investment in industry and manufacturing, in both public and private sectors.
A relatively small and shrinking proportion
of its funds has been made available to a
number of commercial and services enterprises,
and to other financial institutions and government units.
The Mexican experience is, in broad outline,
totally unlike that of the other Latin American
countries. In the first place, no other country
has developed a form of public financial inter-

IV.

mediation designed to supply long-term resources that is on the same scale and as longstanding as in Mexico. Secondly, although
some State banks and development agencies
have played an important role in supplying
long-term funds and channelling them towards
investment in priority areas in the public and
private sectors (such as the Brazilian National Economic Development Bank—^BNDE—
and the Chilean Development Corporation—
C O R F O ) , none of them, unHke the Nacional
Financiera, has offered indirect securities in
the financial market, or controlled loan applications from private financial agencies, let
alone regulated, in conjunction with the Central Bank, intra-sectoral flows within the same
financial system. N o other Latin American
country has set up a public institutional
apparatus to organize and develop a long-term
securities market under its control that is even
capable of transferring resources from private
to public financial intermediation if the G o v ernment has priority projects that lack financial backing.^^
The contribution of private financial agencies to
the financing of the public deficit was not very large
before 1955; during the period 1956-1960, however, it
represented close to 50 per cent of the increase in the
financial system's total holdings chargeable to the
government sector, equal to close to 51 per cent of the
increase in its assets over the period. See Evolución
financiera de México, op. cit.

RECENT

1. Problems raised by the new stage of
development in Latin America
By the beginning of the 1960s, several Latin
American countries had achieved a certain
degree of industrial development at varying
levels of diversification as regards the internal
structure of the manufacturing sector. A t the
same time, virtually all the dynamic growth
possibiUties afforded by import substitution
based on reserved markets or limited market
expansion had been exhausted.
The limitations of the domestic market became obvious when the process of expansion
ceased to be stimulated by demand from the
various sectors for complementarity and diversification that are a natural concomitant of
rapid change in the productive apparatus. A
sign of this phenomenon was the downward
trend of the growth rate in several Latin
American countries towards the middle of the

TRENDS

1960s, and it can be attributed to a number
of closely related problems.
First, problems relating to the base of the
domestic market, aggravated by the low income, in absolute terms, of most of the population and by the exaggerated concentration
of income in a small group, constituted restrictions on growth derived from the structure
and scope of demand.
Secondly, problems relating to the structure of supply, which reflected the lack of an
integrated set of new projects that could sustain and energize intersectoral links and increase income and employment, were determined by a set of circumstances, including
the difficulty of financing government projects
and the lack of interest on the part of foreign
investors in promoting import substitution
through more complex projects of doubtful
profitability.

17

Thirdly, there were sometimes drastic limitations on import capacity, because of the sluggishness of traditional exports and the difficulty
of placing more diversified exports on the international market. Lastly, there were a number of very concrete difficulties, such as the
stabilization crisis in Brazil or the progressive
decline in liquidity in Argentina as a result of
a restrictive monetary policy.
As was mentioned earlier, this was the time
when it was found that the mechanisms used
to expand the domestic market were inadequate and that maintaining the level of modern
industrial activity no longer depended on new
changes in the structure of production. Of
greater and perhaps decisive importance was
the need to expand and diversify demand. In
other words, the key issue was to find mediumterm financing for the sale of goods that could
be produced with the existing installed capacity.
Thus, the enterprises in the major dynamic
sectors which had hitherto confined themselves
to using bank credit to finance their current
expenditure and to employing retained profits
to finance expansion, began to be faced by
a number of problems that hampered their
capital formation activities.
First, the level of profitability expected from
the new investments was held down by the
general restraint on expansion and there arose
a high proportion of idle capacity in several
sectors.
In consequence, it became necessary to
make better use of the possibilities of a market
characterized by the concentration of income
in the high-income groups, and where the
middle-income strata in urban areas were particularly vulnerable to the demonstration effect
of the conspicuous consumption of the highincome groups. This made it necessary increasingly to finance sales of all kinds of consumption goods beginning with durables. The
need to make more credit available to urban
consumers and to extend repayment periods,
however, came up against the inflexibility of
the financial apparatus, and its basic nucleus,
the traditional banking system, which was unable to make credit available on easier terms
because of the increasing control by the monetary authorities over the secondary expansion
of the money supply, as a means of holding
down inflation.
This situation led to the formation of an
embryo financial market outside the banking
system, side by side with or superimposed

18

upon the traditional market and composed of
a number of new financial institutions whose
function was to supply enterprises with additional resources to finance sales or to enable
consumers to broaden the margin between
their disposable current income and their capacity to spend.
The initial capital to start a process of capital formation which would provide the basis
for expanding consumer credit (an essential
condition for the recovery of economic activity
and for the utilization of idle capacity) came
from the following sources:
First, and in most cases, from the traditional
banking system, which tended to create subsidiary financial enterprises as a means of
putting its profits to better use and expanding
its total credit capacity, generally independently from the growth in the money supply
permitted by the monetary authorities.
Secondly, inflows of short-term foreign capital attracted by the high profits likely to
accrue from the rapid growth of a new financial sector and, in the case of countries with
a high rate of inflation, by the prospects for
currency speculation offered by successive
devaluations.
Lastly, surpluses generated by certain enterprises in the sectors of production directly concerned with increasing sales, such as the
consumer durables industries, which in many
cases created their own sales subsidiaries or
consumer financing agencies.
Once the process has been started, expansion is assured by the possibilities of accumulating resources within the financial institutions
themselves, and soon growth becomes self-sustained, provided that the issue of direct debts to
families or enterprises is proportionately less
than the inflow of indirect credit to the financial
institutions. Generally speaking, issues of securities by the latter are guaranteed because they
offer suppliers of resources a higher interest
rate than other operations on the financial
market. In countries that suffer from severe
inflation, such as Chile and Brazil, "monetary
correction" measures were introduced in order
to revalue income on fixed-income securities
and to prevent a reduction in the real value of
financial assets.
Problems of financing in the public sector
became much more complex and urgent in the
1960s than in previous decades. Governments
were obhged to keep their share in the total
expenditure of the economy at a high and
sometimes growing level on account of com-

mitments to development programmes involving various kinds of investment in the basic
sectors of economic and social infrastructure,
and they no longer had an easy arbitrary right
to obtain resources through inflationary measures.
Moreover, there were few possibilities of
holding down consumer expenditure. What was
generally done in the short term was to adopt
emergency measures for freezing or reducing
wages and salaries, and in the long term, to
trust in the effectiveness of administrative reorganization, without going to the extent of
laying off large numbers of workers who could
not be absorbed in the labour market. Nor was
it feasible to reduce investment expenditure,
without serious repercussions on economic
activity in general, and the sectors producing
inputs and equipment in particular, since they
were increasingly dependent on public demand.
In the circumstances, the public sector was
obliged to increase the tax burden, to use
new mechanisms to obtain domestic public
credit by competing on the private financial
market, or in many cases, to increase the
external debt. Combinations of these three
means of action depended to a large extent on
the conditions in each country.
Although the public sector's propensity to
invest is greater than that of the private sector
during the period when there is a downward
growth trend and a transition to a new pattern
of development, it is very difficult to obtain
all the surplus from high-income families or
from enterprises with scant opportunities for
productive investment, when it is the same
"ex-ante" saving potential that is used to
finance production and sales by the major
modern industries, which often have a considerable amount of idle capacity.
For this reason, in the 1960s, economic
policy on public sector financing, in the countries of South America at least, was directed
along two sometimes contradictory lines: control of inflation and the renewal of growth,
which made it necessary to use fiscal and
monetary instruments more cautiously and in
a more sophisticated fashion than in the
previous decade.
In order to find new sources of funds and
be able to increase expenditure without at the
same time increasing inflationary pressure,
some Latin American governments had to
carry out more or less far-reaching fiscal reforms (Brazil and Chile), or considerably to
increase the tax burden using the same tax

structure. In both cases, the greater tax burden
affected consumers and not entrepreneurs, who
were protected by various tax exemptions or
subsidies.
In the field of financial policy, public institutions were generally given new instruments
to attract funds (readjustable bonds and debentures, special funds), and in nearly all
the countries the external debt was increased
sharply.
The more rapid growth of exports, including
traditional exports, allowed certain economies
to improve their tax situation which continued
to derive support from foreign trade income.
Government action aimed at bringing about
a recovery in the growth rate of both Government and private activities and at maintaining
a manageable level of inflation did not always
produce successful results. In some countries,
such as Chile, expansion was achieved through
public spending, but it was not possible for
the private sector to recover its dynamism or
for inflation to be kept at a stable rate.
In other countries, such as Brazil and Argentina, inflation was controlled. Government participation in economic activity was increased
and the most dynamic branches of private
industry (using more complex technology)
recovered their dynamism.
This latter trend was determined both by
the effect of demand derived from autonomous
government investment in the main capital
goods and production sectors, and by the new
interest of foreign investors in the modernization and expansion of certain industries connected with the import substitution process
(petrochemicals and other inputs of capital
g o o d s ) , the diversification of consumption in
the middle- and high-income strata (and new
services) and with exports of non-traditional
products, particularly in areas of Latin America that are carrying out market integration.
In brief, towards the middle of the decade,
there began in many Latin American countries a more or less sharp transition to a new
stage and a new pattern of development, based
on the increased consumption of the middleincome strata and the growing importance of
the State not only in setting the trend and in
promoting a whole range of private activities,
but also as an independent investor.
New forms of public and private financing
through international financial organizations
were essential to this process of transition,
since they permitted the expansion of the

19

market for consumer durables and allowed for
a greater degree of complementarity between
internal and external funds, independently of
the problem of financing the balance of payments.
Thus, for instance, for the first time in the
post-war period, the sharp increase in the
short-term external debt of the more developed
countries in the region was unrelated to problems connected with import capacity. Indeed,
in the last few years of the decade, Mexico,
Brazil, Chile and Argentina, among others,
achieved a net inflow of capital that could
be used to bolster up reserves and not just to
finance the balance-of-payments deficit. In
other words, short-term capital flows were
"financial" and were aimed at establishing new
forms of domestic credit to replace or complement traditional bank financing.^^ xhus,
non-monetary financial institutions outside
the banking system and connected with
international financial corporations grew in
importance, while the position of the traditional commercial banks and, in some cases,
of "developmental" public intermediaries, declined. In cases where the latter maintained
or improved their position, this was due mainly
to the fact of their receiving deposits of fresh
funds from abroad, particularly for special projects financed by the IDB or the World Bank.
2.

Trends in financial intermediation

Before examining some of the trends of
financial intermediation in Latin America and
looking at its most characteristic features in
various countries it may be useful to indicate
the criteria used.
The first point is that the development of
financial intermediation has been affected by
factors relating to inflationary pressures, stabilization policies and, more specifically, the
monetary policies instituted in recent years in
various Latin American countries. Hence, it
may be that the trends that can be taken as
normal in the financial sector as per capita
income rises—for example, an increase in
liquidity and a gradual decline in the importance of the traditional intermediaries—will
change as a result of concern with inflation and
22 In some countries the Central Bank issued special
instructions to facilitate the inflow of speculative investment not allocated to specific projects o r controlled
by specific repayment clauses (deadlines, rates, etc.):
in Brazil, Central Bank instruction N o . 289 and circular N o . 63; in Chile, article 14 of Decree N o . 1272.

20

the possible effect of an over-all expansion of
the money supply.
Secondly, the institutional range of financial
intermediation must be taken into account,
which has been affected by three basic factors:
( а ) Modernization of the traditional financial apparatus, chiefly the banking system, in
two respects: first, the use of new installations
and equipment (incorporating modern banking techniques); and secondly, an effort to
find more specialized ways of tapping and
allocating resources that will enable the system
to extend its coverage to more sectors and
persons;
( б ) Creation of new public and private
institutions with different machinery for tapping resources and different functions as regards the use of funds;
( c ) Improved integration of the new institutions or readaptation of traditional institutions to bring them into line with changes in
the international financial system, as regards
the activities of new international private groups
and of inter-governmental and other financing
groups, such as IBRD, IDB and USAID. Some
of these institutions were even specifically set
up to tap certain external resources directly.
Wherever this process has occurred, successive changes have had to be made in the legal
and institutional framework of the financial
sector, both to provide greater flexibility for
private operations and to pave the way for
government financial policy of a kind that
would make the intermediaries more suited to
the new growth needs of the key sectors. In
some cases, more cohesion has been given to
the internal structure of the system as a result
of greater control by the financial authorities;
in others, a traditional line of monetary policy
has virtually confined public operations to the
banking system or to State development agencies and given free rein to the proliferation of
agencies outside the banking system which do
not operate in a co-ordinated fashion and
which compete for the same total stock of
resources.
Thirdly, the development of financial intermediation in Latin America has a basically
functional side with respect to the tapping and
the allocation of resources. A number of major
factors are involved:
{a) A s to attracting resources, several
mechanisms have been introduced to tap domestic savings, relying in varying degrees on a
number of incentives (degree of Uquidity,
profitability, readjustability, coverage, tied

saving, etc.),^^ which have led to a substantial
increase in the income of the intermediaries
and provided them with a broader scope for
distributing resoiurces among the financial agencies and among the various functions.
In this connexion, it should be noted that
voluntary saving has remained the principal
mechanism, and that forced saving has not
become widespread; if it had, it would have
completely changed the structure of the relations between savers and intermediaries. Only
in a few countries have compulsory deductions
from wages been instituted as a means of
financing the construction of housing.
Furthermore, external resources are being
attracted on an increasing scale and form an
important part of the flow of resources to the
financial intermediaries.
(ft) With respect to the allocation of resources, the dominant trend is for resources to
be channelled towards four major areas. First,
a substantial part of the new funds obtained
has been devoted to increasing consumption
of durable goods. Secondly, there has been
appreciable growth in the use of resources to
finance housing construction. The allocation of
resources for these two purposes is of relatively
recent date in Latin America, for in a number
of countries it began in the late 1950s or
early 1960s.
Thirdly, the resources of the intermediaries
have continued to flow towards more traditional areas, and the criteria governing loans
have mainly been of private profit and the
guarantees offered by prospective borrowers.
Lastly, a proportion of resources, which differs appreciably from one Latin American
country to another, has gone to finance real
capital formation in priority growth sectors,
and more flexible and "developmental" criteria
have been used in evaluating the corresponding
investment.
3. Main institutional and functional aspects
of financial intermediation in Latin America
In line with the criteria suggested above, this
subject will be discussed under two broad
institutional heads, while a third and supplementary subsection will deal with the "foreign
infiltration" that has occurred in various parts
of the financial system. Thus a distinction will
be drawn between public and private financial
23 See E C L A , "Mobilization of domestic resources".
Economic Bulletin for Latin America, vol. X V , N o . 2
(second half of 1970), chapter III.

intermediation, and the functional aspects of
each will be considered.
( a ) Public financial

intermediation

( i ) Modernization of traditional machinery.
The first point to note is that the central banks
or equivalent monetary authorities have modified their regulatory activities, on the one
hand, by using new instruments for attracting
resources, and, on the other, by strengthening
their general operational capacity. Where the
former procedure is concerned, the monetary
authorities in several countries (in particular,
Brazil, Chile and Colombia, together with
Argentina and Mexico, which adopted the
practice some time ago) collect funds through
the sale of securities. \ ^ a t is more, in Brazil
and Chile, because of the inflation affecting
both these economies, the securities issued are
readjustable in accordance with the rise in the
cost of living. That is, the institutions issuing
them have specialized in tapping "untied"
domestic savings, i.e., those funds that the
surplus spending units place at the disposal of
the intermediaries with financial gain motives
and not with the aim of subsequently o b taining resources from intermediaries to cover
expenditure for specific purposes.
There has also been a widespread tendency
to strengthen the operational capacity of central banks, through administrative and legal
changes in their financial systems, and by
making greater and more careful use of the
means at their disposal.
Although the Latin American monetary
authorities guide and control the intermediation
process in its over-all aspects, they have
exerted much less influence on the sectoral
distribution of resources, despite the efforts
made in this direction. The case of Mexico is
an exception to the general rule, as has been
shown.
Secondly, State banks run as commercial
banks have not been modernized to any great
extent, especially as regards their modus
operandi for the tapping and allocation of resources. Although some progress has been
achieved in respect of the methods used to
obtain funds, as in the case of the Banco del
Estado de Chile with its readjustable savings
accounts, in general the role played by such
institutions has undergone no radical change,
and their operation has resembled, in broad
outline, that of the commercial banks.
Thirdly, official development agencies or corporations have likewise shown little sign of

21

moving with the times, especially inasmuch as
they do not have their own sources of financing,
and their expansion and the extent of their
sectoral operations are therefore conditioned
by the inñow of official external loans—mainly
those granted by international agencies—and
the funds obtainable from the Governments
concerned, whose action has generally been
cramped by budgetary stringency.
In several of the countries analysed (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru and Uruguay), official external
resources intended for specific purposes (in industry and agriculture, and the energy and other
sectors) are no longer transmitted through
public development institutions but directly to
specialized public and private agencies and
even to the investor enterprises themselves.
This trend is particularly marked in the case
of the International Bank for Reconstruction
and Development and the Agency for International Development; only the Inter-American
Development Bank has continued to channel
its credits through the official development
organizations.^^
Similarly, short-term foreign capital has
found its way primarily into the new private
financial associations, and the public development agencies have been disregarded.
Owing, therefore, to the limits set to their
supply of funds, the traditional development
agencies seem to be playing a less important
part in the promotion of Latin America's
economic growth, despite the improvements in
their internal organization and in the loan
methods applied. Once again Mexico presents
a different picture, as was mentioned above.
The fourth group comprises speciaUzed official banks or agencies. It should first be pointed
out that they are not very common in Latin
America (especially in terms of one for each
sector, for instance, industry, agriculture and
housing). Of the countries studied, Brazil,
Colombia and Peru are among those that have
developed these specialized agencies to the
greatest extent.
Generally speaking, the modernization of
these intermediaries has been linked to the
countries' increasing practice of negotiating
loans from international agencies, since there
has been no additional tapping of domestic
resources through the use of new instruments.
Similarly, funds for investment purposes have
continued to b e allocated according to largely
tion.

22

See, below, a m o r e detailed analysis of this ques-

traditional patterns, and guiding principles
stemming from the external loans themselves.
Lastly, the traditional public intermediaries
include social security institutions. In almost
all the Latin American countries studied, with
the probable exception of Peru, a concomitant
of the failure to modernize these agencies has
been a steady decline in the savings generated
by the social security system. Thus the tendency for social security systems to act as instruments of distribution rather than of capital
formation has become more mafked. In view
of this decrease in the formation of social security savings, it is not surprising that little has
been done to improve the administration of the
systems in question or to introduce new
methods of tapping and allocating resources.
(ii) Establishment of new agencies. Hence
the first observation to be made is that during
the 1960s new and specialized official development agencies were established, where they did
not already exist, partly because of the lack
of modernization and of diversification characterizing the traditional development agencies and partly because of the specialized nature of the external loans obtained from some
international credit institutions. These agencies
have accordingly acquired increasing importance in the negotiation of official external
loans and in the financing of investment in
specific sectors.
A second instance of new public intermediaries is afforded by the central and controlling agencies of savings and loan associations
with housing as their object. Examples of
such agencies, which act as veritable "central
banks" of the financial subsystem for housing,
are the Banco Nacional de Habitagao in Brazil,
the Caja Central de Ahorros y Préstamos in
Chile, and the Banco Central Hipotecario
in Peru. Besides guiding and monitoring
(i.e., supervising and controlling) the operations of savings and loan associations, their
functions include channelling public funds and
obtaining external and internal savings in order
to provide support for the housing subsystem
and give it liquidity. For the purpose of tapping "untied" savings, these institutions have
mainly resorted to the sale of securities which
they themselves issue, while their principal
source of external funds has been the InterAmerican Development Bank.
( b ) Private financial

intermediation

( i ) Modernization of traditional machinery.
The traditional group of private financial in-

stitutions comprises most of the banks and the
insurance companies. On the other hand, the
new private intermediaries sector would seem
to be made up of the investment banks and
almost all the private agencies other than
commercial banks: savings and loan institutions, mutual funds and financial associations.
Among the traditional private intermediaries,
the modernization process has consisted primarily in improving the operational efficiency
of the institutions concerned, through the
purchase of new equipment and the introduction of more up-to-date organization and
methods systems. In several countries it has
been linked—especially in the case of the commercial banks—to the increasing participation
of foreign (particularly United States) banks
which have been set up in various parts of
Latin America where new branches have been
opened or national banks bought up.^®
In most of the countries considered, little
has been done to introduce new techniques
for tapping and allocating resources in the
deposit and savings banks. Practically no new
methods of absorbing domestic funds have
been adopted, and there have been few changes
in time deposit systems, except in Brazil,
where a monetary readjustment clause has been
included in their regulations.
On the other hand, the commercial banks
have played an important part in obtaining
and channelling a substantial proportion of the
private foreign loans negotiated by the region.
The granting of loans has continued to
follow traditional patterns, although some
countries have begun to apply such procedures
as higher percentages of cash reserves in relation to increases in deposits—with provision
for allowing the monetary authority to release
these reserves for specific purposes—and credit
lines in accordance with cash budgets agreed
upon by the enterprises and the commercial
banks. In addition, the commercial banks
may have kept up or increased their indirect
financing of the expansion of consumption of
durable goods, through the general credits
granted to producers of consumer durables.
It should be noted that the low degree of
modernization of deposit and savings banks in
the private sector is often due to the more or
less restrictive monetary policies which are
applied in many Latin American countries as
2> See Miguel S.
r
América Latina, a
session of a group
American central
1969).

Wionczek, La banca extranjera en
document presented at the ninth
of technical experts from Latin
banks (Lima, Peru, November

part of a broader anti-inflation strategy, and
which especially affect the expansion possibilities of these financial intermediaries. In effect,
the area which best lends itself to manipulation by monetary policy is constituted by the
aggregate sums that the private banks absorb
and lend.
The mortgage banks have not been modernized either to any significant extent, and, in
practice, the movement of resources through
the sale and purchase of mortgages has lost
importance in Latin America, except for the
operations of these banks in financing of housebuilding.
Lastly, among the traditional private-sector
intermediaries are the insurance companies. A s
a general rule, they have not been modernized,
and at the same time their contribution to the
intermediation system has become much less
significant than it used to be. In Latin America, in contrast to what has taken place in
some of the industrialized countries, particularly
the United States, the endowment policy type
of insurance, which is tantamount to a form of
tied savings, has gained little impetus.
(ii) Establishment of new agencies. While
the public sector has been characterized by the
modernization of the existing machinery for
financial mediation, the opposite has been true
of the private sector, especially in the area outside the banking system, where the establishment of new agencies has usually been preferred.
In banking, the outstanding development has
been the establishment of investment banks,
although this solution is not widespread and
appears only in Brazil, Colombia and Mexico,
of the countries under review.
Investment banks have taken over functions
which in a sense complement those of the
public development agencies; in other words,
their task is to channel resources into enterprises to finance the expansion of production
capacity and, although on a lesser scale, to
meet requirements in terms of more working
capital.
These banks have some salient characteristics
which are to be found in the various banks
established in Latin America. First, they have
shown versatility in tapping funds, using various
procedures which range from selling securities
and receiving deposits, in the domestic market,
to extending loans, mainly short-term private
loans with a high rate of return, in the external
market. Secondly, the establishment and expansion of these agencies have been directly

23

related to foreign financial agencies or groups,
including the International Finance Corporation ( I F C ) , the A D E L A Investment C o m pany,
the
United
States
conglomerate,
D E L T E C , and the Hanneman group in Europe. Thirdly, the investment banks have
generally been associated or have acted in
co-ordination with important national financial groups which are offshoots of the c o m mercial banking system itself—especially where
the commercial banks have been prevented by
the monetary authorities from expanding very
much—with fairly large private enterprises or
groups of enterprises, and with other intermediaries outside the banking system, particularly mutual funds and some financial associations. Fourthly, they have used their funds
flexibly and for many different purposes, i.e.,
on the one hand, they have rapidly mobilized
resources by lending to some enterprises and
investing in others and, on the other hand,
they have not confined themselves to financing
one type of productive activity but have spread
their operations over such widely different fields
as petrochemicals, livestock breeding, construction and supermarkets.
A n important factor in the role played by
investment banks is the high proportion of
their resources that has been channelled into
priority sectors. This is due both to the slant
given to their operation by the banks themselves and to the degree of control exercised
by some government agency. A s mentioned
previously, Mexico's Nacional Financiera is
the most representative example of centralized
management in this field.
Among the intermediaries outside the banking sector, the most important group of new
agencies is the savings and loan associations
for housing purposes. These have developed
considerably in some countries, particularly
Brazil and Chile, and to a lesser extent Peru.
They are a typical example of saving tied to
a powerful motive, such as home ownership,
which involves a complete transformation of
the system of intermediation. In other countries, such as Colombia and Mexico, on the
other hand, the amount of resources mobilized
in this way has been small, while in others
these associations have got off to a very slow
start.
Savings schemes linked to specific goals also
include financial associations whose function
is to finance the consumption of durable goods,
particularly motor vehicles. These financial
associations have usually been supported by

24

the enterprises which produce the articles concerned, and which are wholly or partly owned
by parent companies abroad.
In some countries, including Argentina,
Brazil and Uruguay, financial associations have
also come to participate in the regular financing
of enterprises, which has given rise to a parallel credit market operating side by side with
the commercial banks.
There is very little quantitative data available on private financial associations in Latin
America, so it is not easy to gauge how much
they have developed with any degree of accuracy. They are, however, becoming more and
more important in most of the Latin American
countries examined, where the growth pattern
of demand and the effect of the urban highand middle-income groups on its structure,
and any restrictions there may have been on
banking operations have encouraged their expansion. The application of restrictive monetary policies and the legal ban on paying more
realistic interest rates on savings have favoured
the expansion of operations outside the banking system, which were not subject to control
or could generally evade it. Furthermore, in
order to continue expanding, the financial
associations have adopted the procedure of
selling documents representing money owed
to them (their own securities) and investing
the profits, contracting short-term external
loans, and obtaining loans from the commercial banks also.
Only a small proportion of the resources
handled by financial associations seem to have
been used for expanding production capacity
in priority sectors, for two main reasons: first,
allocations are determined by the consumption
to finance which the associations were established and, secondly, the central government
has hardly any control over their policy or
their operations.
Mutual funds constitute another group of
private intermediaries outside the banking
system that have been recently estabUshed in
Latin America. They have become quite important in countries such as Brazil, Colombia
and Mexico. Their development has been largely determined by the growth of investment
banks and the operation and rapid expansion of the security markets. The participation
of some foreign groups has been a decisive
factor in the estabUshment and operation of
these funds, and has strengthened and extended
the influence they exercise through the investment banks.

A s to whether or not they perform a useful
function, it can be said that mutual funds have
become of some importance in tapping domestic
resources and securing short-term external
loans, and in allocating the funds thus obtained
for the purchase of existing assets.
( c ) Foreign infiltration in the financial system
Increasing foreign influence in financial intermediation calls for a study in greater depth.
In the first place, foreign infiltration has
obviously been taking place in the private
rather than the public intermediaries. Nevertheless, as pointed out above, the foreign inñux
has played an important part in the establishment and strengthening of specialized public
agencies in several countries, while the traditional development institutions have had less
importance. Moreover, in some countries, the
trend towards decentralization of the public
agencies in contracting external loans and allocating the resulting funds has been accentuated,
since these funds have been channelled not
only directly to public or private enterprises,
but also to private financial intermediaries.
It may be inferred, therefore, that the first fact
to be stressed in connexion with the infiltration
of the system is that it has been due, in some
degree, to the way in which the relationship
between public intermediaries and foreign lenders has been developing.
In the case of private intermediaries, the
procedure has followed different patterns, and
has more resembled a take-over. In some cases,
foreign institutions have acquired a majority
share of the capital stock of existing national
agencies, which has gained them control of
the intermediary concerned. This has happened mainly in the case of some of the commercial banks in several Latin American countries.
In other cases—also in connexion with commercial banks—the parent firm has acted directly and set up subsidiaries. This has been
the procedure followed by the principal United
States banks in many capitals and other important cities of Latin America. But the takeover has been particularly marked among
the non-traditional intermediaries, especially
through the establishment of new investment
banks and mutual funds. T o that end, representatives of foreign firms have often operated
in co-ordination with national groups of private
investors and have taken up a minority or a
majority share, as the case may be, of the new
intermediaries' capital stock.

The influence of foreign groups on private
financial intermediation in Latin America cannot, however, be measured only in terms of
their share of the intermediaries' capital.
Through a minority share they can sometimes
be very influential in the management of these
agencies, and even in policy-making and decisions on key appointments.
The new "foreign" agencies grant loans and
make fresh capital investments, using their
own resources and also acting as intermediaries
for foreign—and sometimes national—investors,
who generally delegate their powers to them.
They also seem to have been making more
and more use of domestic resources for their
own purposes. The impact of these agencies,
particularly investment banks and mutual
funds, has therefore snowballed.
Through this procedure, "foreign" intermediaries have come to control or influence the
decisions of a great many enterprises in the
region, particularly in the manufacturing sector. In other words, the foreign take-over of
financial intermediaries has spread to the production area, and is a process which has acquired considerable importance in several Latin American countries.
4. Particular aspects of the evolution of the
structure of financing in selected
countrie^^
(a)

General

features

As has been shown in Mexico, which was
able to pass without great difficulty from a
stage of easy import substitution to a stage
of diversification and expansion of consumption and production, pubfic financing institutions played a decisive role in the financing and
reconciliation of public and private objectives
in the 1950s. In the period 1960-1968, the
combined share of the Banco de México and
other national development institutions in the
country's total financial assets fell from 55 to
46 per cent, despite the continued increase in
their credits (see table 3 ) . Most of the drop
was accounted for by the Banco de México
itself (from 22 to 16 per cent).
In the meantime, private financial associations, which had developed rapidly in the
second half of the 1950s, continued to expand,
and increased their share in the total financial
assets from 15 to 24.5 per cent, while the
share of private deposit banks declined to
18 per cent in 1968.
26 T h e evolution of Colombia, Chile, Ecuador and
Peru is examined below in some detail.

25

lO
o

Table 3
M E X I C O : T O T A L ASSETS, C R E D I T S A N D DEPOSITS
{Millions

of

pesos)
Assets

National institutions

Private institutions

Total

Savings and
Te'ict

Otker^

Subtotal

a s ^ ^

Financial

Mortgage

J,Zl

Subtotal

housing

I960

59,467

13,205

19,545

32,750

13,351

2,903

116

9,058

471

627

191

26,717

Í968

188,017

29,845

56,896

86,741

33,010

9,740

115

45,870

11,074

955

512

101,276

Percentage

of

total

1960

100.0

22.2

32.9

55.1

22.5

4.9

0.2

15.2

0.8

1.1

0.3

44.9

1968

100.0

15.9

30.2

46.1

17.6

5.2

0.1

24.4

5.9

0.5

0.3

53.9

Credit
1960

33,024

3,465

14,783

18,248

7,929

1968

101,673

3,193

43,184

46,377

16,612

109

4,125
Percentage

of

6,312

96

325

5

14,776

101

(Savings and
deposits)

25,767

8,176

503

12

55,296

total

1960

100.0

10.5

44.8

55.3

24.0

(Savings and
deposits)

0.3

19.1

0.3

1.0

—

44.7

1968

100.0

3.1

42.5

45.6

16.3

4.1

0.1

25.3

8.0

0.5

—

54.4

NC and FC

Deposits

1960b

2,470

811

3,281

11,304

(Savings and
deposits)

89

1960»

522

14

536

2,018

(Savings and
deposits)

—

17,252

2

~

—

—

11,415

—

—

—

2,020
13,435
33,712
2,909
36,621

45,694

2,992

825

3,817

13,322

89

24

—

—

—

7,251

1968"
1968=

22

1,239

8,490

25,581

7,798

69

264

—

—

—

568
7,819

15
1,254

583
9,073

2,124
27,705

783
8,581

—
69

2
266

—
—

—
—

—
—

Percentage
1960

100.0

17.3

4.8

22.1

77.2

1968

100.0

17.1

2.8

19.9

60.6

of

total

(Savings and
deposits)

SOURCE: Bank o f M e x i c o , Informe anual, 1961 and 1968.
a Includes credits and joint funds o f the Certificados de N a c i o n a l Financiera

18.8

S.A.

0.5

0.1

—

—

—

77.9

0.2

0.6

—

—

—

80.1

B National currency,
Foreign currency.

clause, already amounted to 26 per cent of
the total fmancial assets in circulation.

Brazil experienced an even more radical
change, especially from 1964 onwards. A
number of institutional changes in its financial
system have improved the different methods of
channelling financial flows and caused the
traditional institutions to lose considerable
ground. Thus, the banking system, including
the Banco do Brasil and the commercial banks,
which in 1964 was the source of 80 per cent
of the credit accorded to the private sector,
granted only 55 per cent in 1969 (see table 4 ) .

In Argentina, between 1960 and 1965 (the
last year for which data are available), banking institutions had not lost ground in the
intermediation system, except for mortgage
credit institutions whose share fell from nearly
13 per cent in 1955 to 4 per cent (see table 6 ) .
Outside the banking system, private financing
agencies increased their share slowly from
1955 onwards and practically doubled their
share between 1960 and 1966. In 1965 they
accounted for 16 per cent of the total financial
assets reclaimable from non-financial sectors.
The share of social security institutions, on the
other hand, fell steadily between 1955 (26 per
cent) and 1965 (less than 13 per cent).

At the same time, what is now known as
housing financing, which did not exist in 1964,
expanded so rapidly that in 1969 it already
represented 13 per cent of the total financing
of the private sector. Moreover, private financial groups, such as credit corporations and
investment banks operating outside the banking system, which accounted for barely 6 per
cent in 1964, raised their share to 17 per cent
in 1968-1969. In contrast, the importance of
public development agencies declined slightly
in over-all terms, although they greatly diversified their operations and created new financing
funds which were closely connected with international agencies.

It should be borne in mind that there was
a continuous decline in the coefficient of
liquidity and in financial transactions in the
whole Argentine system from 1955 until the
end of the 1960s, owing to an extremely rigid
monetary policy. As a result, the balance of
securities representing indirect liabilities issued
by the group of traditional financial intermediaries diminished in real terms for all institutions (see table 7 ) . Financial institutions outside the banking system alone were able to
bring about a substantial increase in their
indirect debt by considerably increasing their
time deposits (see table 8 ) .

All these changes were reflected in the
composition of the financial assets owned by
the public (see table 5 ) . In 1963, 95 per cent
of the financial assets in the hands of economic
units consisted of bank-notes and coins, and
bank deposits; investment securities at fixed or
variable interest rates represented barely 2.3
per cent of the total. By 1969, the new private
and public securities, which were introduced
after the adoption of the currency readjustment

Colombia's traditional banking system has
also maintained its position in total financial
assets of which it owns about 60 per cent,
divided equally between the Banco de la

Table 4
BRAZIL: PRIVATE SECTOR LOANS A N D
End of 1964
Millions
of new
rrijU^rirnv

In.ititutions

FINANCING
End of 1969

Percentaoe

Millions
of new
rrn r-firnt

Percent55.3

3,267

79.9

25,040

Commercial banks

2,226

15,693

34.7

Banco do Brasil

1,041

54.4
25.5

9,347

20.6

Development agencies

571

14.0

5,569

12.3

Credit and investment corporations
and Investment Bank

7.45

6.0

7,648

16.9

5,876

13.0

Banking system

System of financing housing . . .
Other

1,132
TnxA

4.089

WOO

2.5

45.265

100.0

SOURCE: Central Bank of Brazil.

n

Table 5
BRAZIL: ASSETS I N T H E H A N D S OF T H E P U B L I C
End of 1969

End of 1963
Millions
of new
cruzeiros

Subtotal

Percentage

21.3
70.2

5,422

12.4

23,868

54.7

2,938

Demand deposits

Millions
of new
crttzeiros

684
2,254

Money in circulation

Percentage

91.5

29,290

67.1

99

3.1

887
2,033

2.0

Time deposits
Bills of exchange

73

2.3

6,174

14.2
2.1

Savings deposits

-

—

—

—

933

—

Real estate bills
Readjustable Treasury bills

—

4,280

100

3.1

3,210

100.0

Other
TOTAL

4.7

9.8
—

—

43,602

100.0

SOURCE: Central Bank of Brazil.

República and the commercial banks. The
10 per cent of the mortgage banks and the
Banco Popular must be added to this figure.
The chief cause was an intensive modernization of the system, as will be shown in more
detail in the relevant section.
In Colombia, changes took place mainly in
the intermediaries outside the banking system.
The share of aU insurance and capital formation companies in the country's total financial

assets fell from 12 per cent in 1960 to 5 per
cent in 1969. On the other hand, the financing
corporations, including investment funds, increased their share from 1.5 per cent in 1960
to 9 per cent in 1969. There was also a decrease in the share of the assets of the Caja
Agraria, the largest development institution
in the country (see table 9 ) .
Chile showed much the same trend as Argentina as regards the over-all hquidity coefficient

Table 6
ARGENTINA:

F I N A N C I A L ASSETS O F F I N A N C I A L

INTERMEDIARIES

(Percentages)
1958

1960

1964

1965

69.8

72.4

75.0

68.1

72.2

74.3

1955
A.

Banking institutions

1962

5.6

20.2

28.3

20.0

22.7

22.8

Commercial banks

49.0

38.4

37.9

40.4

45.2

43.1

Mortgage credit institutions

12.8

11.9

7.3

6.1

4.1

4.0

Caja Nacional de Ahorro Postal . . . .

2.4

2.0

1.6

1.6

2.8

4.4

Institutions outside the banking system

30.2

27.6

25.0

31.9

27.8

25.7

0.4

0.6

1.1

1.3

0.6

0.5

Central bank

B.

Credit co-operatives

0.2

Savings and loan associations

—

—

—

2.3

Others

1.8

1.9

2.8

2.4

2.4

22.4

15.9

16.2

10.7

9.6

1.9

Social security institutions

3.2

6.8

12.3

13.0

12.9

771.7

775.5

519.8

452.8

508.2

507.6

pe-

SOURCE: S. Itzcovich, Los intermediarios
financieros extrabancarios
en la República Argentina, T o r -

28

—

25.8

Insurance companies

Va/ue of total assets in thousands of
sos at 1960 prices'^

0.2

cuato Di Telia Institute, September 1966, table 2.
a Deflator: cost-of-living index, 1960 = 100.

Table 7
A R G E N T I N A : B A L A N C E O N T H E D I F F E R E N T T Y P E S O F I N D I R E C T LIABILITIES
ISSUED B Y F I N A N C I A L
(Percentage

INTERMEDIARIES

distribution)

1955

1958

1960

1962

1964

1965

22.6

Money in the hands of the public , .

30.5

30.1

26.7

23.0

2L7

Demand deposits
Time deposits

18.9
24.9

19.2
28.1

18.9
27.3

14.7
30.4

16.8
32.4

Shares and bonds

12.9

11.8

14.8

20.2

16.4

3.0
9.8

2.9
7.9

3.0
9.4

3.8
7.9

3.2
9.6

Insurance companies
Social security institutions
Total balance in thousands of
of pesos at 1960 prices^

16.5
32.2
15.1
3.2
10.5

millions
533.2

544.6

SOURCE: S. Itzcovich, Los intermediarios
financieros extrabancarios en la República Argentina, op. cit.
table 5.

394.9

403.8

476.5

«Deflator: cost-of-living index, 1960 =

462.7
100.

or the ratio of financial assets to the gross
national product. This ratio declined steadily
from 36 per cent in 1940 to barely 13.2 per
cent in 1959. It recovered slowly after that
year, and more quickly from the years 19641966 onwards, as a result of changes in monetary and financial policy, reaching 22.6 per
cent in 1968.

O n the other hand, savings and loan associations were of small significance in 1960, but
by virtue of operating within the system of
savings linked to housing construction and
of new readjustable conditions of saving, they
boosted their sales to over 19 per cent of the
total for the whole financial system in 1968
(see table 1 0 ) .

Although the banking system expanded in
real terms, its over-all position deteriorated,
and this trend affected both the Banco del
Estado and the commercial banks. The share
of the former, which in 1960 accounted for
a little under half the securities held by the
main financial institutions, fell to 37 per cent
in 1968; that of the commercial banks fell
from 52 to 42 per cent.

A s in Brazil, this development of intermediaries outside the banking system altered the
composition of financial assets; the share of
currency and banking assets proper (banknotes and coins, and deposits) in the total
funds of the main institutions of the financial
system declined from 98 per cent in I960 to
86 per cent in 1968 (see table 10). In other
words, virtually the whole increase in the ratio

Table 8
A R G E N T I N A : T I M E DEPOSITS R E C E I V E D B Y F I N A N C I A L I N T E R M E D I A R I E S
(BALANCES)
{Percentage

distribution)

1955

I960

1962

1965

73.0

47.5

57.7

0.4
—

1.0
1.6

2. Credit co-operatives

—

55.5
0.3

3. Savings and loan associations . .

—

—

1. Commercial banks

4. Caja Nacional de Ahorro Postal
5. Other financial institutions outside the banking system
Total deposits (thousands
lions of pesos at 1960

of milprices)^

14.1

7.7

5.2

4.2

12.9

36.5

47.0

35.6

131.3

107.8

122.7

148.7

SOURCE: S. Itzcovich, Los intermediarios financieros extrabancarios
Argentina, op. cit., table 8.
a Deflated by the cost-of-living index, 1960 = 100.

en la

República

29

Table 9
C O L O M B I A : ASSETS O F T H E F I N A N C I A L
(Millions of pesos at current

1969

I960

Institutions

Millions
of pesos

Percentage

Banco de la República

3,915

Commercial banks

4,419

29.1
33.3

Mortgage banks

1,022

7.6

Caja Agraria"

1,795
200b

Financial corporations
Warehouses
Insurance companies
Capital formation companies
Banco Popular
TOTAL

24,622

31.8
31.3

5,648
8,364

10.8

1.5

5,983

7.7

0.4
4.9
6.9
100.0

SOURCE: Revista del Banco de la República;
earía.
a Caja Agraria and Banco Ganadero,
b Estimates.
« January of each year.

In the banking system, apart from the
smaller participation of the Central Bank and
the commercial banks in total assets and credit,
new government banks have made their appearance, not only in the general credit area
(Banco de la Nación) but in specialized areas
as well (Banco de la Vivienda). The Banco de
la Nación, in particular, has assumed considerable importance, accounting for 15 per
cent of assets, 27 per cent of the deposits of
the banking system, and more than 17 per cent
of the total credit accorded by the financial
system in 1969 (see table 1 1 ) .
A s regards specialized development banks,
the relative importance of the Banco Central
Hipotecario, the Banco Agropecuario and the
Banco Minero did not change, while that of
the Banco Industrial increased considerably.
In all, the State development agencies accounted

1.4

505'=
2,8I0b
1,363b

0.7

2.9

13,445

7.3

1,110

—

922
394

of financial assets to gross national product
since 1964 is attributable to the new forms of
financing linked to the financial system of
savings and loans.
In Peru, significant changes are also observable in the financial structure, both within the
banking system and outside it, besides the drastic institutional reforms initiated recently, which
introduced very different financing rules and
modes of operation from those previously in
force.

Percentage

24,241

662
..

Millions
of pesos

13.4

4
52<=

Investment funds

30

SYSTEM

prices)

3.6
1.8
3.5

77,331

Revista de la Superintendencia

100.0
San-

for over 20 per cent of the total credit accorded
by the financial system in 1969, a share exceeded only by that of the commercial banks,
while the share of the whole group of public
financial institutions in the financial and banking systems was nearly 60 per cent and 70 per
cent, respectively, in 1969.
A s in other countries, the decline in the
relative importance of insurance companies
contrasted with a substantial increase in the
number of intermediaries operating outside
the banking system which are linked with
foreign financial groups, particularly in mutual
funds and savings and loan co-operatives, of
which there were virtually none in 1960 but
which had come to provide more than 8 per
cent of total credit in 1969.
Ecuador also followed the general trend
towards a decline—although less pronounced
than in other countries (see table 1 2 ) — i n the
share of the banking system in the system's
total assets, and the emergence of new specialized public financing agencies. The Compañía
Financiera Nacional was founded in 1962 to
finance the fixed capital formation of industry,
assuming the main functions formerly assigned
to the Banco Nacional de Fomento. Although
the latter's operations have continued to expand, it has lost much of its character as a
general and industrial development agency and

Table 10
C H I L E : F U N D S A N D SECURITIES IN C H I L E A N C U R R E N C Y H E L D B Y SELECTED F I N A N C I A L INSTITUTIONS
(Millions of escudos at December

1965 prices)

Funds

Securities
End of 1960

End of 1968
Percentage

Escudos

1,615.6

72.4

2,824.2

64.9

1,101.9

49.4

2,035.9

23.0

563.1

25.3

986.1

22.6

563.1

25.3

930.2

Demand deposits
Time deposits
Central Bank
Notes and coin in free circulation

55.9

1.3

14.9

0.3

Readjustable savings certificates . .

mortgages,

Escudos

Percentage

Commercial banks

641.3

52.2

1,118.5

42.6

Banco del Estado^

562.7

45.8

982.2

37.4

25.7

2.1

17.7

0.7

509.0

19.4

2,627.4

100.0

Institutions

Mortgage banks
51.6

2.3

National savings and loan system . . .
Deposits,
bonds

Escudos

Percentage

18.1

Mortgage banks
Value of the bond market
lOUs

End of 1968

21.3

Escudos

Commercial and State banks

End of 1960

46.8

513.7

Institutions

Per.
centage

Savings and loan associations

and

TOTAL

2,230.3

100.0

529.7
4,354.9

12.2
100.0

SOURCE: Figures taken f r o m Padro Jeftanovic, Estudio sobre el mercado de capitales chileno (Centro de Estudios Socio-Económicos, August
1969), mimeographed.

TOTAL

1,229.7

100.0

« D o e s not include the overdraft on the consolidated public sector
account.

N>

Table H
P E R U : S H A R E OF F I N A N C I A L O R G A N I Z A T I O N S I N T O T A L ASSETS
{Millions of soles)

Total

Central
Reserve
Bank

Commercial
and
savings
banks

Banco
Central
Hipotecario
522a

1960

22,793

6,338

13,418

1969

98,547

20,916

44,943

3,767

Banco de
Fomento
A gropecuario

Banco
Industrial

Banco
Minero

1,659a

526a

330a
1,204

4,266

7,318

100.0

1969

100.0

27.8
21.2

2.3

45.6

7.3

2.3

Mutual
funds

Savings
and
credit
co-operatives

f

h
1,005

Insurance
companies

15,128

1.4

3.8

58.9

Banco
de la
Nación

of total

Percentage
1960

Banco
de la
Vivienda

7.4

4.3

1.2

1.0

15.5

Credits
1960

14,555

4,170

6,785

495

1,470

514

240

1969

64,622

11,988

19,538

2,451

6,446

3,901

902

Percentage
1960
1969

c

—b
11,207

615

855
2,099

1.0
3,025

of total

100.0

28.6

46.6

3.4

10.1

3.5

1.6

100.0

18.6

30.2

3.8

10.0

6.0

1.4

5.9
1.0

17.3

3.2

Deposits
1960

11,549

1,764

9,073

30

669

11

45,736

2,766

26,913

151

2,150

962

193

b

2

1969

Percentage
15.3

78.6

0.2

5.8

0.1

100.0

6.0

58.8

0.3

4.7

2.1

1969, Peru.

271

c
12,330

of total

100.0

SOURCE: Superintendencia de Bancos y Seguros, Memoria
® Only available funds, securities and investments.

25
2,450

—
0.4

0.6

27.0

b 1963: Assets, 195; credits, 91; deposits, 5.
< 1966: Assets, 5,522; credits, 3,158; deposits, 4,592.
=

0.2
4.7

3.8

has become practically the main public agency
for agricultural financing.
Specialization in private financial intermediation has been less intensive than in other Latin
American countries and the relative importance
of private commercial banks is still considerable, and much greater than in the other
countries studied. The most important form of
diversification in intermediaries not belonging
to the banking system was the establishment
of a private financing agency, the Ecuadorian
Finance Corporation ( C O F I E C ) , initially financed jointly by the International Finance
Corporation (set up by the World Bank) and
A D E L A (a private international group).
Contrary to trends in the other countries
studied, in Ecuador there has been an increase
in the importance of social security institutions
outside the banking system, represented by the
Caja Nacional de Seguro Social, whose share
in total financial assets rose to 9 per cent in
1968 (see table 12).
(b)

Relations with international

organizations

A s was mentioned earlier, the modus operandi of public law international financial
organizations (IBRD, A I D and I D B ) had a
great influence on the creation of new public
agencies and on the way in which they attracted
resources and assigned them to sectors. In
particular, given the specialized nature of the
new external funds, they often helped to decentralize official development organizations
and to minimize the relative importance of
traditional development agencies. T o give an
idea of their influence, a general outline is
given below of their activities in the 1960s
and of the amount of loans from international
financial organizations to the government development organizations in the various countries, which may be compared with the overall amounts loaned out up to 1970 (see
table 13).
In Latin America, IBRD has financed mainly
highways, transport and electrical energy systems. In the last years of the 1960s it generally
made direct loans to decentralize government
organizations or to foreign enterprises, with
the Government's guarantee that the funds
would be channelled through national development agencies (such as C O R F O in Chile and
the B N D E in Brazil) or through the development banks in Colombia, Peru, Ecuador and
Argentina. In the last two years of the decade
loans were also granted for livestock development in Bolivia, Colombia, Ecuador, Uruguay
and Brazil, but they were made directly to

specialized agencies or through State banks.
Loans to industry were normally directed
through financial institutions or private investment banks.
The only important exception to this rule
was the channelling of funds by the World
Bank into energy, transport and other programmes, through the Nacional Financiera de
México, a centralized national development
organization.
A I D makes loans for many purposes, ranging
from feasibility studies to the financing of
imports, housing, education, health, agricultural
programmes, etc. It also grants loans to decentralized, public, semi-pubhc, autonomous
and private agencies, without first directing
them through large national official development agencies.
In Brazil, for instance, loans for a total of
1,179 million dollars were authorized up to
mid-1970, and were directed to scores of
regional, state and sectoral projects, most of
which are outside the control of centralized
financial agencies.
In Chile, of the 566 million dollars in loans
authorized up to 1970, barely 58.3 million
were allocated through C O R F O .
In Argentina, out of a total of 137 million,
24.7 miUion were recorded as loans for economic development and were directed to the
Government, with no mention of any financial
development organization.
In Colombia, out of a total of 636.5 million,
only 20 million were loaned directly to the
investment fund of the Banco de la República
and 4 million to the Banco Ganadero.
In Ecuador, nearly all the 103 million dollars
granted up to 1970 went to finance the government budget or to specific decentralized
projects. Development agencies as a whole
received barely 10.4 miUion.
Lastly, in Mexico, where A I D loans are
much smaller, a total of 65 million dollars
was loaned out, all through the Nacional
Financiera, except for 3 million directed to
the University of Guadalajara.
IDB is the only international organization
that has continued making large loans through
centrahzed
official
development
agencies,
although it has often made direct loans to
decentralized public services (energy, transport
and communications) and, less often, to private
enterprises, particularly in countries where development agencies are of relatively minor
significance.
33

Table 12
E C U A D O R : SHARE OF THE FINANCIAL INSTITUTIONS IN T O T A L CREDITS
(Millions of sucres)

Total

Central
Bank

Private
hanks

Corporación
Financiera
Nacional

Caja Nacional
de
Seguro Social

Banco de
Fomento

Banco de
Cooperativas

241.4
549.3

11.4

218.3

185.4

282.0
808.5

0.1

2.4

2.1

6.8
9.0

1960
1968

4,160.8
8,994.3

1,058.4
2,217.1

2,579.0
5,004.3

1960
1968

100.0
100.0

25.4
24.6

62.0

5.8

55.6

6.1

COFIEC

Percentage of total

Deposits
Central Bank
General
government

1960
1968

1,894.2
4,829.4

151.4
218.6

Private banks

Public

Banks

56.1
54.3

311.9
740.5

National
currency

Foreign
currency

Banco de
Fomento

1,181.7
3,386.7

44.9
185.6

148.2
243.7

62.4

2.4
3.8

7.8

Percentage of total
100.0
100.0

8.0
4.5

3.0
1.1

16.5
15.3

SOURCE: National Board for Economic Planning and Co-ordination, Indicadores Económicos,

70.1
July 1970.

5.0

Table 13
LATIN A M E R I C A : LOANS BY INTERNATIONAL AGENCIES AT 30 JUNE 1970
C Millions of dollars)
World Bank
Country

Argentina

Paid
out

Total
authorised

168.2

329.5

Bolivia
Brazil
Colombia
Costa Rica
Chile
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Dominican Republic
Uruguay
Venezuela

—

33.9

473.2
465.9
68.9

33.7
24.8

147.7
41.2
32.2

322.9

11.4
0.5
25.2
532.2
7.6
119.3
1.7
51.6
212.1

28.7
0.5
37.1
763.0
il.9
7.6
11.2
154.0
25.0
54.0
274.7

AID

IDB^

Under
negotiation

23.3
205.0
127.6

Total

329.5
23.3
678.2
593.5

Paid
out

Total
authorised

175.2
48.8
365.0

459.1

145.9
28.5

95.1
678.1
324.1

—

68.9
167.0
41.2
32.2

—

28.7

28.0

78.2

0.5
42.6
784.8
37.9
49.6
17.2

4.8
31.4
192.0
33.5
22.6
41.2

7.2
52.5

154.0
25.0
60.3

76.7
25.6

—

19.3
—

—

5.5
21.8
—

42.0
6.0
—
—

6.3
—

274.7

SOURCE: World Bank, Annual Report, 1970; IDB, Tenth Annual Report, 1969; AID, Statement of Loan, 30 June 1970.

42.9

Paid
out

105.5
88.8
S22.7
491.9
38.2

153.7
44.4
27.0

273.1
78.8
42.2

499.9
66.0
16.7
4.5
25.4

25.3
116.0

428.9
56.3
41.5
96.8

30.2

53.8
70.6

64.5
46.5
49.7
20.5
66.7
136.0
32.1

168.4

55.0

152.1

" A t 31 December 1969.

Total
Total
authorised

137.1
113.6
1,179.0
636.5
70.5
566.0
102.8
51.2

Paid
out

Authorised
and under
nesotistioii

448.9

925.7

137.6
1,414.5

232.0
2,535.3
1,554.1

960.7
100.6
751.3
144.1

61.7

82.0
56.1

4.6
48.4
65.0
72.1
103.4

9.8
82.0
788.7
102.4
79.9

39.1
102.1
167.8
51.0
55.0

67.5
262.7
163.3
109.0
383.1

182.3
906.1
222.8
125.6
168.6
12.3
143.5
1,278.7
166.3
194.5
153.1
408.2
246.6
181.9
498.1

In Chile, most loans, whether directed to
industry, agrarian reform, agricultural and
commercial credit organizations or universities,
were negotiated
and channelled
through
C O R F O . The major exceptions were loans to
finance housing and public works in general,
which were negotiated through different decentralized agencies, from the Corporación de
Servicios Habitacionales to the Caja Central de
Ahorro y Préstamos.
In Mexico, as in the case of external loans.
Nacional Financiera had absolute pre-eminence.
Out of 429 million dollars loaned by IDB
up to the end of 1969, barely 5 million went
directly to private enterprises. Nacional Financiera even handled a loan of 35 million from
the Social Progress Trust Fund.
In Brazü, on the other hand, loans were
completely decentralized. Not only did loans
to government development agencies go through
federal bodies (National Economic Development Bank, Banco do Brasil, Banco do Nordeste, National Housing Bank, state banks) but
the loans granted by the Social Progress Trust
Fund to finance infrastructure and resources
were distributed among a large number of
V.

In Argentina, although the Banco Industrial
de la República intervened to grant international loans to industries (chemicals, refrigeration, paper, petrochemicals), these loans
were made directly to the enterprises concerned. The only exception was an industrial
credit of 33 milUon doUars granted to the
Banco Industrial for transfer to small and
medium-sized enterprises, 10 million dollars
of which were authorized in 1968. This type
of loan is similar to the credits granted to
the B N D E in Brazil in 1964 and 1967.

CONCLUSIONS A N D

1. The background material and the comments in this document show that during the
1960s there has been considerable development of the systems of financial intermediation
in Latin America.
2. It has also been shown that this develop-,
ment has features which are pecuHar to each
country, for in each it is determined by a
variety of factors, the most important being
the stage of economic and social development
they have reached, the pattern and pace of
their development, and, lastly, the over-all and
the specific economic policy towards the financial sector adopted by each Government. Of
these, those connected with the objectives and
requirements of development seem to have
been most instrumental in producing the structural changes that have occurred in the machinery of intermediation.
3. One striking fact which emerges from
recent experience is that Latin America possessed a substantial personal saving potential
of which hardly any had been tapped or
channelled through the system of intermediation.
36

public or semi-public decentralized agencies.
The BNDE, which was the largest development agency in Brazil in the 1950s, received
only 74 mülion dollars in loans from different
IDB funds up to the end of the 1969 financial
year.
The situation of the other Latin American
countries was somewhere between that of
Mexico, Brazil and Chile. In countries where
international development agencies had no
great influence, most loans from international
development agencies went directly to private
enterprises, and were hardly ever guaranteed
by a centralized government institution.

SUGGESTIONS

Thanks to the introduction in most of the
countries considered of various tied and untied
savings
schemes,
fundamental
structural
changes have been made in the intermediation machinery, as the intermediaries have
begun to receive a substantial proportion of
the new funds generated by family savings.
These funds have largely gone to finance
housing construction and to increase consumption of durable goods.
4. Another conclusion that emerges from this
paper is that there is not necessarily a synchronous relationship between the level of
development and sophistication of the intermediation system and the promotion and
direction of the economic and social development process. Indeed, the function of the
intermediation systems in Latin America, given
the basic structures of the economies, has
been to facilitate the flow of funds from the
surplus to the deficit spending units, although
the activities or goals of the latter are not
always and most frequently are not among
those usually considered to be of prime importance for development.
Experience seems to show that the intermediation systems with a neutral function

aggravate certain unfavourable trends or do
not help to solve problems that have been
brought to light by most analyses, such as
inequalities between social groups, regional
imbalances, and the lag in the production of
consumer goods that are essential for the bulk
of the population or to maintain economic
growth. Such a situation may have an unfavourable effect on the allocation of resources
and the rate of savings and investment, and
may increase the existing sectoral, regional and
social disparities in the different countries.
5. In several countries there has been considerable foreign infiltration in financing and
credit institutions, which, in turn, has led to
the take-over of some enterprises, particularly
in the manufacturing sector. This process has
been fostered by short-term foreign loans,
which have been attracted to the region mainly
by the possibility of making profits and dominating markets.
On the other hand, most official long-term
external loans have been granted to government development agencies, particularly the
specialized institutions, to be channelled into
enterprises. In many countries, however, these
loans have been made directly to public and
private enterprises.
It is interesting to note that foreign infiltration of several intermediation systems in Latin
America has gone hand in hand with greater
control of the financial sector by the government monetary authorities. This shows that
foreign infiltration has been encouraged in
some cases, or at least permitted, by financial
policy, while in others no definite line has
been followed. At all events, the fact that
the financial authorities have focused their
attention on over-all policy-guidance and control of the intermediation system has made
possible structural changes such as those
described above, unintentional though they
may have been.
6. In the light of the foregoing conclusions,
it may be of interest to present some possible
and alternative ways of improving the operation of the intermediaries with a view to
speeding up and reorienting the process of
intermediation along the lines laid down in
national development strategies.
Generally speaking, it is essential to give
the financié system a function that enables it
to respond immediately to the basic needs of
economic and social development. Obviously,
therefore, the guidelines of the system cannot

be laid down in vacuo, they will have to b e
in line with each country's own economic
policy.
One way of making the intermediaries
function in this way is to make some changes
in the system prevailing in the region but
leaving the existing structure more or less
untouched.
Another method consists in making substantial changes in the system to enable it to
fulfil the economic and social requirements
of development. The line of action being followed by Chile at the present time seems to
be based on this more radical approach. In
Chile, the intermediaries, or most of them,
have been nationalized, so that, as was pointed
out earlier, the ñow of funds should conform
strictly to the Government's directives and
controls.
In any event, if the system is to operate
properly, the first prerequisite is that financial
policy should be part of economic policy.
For this purpose, it is essential that development plans should go into the planning of the
financial sector explicitly and in some detail.
In other words, it cannot be assumed—as has
sometimes been done in the past—^that the
flow of funds will adapt itself almost automatically to the requirements of the planned
mobilization of real resources; on the contrary, there must be a prior definition of the
ways in which the financial resources wUl be
used to help achieve the stated goals.
Consideration should be given to other
factors that are also important if the system
is to have a developmental function, especially
in cases where the existing structure has been
adapted.
( a ) The
strengthening
of
government
guidance and control of the over-all and
sectoral aspects of the intermediation system,
in terms of institutions and functions and in
deciding whether funds shall be drawn from
local or foreign sources, is worthy of note. In
this last connexion, the lines laid down for the
extent and the form of foreign infiltration and
for its control are important.
(b) It is also important that financial policy
should b e realistic and enable the intermediaries, especially the private and public banks,
to offer attractive loan conditions—in respect
of interest rates and degrees of liquidity, for
instance—to the surplus spending units, so as
to induce them to pour their funds into the
system.
Experiments like Mexico's provide some
suitable formulas for achieving the above aims.
37

On the other hand, wherever there have been
no explicit guidelines and restrictions, or the
controls exercised by the financial authorities
have proved ineffective, the intermediation
system has expanded more or less unchecked,
especially in the private sector outside the
banking system and led to unproductive specialization and competition, the misuse of resources
and higher costs for financing.
( c ) From the institutional standpomt, it is
advisable that support be given to government
bodies such as development agencies or corporations, whose influence declined in the last
decade in nearly all the countries that had
been using them as a lever for development.
With support, these agencies would be able
to use a wide range of devices in order to
gain access to untied community savings and
channel them into investment in priority sectors.
In addition, most of the foreign savings, in
the form of official credit and short-term loans,
could flow to and from those bodies, thus
guaranteeing greater efficiency in borrowing
and allocating foreign resources and avoiding
an undesirable take-over of the intermediation
system.
( J ) The strengthening and modernization
of the traditional government intermediaries
could be accompanied by the creation of
carefully selected new public development
bodies, without leading to excessive specialization of functions, and, hence, to a proliferation
of agencies and unnecessary competition to
attract resources. In achieving this purpose,
flexibility in the allocation of resources within
the public sector is important, so as to obviate
such competition and ensure a suitable distribution of funds among priority objectives.^''
(e) Tied savings for housing construction
may continue to account for a significant and
probably growing proportion of the resources
In this connexion, see Part II of "Public enterprises: their present significance and their potential in
development", Economic Bulletin for Latin America,
vol. X V I , No. 1, first half of 1971.

mobilized by the intermediation system. For
that reason, it is advisable that the development of this subsystem should be planned and
oriented towards the solution of the housing
problems of the lower income groups. Definite
policies for this purpose must be formulated
and adopted so as to give these groups better
and easier access to housing savings and loan
facilities.
( / ) It is possible that tied savings to finance
increased consumption of durables may also
continue to grow in importance in Latin
America's economic development. Bearing this
possibility in mind, it will be advisable to
calculate how much is to be spent for this
purpose and to make provision for this amount
in financial programming and in whatever
policies are formulated and applied.
In the policy to be adopted in this field,
the measures that the authorities may adopt
to influence the volume and possible categories
of such consumption are of great importance.^®
By influencing the volume and structure of
consumption, the authorities can thus intervene
in the process of intermediation.
Lastly, it should be stressed that all these
aspects are particularly important when it has
been decided to modify the existing system,
and many of them are important also if a
government opts for more radical changes in
the financial system.
28 In the case of automobiles, which is the most
representative, it is most important to specify the plans
for the production and annual sales of vehicles and
their price. Both variables, quantity and price, are
flexible enough to make it possible to determine the
amount of funds needed to market the annual output.
It may be noted incidentally that the automobile
models chosen for domestic production in the Latin
American countries have a considerable influence on
the amount of resources required from the intermediaries. For example, at a given level of output, a
United States "compact" vehicle costs about twice as
much as a small European car. Unfortunately, manufacturers have been allowed considerable freedom to
produce relatively expensive automobiles, unlike producers in some European countries, such as France
and Italy, twenty years ago.

Annex
FINANCIAL INTERMEDIATION I N COLOMBIA; CHILE, E C U A D O R A N D PERU
COLOMBIA
I.

GENERAL FEATURES

The development of the Colombian system of
financial intermediation during the 1960s has certain

38

characteristic features that will be considered in
some detail, in particular as regards the flexibility
of the financial apparatus to adapt to the pace and
pattern of Colombia's development. The intermediaries
in. Colombia have played an active part in mobilizing

resources from the surplus to the deficit spending
units in a way consonant with the trends of Colombia's economic development.
It is also worth noting that the Monetary Board
(Junta Monetaria) has played a fundamental role
in guiding the development of the financial system.»
The financial system increased fairly rapidly; expressed as a proportion of the gross domestic product
they grew steadily from about 50 per cent in 1960
to close to 70 per cent in 1969. This upward trend
provides the background for the structural changes
that have taken place in Colombia's financial system,
as can be seen from the figures given in table 9
of the main body of this study.
The first salient feature is that the commercial
banking subsystem maintained and even slightly
increased its share in total financial assets. Taking
the assets of the Banco de la República, the commercial banks and the Banco Popular together, this
share rose from 65.3 per cent in 1960 to 66.6 per cent
in 1969. Only on the mortgage side did the share
of the commercial banks show a slight decline.
The share of the rest of the traditional financial
sector in Colombia—including the Caja Agraria, the
Almacenes Generates de Depósito, insurance companies and capital formation companies—declined
sharply, from 25.6 per cent of total assets in 1960
to 17 per cent in 1969. More than half this decline
is attributable to the substantial reduction in the
share of capital formation companies (see table 9
supra).
This decline was accompanied by a rapid rise
in the assets of the new intermediaries—financial
corporations and investment funds—^whose share of
the total rose from 1.5 per cent in 1960 to 9.1 per
cent in 1969. As will be seen below, the growth
of these intermediaries and its special features constitute another salient aspect of the evolution of financial
intermediation in Colombia during the 1960s.
II.

PUBLIC FINANCIAL INTERMEDIATION

T o some extent, the modernization of the traditional system of public financial intermediation in
Colombia is closely intertwined with the creation of
new agencies. The Monetary Board is a typical
illustration of how these two processes occurred simultaneously. Hence it may be useful to consider the
institutional side of public intermediation from the
standpoint of renovation of existing bodies and the
creation of new ones.
A. THE MONETARY BOARD

1. General

background

Until the beginning of the 1960s, central bank
functions were exercised by the Banco de la República which was initially owned by the private banks,
private shareholders and the Government. The Government, however, was always a minority shareholder
» I n this connexion, see "Mobilization of domestic
resources", Economic Bulletin for Latin
America,
vol. X V , No. 2, second half of 1970, p. 142.

from the beginning, and in the early 1950s it sold
off all its shares. The Banco de la República was
managed by national and foreign banks and by
trade associations representing agriculture, coffeegrowing, commerce and industry. The Board of
Directors was the supreme monetary authority and
was responsible, inter alia, for discounting and rediscounting transactions in the public and the private
sectors.
Given this organizational structure, it was difficult
to co-ordinate financial and economic policy, even
though some efforts were made—mainly around 1959
and 1960—to make the system more developmental
in function. It was established initially that banks
should earmark 15 per cent of their demand and
time deposits for loans to agriculture and fisheries
at a basic interest rate of 10 per cent per year.
Subsequently, it was laid down that banks should
earmark 70 per cent of their savings deposits for
financing investment in certain sectors considered to
be of priority importance.
The financial sector began to take on a developmental function, and also to be co-ordinated with
economic policy, in November 1963 when the Monetary Board began operations, and the situation was
further improved when the Board's powers were
expanded in 1967. Co-ordination with economic
policy was made possible because, unlike the Board
of Directors of the Banco de la República which
was dominated by credit users, the Monetary Board
is made up of high-level officials in charge of
formulating and implementing national economic
policy. These officials are the Ministers of the
Treasury, Development and Agriculture, the chief of
the Administrative Department of the National
Planning Commission, and the Manager of the Banco
de la República. The Board also has two permanent
advisers participating in its discussions without the
right to vote, one on monetary matters and the
other on economic matters. The Monetary Board
has also taken over the substantive functions of
the Board of Directors of the Banco de la República, which has in a sense become a kind of secretariat to it.
2. Operating functions and characteristics
(a) Over-all supervision of the financial system
The Monetary Board took over the Banco de la
República's responsibilities for the note issue and was
also given other functions, including: ( i ) fixing the
maximum interest or rediscount rates chargeable by
the financial intermediaries; (ii) fixing the length of
repayment periods, the types of documents to be
used and the size of particular transactions by financial
intermediaries; (iii) prohibiting the use of specific
credit instruments, for example guaranteeing liabilities
in legal currency; and (iv) determining the terms
for retail credit sales of movable goods or services.
The Monetary Board has very broad functions,
particularly if compared with similar institutions in
other Latin American countries. Of particular note
is the fact that it can allocate resources directly
to the financial intermediaries through the Banco
39

de la República and also through other funds that
will be discussed below. It is also empowered to
determine the kind of indirect debt securities that
the intermediaries may issue.
It also has a special function of regulating instalment credit operations, chiefly for the purchase of
consumer durables, for example, by fixing the maximum interest rates chargeable on such transactions.
The system used by the Monetary Board to
regulate the resources of the traditional financial
sector consists basically in requiring intermediaries
to follow a certain distribution in allocating funds,
with the accent on loans to the sectors considered
to be of priority importance. Each intermediary is
bound to follow the distribution or else he must
neutralize his funds in a compulsory reserve either
in the form of cash or as low-yield bearer securities.
In other words, except for a proportion equal to
20 per cent of the savings deposits they receive,
the intermediaries cannot use the resources they
have available for loans or investment exactly as
they see fit.
The fact that the Monetary Board can allocate
resources within the traditional financial system is
particularly important if it is remembered that the
interest rates prevailing during the 1960s in Colombia
have generally been negative in real terms, taking
account of price rises. In other words, the users
of credit have quite definitely been encouraged and
subsidized, particularly certain priority sectors which
were eligible for interest rates lower than those
generally prevailing.
In order to comply with the pattern of distribution established by the Board, the intermediaries in
Colombia have been obliged to engage in promotional
activities in the sectors in which the demand for
resources has been relatively weak. They have also
had to be prepared to grant credit to productive
units which did not offer the best repayment prospects,
compared with the large established traditional enterprises, and this helped to reduce the level of concentration of bank credit.
The net result is that the traditional intermediaries,
with the aim of increasing their own profits, have
to some extent endowed the financial system with
a developmental function by giving preference to
the sectors considered of priority importance in
speeding up growth.
Although the Monetary Board has played a highly
significant role in directing the growth of the financial
sector in Colombia, it has come up against some
obstacles. First of all, while it has been able to
guide the activities of the commercial banking
system, it has not been able to exert the same
influence over the rest of the intermediation system
and has had virtually no influence over some agents
outside the banking system.
Secondly, the share of savings, particularly personal savings, within the resources mobilized by the
commercial banks and regulated by the Board has
fallen. Hence, the supply of resources for the commercial banking system has continued to depend to
a very great extent on the trends of demand deposits
40

and the rediscounts offered by the Banco de la República. To offset this, however, it was proposed in
1970 to raise the real rate of interest paid on savings
and time deposits to take account of inflation.
( b ) The Monetary Board's development

funds

The Monetary Board's special funds are an important means of regulating the trends of the financial
sector. The domestic resources of the funds generally
come from bonds issued by the Board, which the
financial intermediaries can purchase for use as cash
reserves.
The Board's funds have two main characteristics.
The first is that their resources, which come from
bond issues and external loans, are used to provide
direct financing for priority sectors that cannot secure
financing on a regular basis from the intermediaries.
This considerably expands the Board's functions as a
channel for resources, and brings it close to the position and functions of National Financiera in Mexico.
The second concerns the role of these funds in
regulating the resources of the commercial banking
sector. Given the system of compulsory cash reserves,
the banks can use their surplus resources to purchase
bearer securities issued by the Government and by
the Board that fulfil certain conditions. Thus, ,the
bonds issued by the Board are used by banks to
comply with cash reserve requirements and allow for
the flexible channelling of credit on both a permament and a seasonal basis.
( i ) Private Investment Fund (Fondo de Inversiones Privadas—FIP). As its name indicates, the purpose of this Fund is to strengthen private investment
in Colombia. It was established in 1963 under an
agreement between the Governments of Colombia and
the United States providing that the programme
loans granted by A I D would generate a counterpart
contribution in local currency that would be used
to finance the operations of the Fund. FIP has also
received foreign exchange resources from AID, IDB
and public agencies in the Federal Republic of
Germany and the Netherlands.
FIP has devoted most of its energies to promoting
production for export and import substitution, either
directly or by passing on resources to other intermediaries, especially financing companies. At the
end of 1969, 45.7 per cent of the resources it had
on loan in national currency (1,013 miUion pesos)
were allocated to the export sector and 36.5 per cent
to import substitution. For credits in foreign currency (17.8 million dollars), these proportions were
30.6 and 64.4 per cent respectively.
The loans granted by the FIP, with both national
and foreign resources, have repayment periods of
up to ten years at a basic annual interest rate of
ISVz per cent for most operations and 12 per cent
for planting cocoa beans. Given that between 1963
and 1969 domestic prices rose on average by 11 per
cent each year, these interest rates are rather low
in real terms.
The loans granted by FIP are generally for financing real investment, although for 1970 onwards

provisions were introduced allowing 20 per cent of
each loan to be used for financing working capital.
(ii) Industrial Financing Fund (Fondo Financiero
Industrial—FFI). This Fund was established in 1968
in order to rediscount the credits granted by banks
and financing houses to small- and medium-scale
industry. These credits must be used to finance working
capital, technical assistance and, under certain conditions, the purchase or installation of equipment.
The functions of FFI were recently expanded to
include the financing of up to 80 per cent of purchases by small- and medium-scale industry of
domestically-produced capital goods.
Most of the Fund's resources come from the issue
of six-month bonds bearing an annual interest of
11 per cent. Furthermore, in order to make these
bonds more liquid, the Banco de la Reptiblica rediscounts them at a rate three points below the
stated rate.
(iii) Urban Financing Fund (Fondo
Financiero
Urbano~FFU).
This Fund was established in 1968
with the basic purpose of rediscounting securities
issued by municipalities to finance urban development projects. Also, as with the FFI, rediscount
facilities are available for the banks and finance
houses purchasing such securities at the same rediscount rate.
The FFU, in addition to providing resources to
finance the urban development programmes undertaken autonomously by municipalities, also helps to
provide the domestic funds required by the municipalities as their counterpart contribution for external
credits.
(iv) Agricultural Financing Fund (Fondo Financiero Agrario—FFA).
The operations of this Fund
were transferred to the Banco de la República in
1966 by decision of the Monetary Board. The bonds
it issues must be taken up by the banks which can,
however, rediscount them with the Banco de la
República for up to 65 per cent of their value and
at an annual rediscount rate of 7 per cent.
The resources thus collected are used to provide
subsidized credit to the agricultural sector under a
credit programme designed to encourage investment
in certain branches specified in national development
plans.
B.

OTHER PUBLIC INTERMEDIARIES

There is little to add regarding the development
of the remainder of the public intermediation system
in the 1960s, for such changes as did occur were
on a very small scale.
First of all, the Banco Popular—^which is the
State-owned commercial bank—did not grow in any
substantial way and increased its share in total
financial assets from 2.9 per cent in 1960 to 3.5 per
cent in 1969 (see table 9 supra). There were some
technical improvements in the Banco Popular's organizational structure, but no substantial modifications
were made in the qualitative aspects of its functions.
In general, thus, it can be said that its growth was
closely associated with that of the private commercial
banking system.

Secondly, as noted earlier, the Caja Agraria declined in importance, both quantitatively and qualitatively, within the intermediation system. Between
1960 and 1969, its share in total financial assets fell
from 13.4 to 10.8 per cent, which is a reflection
of the fact that it did not modernize to any great
extent and also shows the volume of resources that
were channelled through the Agricultural Financing
Fund of the Monetary Board from 1966 onwards.
The case of the Industrial Promotion Institute
(IFI) is interesting, since the IFI has grown in
importance in step with the rapid development of
the private investment banks. Although the functions
of the private and the public development banks
are not co-ordinated in a very detailed way, there
is no doubt that competition among them has not
curbed the rapid growth of the industrial sector.
III.

PRIVATE FINANCIAL INTERMEDIATION

As indicated above, the most striking feature of
the development of private financial intermediation
in Colombia is the creation of several investment
banks and the increase in the activity of existing
investment banks.
A. THE INVESTMENT BANKS

During the 1960s, the investment banks increased
their share in total financial assets fivefold (from
1.5 per cent in 1960 to 7.7 per cent in 1969). This
trend is mainly related to the growth of three investment banks: the Corporación Financiera
Colombiana, the Corporación Financiera Nacional
and the Corporación Financiera de Caldas. At the
end of 1969, the capital and reserves of these three
institutions represented two-thirds of the capital and
reserves of all the investment agencies in Colombia,
even though several of them were not in existence
before 1967. The proportion is similar with respect
to assets.
The International Finance Corporation of the World
Bank has a majority holding in these three corporations, having contributed a total of 4.7 million dollars
to their capital (2 million to the Corporación Colombiana, 2 million to the Corporación Nacional and
0.7 million to the Corporación de Caldas).
The Colombian investment banks have several
unusual operating features. First, as regards the collection of resources, they have received funds from
other sources for a variety of purposes: ( a ) from
the Private Investment Fund of the Monetary Board,
which as well as lending directly also transfers funds
to other intermediaries, most of the funds in this
case coming from the local currency generated as
a result of A I D programme loans; ( 6 ) from the
Banco de la República, which channels resources
originally loaned by international agencies and by
public agencies in other countries to the financial
corporations; and ( c ) from other external sources,
mainly banks.
Taking the balance of loans and discounts granted
by these corporations at the end of 1968, 41 per
cent was financed from own funds, 18 per cent

41

from FIP resources, 11 per cent from credit from
the Banco de la República and 30 per cent from
direct loans of international resources. In other words,
the credit capacity of the investment banks based
on their own resources had increased by roughly two
and a half times (see table A ) .
As regards the growth trends of the different types
of income, the rapid expansion of own resources is
fundamentally attributable to the capitalization of
new inflows and undistributed profits. In contrast,
the resources received by the corporations via savings
deposits—which are included under the head of own
resources—did not show much change. This has been
a serious obstacle to the activities of the corporations.
The volume of funds supplied by FIP and international loans contracted directly by the corporations
has also grown very rapidly (the latter from 1968
onwards). The same is not true, however, for the
funds from the Banco de la República, which have
grown very slowly in money terms (see table A ) .
Secondly, as regards the allocation of resources by
the financial corporations, they have tended to make
capital contributions to most of the enterprises to

which they have provided financial assistance.^ In
addition they have supplemented this with support
through supplying loans and other resources, in the
form of credit or capital contributions, from national
and foreign sources. In other words, the financial
institutions have helped to centralize the distribution
of resources, and are concerned with much more
than simply the funds they supply directly.
The investment banks have also been important
in qualitative terms, since their links with the enterprises to which they have supplied financial assistance
have generally been fairly close,® ranging from
control of policies and management to varying degrees
of influence on their main lines of action and on
appointments to key posts.
In this respect, it is clear that the Colombian
financial corporations have been concerned simultaneously with the profits they could derive from
b In 1968, capital contributions accounted for
around one-fifth of the loans granted by the financial
corporations.
c These enterprises generally belong to the manufacturing sector (petrochemicals, textiles, etc.).

Table A
COLOMBIA: F I N A N C I A L CORPORATIONS
(Millions of pesos at current

prices)
1967

1968

1965

1.557

A. Cash
1. Bank cash reserves (local currency)
2. Bank cash reserves (foreign currency)

1. Investment in securities
(а) Shares and other holdings in
non-financial enterprises . . .
( б ) Mortgage bonds
2. Other investment

295

25

31

80

287

2. Credits and acceptances

23

14

8

286

455

660

216

268

407

580

(215)
(1)

(266)
(2)

(380)
(27)

(542)
(38)
80

assets

18

48

1,179

1,477

2,706

625
(268)
(142)

779
(332)
(213)

1,183
(547)
(353)

2,272
(931)
(419)

(211)
(4)

(231)
(3)

(237)
(46)

(241)
(681)

427

400

294

434

11

13

33

55

188

219

100

713

re-

SOURCE: Revista of the Banking Authority.
2118

3,829

54

1,052

1. Loans and discounting
(a) Own resources
(b) FIP resources
( c ) Banco de la República
sources
( d ) International resources

assets

94

2,159

II

C. Portfolio

E. Other

54

,

227

B. Total investment

D . Fixed and deferred

1,751

79

Total Assets/LiabilUies

1966

their operations and with the development of the
enterprises they have supported, which include some
new and some established enterprises with problems
of poor management or which could not obtain the
funds they required for current activities or for
expansion. It is indisputable that financial corporations in Colombia, and in other countries of the
region, have taken on certain of the functions of
the securities markets in the financial systems of
the more industrialized countries by allowing enterprises to raise funds through the sale of shares and
debentures.
In brief, it appears clear that the Colombian
financial corporations have played an important part
in promoting the growth of many enterprises, while
at the same time being fundamental in giving material
form to external influences upon the intermediation
apparatus and, through it, upon the productive system.
B.

OTHER PRIVATE INTERMEDIARIES

Of the other changes that took place during the
1960s in private intermediation, especially as regards
the creation of new machinery, of particular note
is the creation of mutual or investment funds, both
because of the growth of such funds and because
they complement the activities of the financial corporations. It should be noted that Colombia is one
of the few Latin American countries in which mutual
funds have grown to any considerable extent.
Apart from the creation of financial corporations
and mutual funds, no other private intermediaries of
any special significance have emerged in Colombia.
For example, there is no savings and loan institution for the financing of housing construction of
the kind existing in other countries at a similar level
of economic development designed to tap and channel
tied savings for housing.
Furthermore, as regards financing the expansion
of consumption, particularly of durable goods, no
new intermediaries have been created on a par with
those in other countries of the region. This is
attributable, in the first instance, to the fact that
the Colombian motor-vehicle industry only began to
speed up its growth rate at the very end of the 1960s.
Secondly, the financing of consumption has not led
to the establishment of any scale of financing companies, for example, because the resources available
have flowed through other channels, notably the
traditional banking system.^
As regards the modernization of traditional private
intermediation, it appears that the most significant
changes occurred in the commercial banking system.
The banking sector managed in practice to maintain
its share in total financial assets even though, as
noted above, it was not authorized during the 1960s
to offer terms for time deposits of a kind that
would have attracted resources from the surplus
spendine units. In order to offset this, the commercial
< Other methods have been used to finance increases
1
in consumption, for example, credit cards, some of
which were backed by United States and European
banks.

banks basically took two steps. First, they modernized
internally, especially as regards administrative organization and methods and the installation of modern
accounting equipment. Secondly, and at the same
time, they opened a large number of branches in
different regions of the country.^ This improvement
in the coverage of the banking sector helped to
increase the number of current bank accounts and
to collect funds in the form of increased demand
deposits.
The resources absorbed by the banks have continued to be used for the most part to finance the
current activities of enterprises, under the supervision of the Monetary Board. Nevertheless, the data
available indicate that some of these resources have
flowed directly and indirectly towards the expansion of consumption of consumer durables, although
it is not possible to put a figure on the actual
amount.
One of the factors attracting funds towards the
financing of consumption—that part of their funds
which banks are free to dispose of without consulting the Monetary Board—is the fact that banks
were authorized to charge a total annual interest
rate of up to 50 per cent on loans to individuals.
This rate provided the commercial banks with a very
attractive profit margin and encouraged them to
grant credit to finance the expansion of consumption.
It must be noted, however, that the rapid growth
of domestic production of consumer durables has
already made it clear that the existing financial
system in Colombia will have difiiculties in financing
the growth demand for instalment credit. It is therefore possible that the present system may have to be
radically changed.
In conclusion, it is worth while noting that the
other traditional private financial intermediaries, for
example the mortgage banks and the insurance and
capital formation companies, have not modernized
on any great scale.
CHILE
I.

GENERAL FEATXIRES

The 1960s in Chile were characterized by efforts
to bring the financial system out of its relatively
backward state and to establish machinery to restore
liquidity to the system, which had steadily become
less and less liquid since 1940.
Together with increased control by the Banco Central, several financial mechanisms were created and
modernized through the establishment of new intermediaries and the introduction of innovations into
the traditional financial structure.
In the public sector, the basic changes were the
modernization of traditional institutions, with the
issue of readjustable savings certificates by the Banco
Central, and the creation of readjustable savings
deposits and new methods of financing the public
sector in the Banco del Estado. The Caia Central de
e l t was only in 1969 that the Banking Authority
introduced restrictions on the opening of new branches.

Ahorros y Préstamos was also established to regulate
the national savings and loan system.
In the private sector, the most important changes
were the creation of new institutions specializing in
tied savings, mainly for the financing of housing
(national savings and loan system). Although from
1965 onwards legislation was enacted providing for
other changes, these did not take place or did so
only recently, which makes it difficult to assess their
impact. The traditional private intermediaries, unlike
those in the public sector, have not modernized as
regards the introduction of new mechanisms for
tapping and allocating resources, and have confined
themselves to modernizing their installations and
equipment. As a result, their share in the financial
system has dropped.
Links with the international financial system have
not taken the form of the establishment of new
institutions, except for savings and loan associations,
but rather consist in an inflow of short-term capital
into the banking system. As a consequence, there
are no apparent links between national and foreign
groups. Legislation restricting the association of
domestic and foreign capital in the formation of new
institutions (for example, private development banks)
has been an obstacle to the creation of such institutions and made it difficult to find out what links
exist between the two groups.
A look at some financial indicators shows that
over the past thirty years in Chile the growth of

the means of payment and of the total assets of the
financial system has not been in line with the real
growth of the economy.
The coefficient of real liquidity (ratio of means of
payment to national product in real terms) and
the ratio of total financial assets to the national
product fell between 1940 and 1959 (see table B ) .
The first ratio (coefficient of real liquidity) fell by
50 per cent over the period; but the ratio of total
assets to the product fell by even more, in 1959 being
only slightly more than one-third of what it had
been in 1940.'
Inflation is the main factor responsible for these
trends. It discouraged the holding of liquid assets
and constantly made it necessary to apply monetary
policy measures. The monetary stabilization measures
taken so far, by restricting the secondary expansion
of the means of payment, have reduced the effective
level of liquidity, and this has brought the problem
of the lack of development of the financial sector
to almost intolerable levels.
Among the measures put into effect during the
1960s, it is worth while noting those adopted in
1959 and 1960, which did at least arrest the downward trend. Over the first five years of the
decade (1960-1964), the liquidity of the economy
Í See Pedro Jeftanovic, "Estudio sobre el mercado
de capitales chilenos" (Centro de Estudios Socio-Económicos, Santiago, 1969), mimeographed.

Table B
CHILE: RELATIONSHIPS BETWEEN MEANS OF P A Y M E N T , FINANCIAL ASSETS A N D
NATIONAL PRODUCT
(Millions of escudos at December

GROSS

1965 prices)

Notes and
coin in
circulation

Total
means of
payment

Total
assets^
financial
system

Gross
national
product

Means of
payment

(V

1940
1950
1955
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968

Demand
deposits in
commercial
banks and
Banco del
Estado
(2)

(V

(4)

(5)

(6)

(7)

19.5
16.5
12.4
9.7

36.2

386
485
445
465

926
1,113
954
790
1,102
1,081

563
565
582

1,390

517
610

1,200
1,452

725
872
918
930

1,518
1,768
1,705
2,036

1,312
1,598
1,399
1,255
1,665
1,646
1,972
1,717
2,062
2,243
2,640
2,623
2,966

SOURCE: Boletín Mensual of the Banco Central de
Chile, quoted by leftanovic, op. cit.
44.

2,443
2,161
1,548
1,706
2,230
2,311
2,609
2,297
2,642
2,921

Gross national product
Financial
assets

Percentages

9,677
11,294
12,954
13,828

3,609
3,770

14,686
15,373
16,130
16,775
17,547
18,510
18,900

4,355

19,297

12.0
11.2
12.8
10.6
12.3
12.8
14.3
13.9
15.4

22.3
13.7
13.2
16.1
15.7
17.0
14.2
15.7
16.6
19.5
19.9
22.6

«Assets of the commercial banks. Banco Central,
mortgage banks and national savings and loan system.

did increase over the 1959 figure but without showing an upward trend. In the mid-1960s, further
measures to stimulate financial development steadily
increased liquidity (see table B ) . Recent trends in
the Chilean financial system fall into two periods,
demarcated by the average values of the indicators of
liquidity.
The first period runs from 1960 to 1964 with
a coefficient of liquidity (ratio of means of payment to gross national product) of 11.8 per cent
and a ratio of financial assets to gross national
product of 15.8 per cent. The second runs from
1965 to 1968, in which these coefficients were 14.1
and 19.7 per cent respectively.
The difference in the growth of the financial system
in these two periods is even more apparent from a
comparison of the real growth of the assets and
liabilities of the financial system. In the first period,
the financial system's total assets grew by 18 per cent
and total liabilities by 46 per cent. In the second,
these figures were 65 and 47 per cent respectively.
The real growth of liabilities was much the same in
both periods, which indicates that the economy's
financing needs are more or less rigid and are not
subject to the trends followed by assets. If assets do
not grow at the same pace, the financing of the
system then depends on increasing the rate of circulation of monetary assets and on raising the
multiplier of the banking system.
These were the trends in the early 1960s. The
purpose of the measures introduced in 1964 and 1965
was precisely to create machinery to encourage the
surplus spending units to hold their savings in the
form of financial assets. The result was a sharp increase in the real growth of the assets held by the
financial intermediaries, which meant that the financing of the economy during the second period was
less dependent on the multiplier effect of the primary
issues.
II.

PUBLIC FINANCIAL INTERMEDIATIONS
A. THE BANCO CENTRAL

The Banco Central acts as the overseer of the
financial system and also as a financial intermediary
engaging in transactions with the public.
As regards the first of these functions, the Banco
Central has gained added importance in the financial
system in the 1960s, although this gain may have
been greater in the regulations issued than in actual
practice. More recently, reforms have been advocated
s T h e division between the public and the private
sectors is not altogether clear-cut since the Banco del
Estado functions as a development bank and the financing agency of the public sector and also as a commercial bank. For purposes of analysis, it will be considered a public intermediary as regards the first of these
functions and a private intermediary as regards its
functions as a commercial bank. The same is the case
with the Caja Central de Ahorros y Préstamos, which
will be considered in conjunction with the national
savings and loan system, given that it has special
features not shared by the other financial intermediaries.

whose basic purpose is to provide the Banco Central
with a greater real capacity to supervise the Chilean
financial system.
The Banco Central's activities vis-a-vis the public
have declined in importance, and are at present confined to the public warehouse warrants of the
Almacenes Generales de Depósitos, some transactions with industry, namely the nitrate and steel
industries, and, in open market transactions, to
transactions between banks. In 1965 an innovation
was introduced in its relations with the public which
enabled the Banco Central to tap savings. Since 1965
it has issued readjustable savings certificates ( C A R )
which to some extent maintain the real value of the
public's liquid savings. These certificates have grown
in importance (see table C ) and the most recent
data indicate that this trend will continue and become
more marked. The resources generated by the issue
of the C A R have gone in the first instance to longterm financing in the private sector and some public
enterprises, and in particular to financing the expansion of export enterprises and enterprises producing capital goods.
B. OTHER PUBLIC INTERMEDIARIES

The general trend for there to be less public
participation in credit to the private sector, and in
financial intermediation, is also evident in Chile,
although to a lesser extent, because the public sector
has modernized its operations in the financial system
by creating new machinery within its traditional
institutions.
1. The Banco del Estado
The main change, which occurred in the mid-1960s,
in the operation of the banking system was the creation of readjustable savings deposits in the Banco
del Estado and the authority given to the Banco
del Estado to act as a development bank providing
readjustable long-term loans.
The Banco del Estado, like the commercial banks,
maintains demand and time savings deposits, which
declined in importance from 1965 onwards owing to
inflation. At the beginning of 1966, these deposits
were made readjustable according to the rate of
inflation up to an amount deposited per account
equivalent to 1.5 basic annual salaries.
The readjustment was to be financed out of the
earnings on the development loans granted by the
Banco del Estado. In practice, however, these earnings have covered only a small fraction of the amount
required, the rest being covered by nominal fiscal
contributions (acknowledgement of debts). At all
events, readjustable savings deposits have been quite
successful as a means of tapping savings (see table C ) .
Innovations have also been made in the way the
Banco del Estado finances the public sector. All public
agencies hold accounts in the Banco del Estado and,
for purposes of Treasury overdrafts, these accounts
are considered to be a single account: the "consolidated public sector account". The overdraft may
be up to 70 per cent of the balance of this account;
and if the Treasury takes the initial overdraft,
45

0\

Table C
CHILE: ASSET STRUCTURE OF SELECTED FINANCIAL
(Millions of escudos at December

INSTITUTIONS

1965 prices)

Commercial banks and Banco del Estado
Demand
deposits
(excluding
draft in
clearance)
Commercial
banks and
B. del Est.

1940
1950
1955
1960
1961
1962
1963
1964
1965
1966
1967
1968

926.0
1,112.8
954.3
1,101.9
1,080.9
1,390.4
1,200.0
1,452.0
1,518.2
1,768.4
1,705.3
2,035.9

Banco Central
Percentage of
total
assets

Time deposits
Banco
del
Estado

37.9 (586.8)
51.5 (356.1)
61.7
(92.6)
49.4 ( 2 4 9 . 5 )
46.8 (336.7)
53.3 (321.4)
52.2 ( 3 0 4 . 4 )
55.0 (275.9)
52.0 (286.7)
49.0 ( 4 3 4 . 3 )
45.2 ( 5 1 6 . 3 )
46.7 (577.0)

Commercial
banks and
Bco. del
Estado

808.1
446.3
122.9
513.7
592.7
550.6
486.5
457.9
476.0
641.2
726.0
788.3

Percentage of
total
assets

33.1
20.6
7.9
23.0
25.7
21.1
21.2
17.3
16.3
17.8
19.3
18.1

Notes and
"?
circulation

Percentage of
total
assets

385.7
484.6
444.6
563.1
565.4
581.5
516.9
610.1
724.5
871.5
917.6
930.2

Readinstable
savings
certificates

15.8
22.4
28.7
25.2
24.5
22.3
22.5
23.1
24.8
24.2
24.3
21.4

SOURCE: Boletín Mensual of the Banco Central, data quoted by P. leftanovic, op. cit.

Mortgage banks
Percentage of
total
assets

—

14.9
21.2
55.9

0.4
0.6
1.3

Mortgage
bonds
in
circulation

323.1
117.7
26.0
51.6
71.5
51.3
30.1
19.4
15.5
13.5
13.8
14.9

Percentage of
total
assets

13.2
5.4
1.7
2.3
3.1
2.0
1.3
0.7
0.5
0.4
0.4
0.3

National savings and
loan system
Deposits,
mortgages,
Promissory
«otes and
bonds

35.4
63.6
102.6
186.3
299.1
386.4
529.7

Percent¡^¡J
assets

1.4
2.8
3.9
6.4
8.3
10.2
12.2

Total
assets

2,442.9
2.161.4
1.547.8
2,230.6
2.310.5
2.609.2
2,297.1
2,642.0
2.920.5
3.608.6
3.770.3
4.354.9

deposits it in the accounts of the various public
agencies and then overdraws again, it can have
available to it, in addition to the balance of its own
account, an amount equal to 2.3 times the funds
actually on deposit in the accounts of the other public
agencies.
This means of financing grew in importance during
the 1960s. The data available indicate that in 1965
the resources obtained by the public sector through
overdrafts on the consolidated account accounted for
85 per cent of all credit obtained by the public sector
from the Banco del Estado."^ A comparison of the
growth rates of loans to the public sector by the
Banco del Estado and of the total liabilities of the
banking system indicate that the more rapid growth
of the former occurred from 1960 onwards, which
demonstrates that being able to overdraw the consolidated account was what prevented the public
sector in Chile from having more serious problems
with its current financing than it actually did.
2. The public development

agencies

The public sector in Chile has specialized credit
institutions basically designed to provide long-term
financing for fixed investment and the infrastructure.
These include the Production Development Corporation ( C O R F O ) , the first to be established, which
promotes development in all sectors through loans,
direct investment and shareholdings in enterprises;
the Housing Corporation ( C O R V I ) which participates
in financing the contruction of low-cost housing and
at present operates in much the same way as the
savings and loan system but in close association
with the social security institutions; the National
Mining Enterprise ( E N A M I ) , which finances smalland medium-scale mining; and the Agricultural
Development Institute ( I N D A P ) and the Agrarian
Reform Corporation ( C O R A ) which are responsible
for promoting agricultural development and financing
the agrarian reform.
In the mid-1960s, loans by these agencies accounted
for about 25 per cent of all loans granted by the
banking system.' Their resources come mainly from
fiscal contributions and external loans, the only exception being CORVI which obtains resources from
social security funds and saving deposits by the public.
As noted earlier, there has been a tendency recently
in Latin America for the centralized development
agencies to lose their importance as a means of
channelling external credit to the productive system.
In Chile, however, the public agencies have managed
to maintain a certain degree of control over external
credit (see table D ) . While direct external credit to
the private sector remained virtually stationary in
the period 1965-1968, credit negotiated with public
sector guarantees—i.e., approved or supervised
normally by CORFO—increased. This had the effect
of reversing the ratio of credit guaranteed by the
public sector to direct external credit from 16 per cent
in 1965 to almost 60 per cent in 1968. If suppliers'
credits are left out of account, in other words, con•"See Jeftanovic, op. cit., p. 114.
I Ibid., p. 170.

sidering only credit from international agencies, banks
and Governments, the upward trend of external
credit guaranteed by the public sector is even more
marked, rising from 15.4 per cent in 1965 to 87.3
per cent in 1968 (see table D ) .
Chile's external situation in 1964 and 1965 had
the effect of making the lenders of funds require
government guarantees, and this was largely responsible for the sharp rise in the ratio from 15 per cent
in 1965 to 80 per cent in 1966. Only subsequently
did the monetary authorities become more concerned
about using government guarantees for external loans
as a means of influencing the allocation of resources.
All the above, however, is not to say that Chile's
position is different from that of the region as regards
the centralization of external credit. More and more,
external resources arrive already earmarked for
specific projects and not as lump sums for subsequent allocation. The fact that there is greater control
is a consequence of the way in which CORFO
operates in guaranteeing external credit.
III.

PRIVATE FINANCIAL INTERMEDURIES
A. THE BANKING SYSTEM

The share of the assets of the banking system
(including the Banco del Estado and the commercial
banks) in total assets has declined steadily but not
very sharply in recent years. Taking account of demand and sight deposits, its share fell from 72.4
per cent in 1960 to 64.9 per cent in 1968 (see
table 10). This ratio does not, however, explain the
way in which the system actually evolved.
The share of demand deposits increased between 1960 and 1964, reaching a level of 55 per cent
in the latter year. From then on they declined
steadily in importance, although they grew more in
real terms than in the previous period. This would
seem to show that their greater share in total assets
in earlier periods was largely due to the lack of
development of the system as a whole. Time deposits,
on the other hand, have shown exactly the reverse
trend. Their share in the total assets of the financial
system declined up to 1965, and from then on increased, which is explained by the introduction of
readjustable savings accounts in the Banco del Estado
(see table C ) .
The commercial banks have not been able to bring
their system of time deposits into line with the new
system of readjustable savings introduced by the
Banco del Estado. The interest rates on time deposits
in commercial banks fluctuated around 15 per cent
a year; because of inflationary trends, such interest
rates became negative in real terms, except in 1960
and 1961.
The banking system's Share in the total loans of
the financial system also fell throughout the decade
(see table 10), from 98 per cent in 1960 to only
80 per cent in 1968.3
j These figures are overestimates of total financing
in Chile because of the exclusion of State development
agencies (CORFO, CORVI, etc.), social security institutions and consumer credit organizations.
47

Table D
CHILE: USE OF E X T E R N A L C R E D I T BY THE P R I V A T E SECTOR
(Millions

of

dollars)
1966

1965

196S

1967
Dollars

Percent

Dollars

Percent

25.6

21.0

30.6

12.8

8.7
5.5
6.8

12.7

81.8
45.4
10.2
4.0
22.2

59.2
32.9
7.4
2.9
16.1

69.4

56.3

40.8

8.0

8.7

6.3

—

—

42.1

61.4

47.6

34.5

68.6
14.2
5.5

100.0

138.1

20.7
8.0
9.9
61.4

54.1
10.2
4.0
69.8

100.0
39.2
7.4
2.9

Dollars

Percent

Dollars

Guaranteed by the public
sector
International agencies . . .
Governments
Private Banks
Other suppliers

11.3
5.6
—
—
5.7

15.8

21.0
10.5
2.2

8.0

8.3

10.1

—

Direct private debt
International agencies

60.5
21.7

84.2

74.4

47.6

12.7
41.8

58.0

1.9
1.6
70.7

5.5

9.1
29.7

61.0
1.6
1.4

71.8

100.0

82.0

100.0

27.3
—
9.1
35.4

38.0

12.1
2.2
1.4
66.3

14.8
2.7
1.6

..

Private Banks
Other suppliers
Total
International agencies
Governments
Private Banks
Other suppliers

..

7.8

Percent

2.7
—

30.2

12.7
49.3

80.9

8.0
9.9
—

6.8
42.1

50.5

SOURCE: Foreign Trade Division of the Planning OflSce ( O D E P L A N ) , quoted in "Análisis y Diagnóstico", Santiago, year VI, No. 5 (mimeographed).
B. THE NATIONAL SAVINGS AND LOAN SYSTEM

The modernization of the financial system in Chile
began in 1959 with the formulation of norms to
govern incentives to financing and building low-cost
housing units.'' A system of "tied savings" was introduced and provision was made for the Corporación
de la Vivienda to be the financial intermediary in
charge of such operations. In 1960,i the law was
broadened to allow the establishment of private savings and loan associations controlled and financed
by the Caja Central de Ahorros y Préstamos, acting
as a Government agency.
The twenty-five savings and loan associations operating today attract resources by collecting savings
deposits from the public, selling readjustable mortgage
securities and through loans from the Caja Central
de Ahorros y Préstamos. Table E shows that most
of the resources of these associations come from
public savings deposits (62 per cent in 1968). Loans
are for housing construction, are readjustable and
have long repayment periods (maximum twenty-five
years).
The Caja Central de Ahorros y Préstamos supervises and provides financial support for the system
of tied savings. Most of its funds come from the
exchequer and from external credits, supplemented
by the sale of mortgages and readjustable bonds to
the public. The data contained in table 10 give a
t Legislative decree N o . 2 of 1959.
1 Legislative decree N o . 205 of 4 April 1960.
48

rough idea of the way in which these institutions
have expanded in Chile. In 1968, they held 12 per
cent of the total assets of the system and their sales
accounted for nearly 20 per cent of the same total.
C. OTHER PRIVATE INTERMEDIARIES

The importance of mortgage banks (there are currently two, together with the mortgage department
of the Banco del Estado) within the financial system
in Chile has declined (see table 10). In 1965, their
rules of operation were altered to enable them to
take advantage of monetary readjustments. The prior
authorization from the Central Bank needed to make
this change effective was delayed until 1968, when
authorization was given for two issues of readjustable
bonds for specific amounts by private banks.
The real annual volume of transactions carried out
on the country's two stock markets fell from 73.4
million escudos (at 1958 prices) in 1940 to 9.7 million in 1968. At the same time, the real share index
fell from 3,562.4 in 1940 to only 698 in 1968.™
In the 1960s certain measures were taken to alter
the above trend, but they produced no concrete
results. Indeed, the temporary fluctuations observed
on the stock exchanges were dictated by different
political trends rather than by specific situations.
By virtue of legislative decree No. 324 of 1960,
authorization was granted for the establishment of
four mutual funds and one investment company from
™ See P. Jeftanovic, op. cit., p. 166.

Table E
CHILE: SAVINGS A N D L O A N
(Millions of escudos at December

ASSOCIATIONS
1965 prices)
Funds

Loans

52.0
140.8
179.5
298.0
283.0
375.0
509.0

1962
1963
1964
1965
1966
1967
1968

Savings
deposits

35.4
63.6
95.1
164.1
252.0
301.4
344.7

Readjustahle
mortgage
certificates

—
—
3.4
20.2
44.3
75.9
162.4

Total
funds

35.4
63.6
98.5
184.3
296.3
377.3
507.1

SOURCE: Monthly bulletins of the Central Bank, quoted by P. Jeftanovic, op. cit.
that year onwards. Naturally, given the conditions
under which the Chilean stoclc exchange has developed, these funds have met with no success.
A law on development banks promulgated in 1965
contains a set of regulations governing the operation
of mortgage banks and the development activities
of the Banco del Estado.
The law stipulates that development banks must
grant readjustahle loans for upwards of three years
and that at least 51 per cent of their social capital
must be owned by Chileans. However, no institution
of this type has been set up for want of agreement
on the structure it should be given, and this has
meant that CORFO and, to a lesser extent, the
Banco del Estado, have continued to fulfil the functions of a development bank.
D. CONSUMER CREDIT

There was a fairly sharp upswing in consumer
credit in Chile in the 1960s, which cannot, however,
be measured with exactitude because of the lack of
systematic information."
Nevertheless, most of the burden has fallen on
non-specialized institutions which have taken on
neither the form nor the function of consumer credit
organizations. The financial institutions have a small
share in mobilizing resources for consumer credit
owing to rediscount limits set by the Central Bank
(in the case of loans by the commercial banks) and
to the fact that such mobilization is carried out by
institutions that do not have the capacity to issue
indirect liabilities on a generalized scale. For this
reason, most consumer credit is granted by the
producers and distributors of goods for which financing is available. Moreover, the real reason for the
° T h e work by Ema Kunz and Marina Weinstein,
El crédito para el consumo en Chile, goes a long way
towards filling that gap. (Economics Institute of the
University of Chile, 1969.) Mimeographed.

existence of that type of credit is that the producers
finance their sales to the distributors. The purpose
of these and the other institutions (financial association) is to expand and facilitate consumer credit.
An analysis of the structure of the liabilities of the
producers and distributors of durable consumer goods
partly confirms the above. Moreover, it shows that
the share of the banking system in consumer credit
is not so small as might be supposed. Indeed, the
resources of the banking system are used indirectly
to finance consumption, since they are largely made
up of credits obtained by producers to finance their
sales (see table F ) .
Moreover, a study undertaken by the Banco Central
de Chile shows that in September 1968, the credit
granted by producers and distributors for the purchase of textiles, furniture, clothing, footwear, household appliances and cars amounted to an estimated
775.8 million escudos, or the equivalent of 20 per cent
of the total credit transactions of the banking system.
It may be concluded that the system of consumer
credit in Chile is basically traditional and therefore
offers no prospects for a continuance of the process
of expansion noted up to now: direct participation
by
the banking
system
in consumer
credit
(since 1965) is restricted by strict rediscount ceilings;
the thirteen consumer credit institutions in existence
have no efficient machinery to guarantee very rapid
growth—in practice, their expansion depends on the
reinvestment of profits and the growth of their
clientele, since they have no source of funds apart
from the fees they charge commercial firms and
clients—and social security institutions also have a
share in consumer credit by virtue of the loans they
grant to members. However, their importance is on
the wane, and their contribution to total consumer
credit is insignificant nowadays. The future growth
of this type of financing will depend largely on the
growth of the number of producers and distributors
who finance their sales and on an increase in the
number of products that can be financed.
AQ

Table

18

CHILE: STRUCTURE OF THE LIABILITIES OF PRODUCERS A N D
DISTRIBUTORS OF CONSUMER DURABLES
(Percentages)
Appliances

Clothing

Producers
Suppliers' credit
Bank credit
Own capital
Other liabilities
Total liabilities

9.0
16.0
48.0
27.0
100.0

13.0
11.5
27.0
48.5
100.0

24.0
2.5
27.0
46.5
100.0

5.0
29.0
38.5
27.5
100.0

Distributors
Producers' credit
Bank credit
Own capital
Other liabilities
Total liabilities

57.0
8.0
23.0
12.0
100.0

42.8
1.9
42.5
12.8
100.0

24.7
1.0
63.0
11.3
100.0

40.5
1.7
41.3
16.5
100.0

Footwear

Textiles

SOURCE: Catholic University of Chile, Algunos aspectos del crédito al consumo,
quoted by Erna Kunz and Marina Weinstein, op. cit.
ECUADOR
I.

GENERAL REMARKS

The financial sector developed at a moderate rate
in the 1960s. The first indication of this trend is the
fact that the ratio of financial assets to gross domestic
product rose from 29.4 per cent in 1960 to 33 per cent
in 1968;° that is, a fairly slovsf rise compared with
trends observed in other countries of the region.
As regards the structure of financial intermediaries,
the first point worth noting is that the Central Bank
and the commercial banks have largely monopolized
the loan market, although their share of that market
declined in the 1960s, from 87.4 per cent in 1960
to 80.2 per cent in 1948. As will be shown below,
the Central Bank and the commercial banks should
be considered together because in Ecuador the
Central Bank normally fulfils the function of granting
credits to the private sector.
The above-mentioned decline was compensated by
the increase in the total credit acquired by the Caja
Nacional de Seguro Social, and by the part played
by two financial institutions which were set up during
the period under review: one public, the Corporación Financiera Nacional, and the other private, the
Ecuadorian Finance Corporation (COFIEC). On the
other hand, there was little change in the importance
of the Banco Nacional de Fomento (see table 12).

oped countries of the region. Thus, in addition to
the traditional banking sector (Central Bank and
commercial banks) there are an official development
corporation, government and private financial institutions, agencies to finance the construction of housing,
credit co-operatives and insurance companies.
However, this diversification is marked by two
singular features. First of all, the number of intermediaries of each type is small, and, as has been
shown, the credits granted by the Central Bank and
the commercial banks continue to dominate the
structure of the financial system, although the share
of the new intermediaries has increased slowly.
Secondly, there is little specialization by the different
organizations. Thus, in addition to granting loans of
at least one year to finance the current expenditure
of enterprises, the commercial banks also act as
mortgage banks (mortgages account for approximately one-fifth of total bank transactions) and,
generally speaking, grant loans with repayment
periods of one year and more. Moreover, in practice
there are two government development banks (the
Banco Nacional de Fomento and the Corporación
Financiera Nacional), which overlap, to some extent,
in financing manufacturing, and, in addition, a
private bank (the Ecuadorian Financial Corporation)
which covers the same field. Lastly, the Central
Bank acts simultaneously as a commercial bank, as
was shown above.

The level of diversification of the country's
financial system is comparable to other more devel0 See table 12. Moreover, between 1960, and 1968
the gross domestic product grew from 14,140 to
27,288 million sucres at current prices. (Source:
Statistical Bulletin for Latin America, vol. VII,
No.
1-2,
United
Nations
publication.
Sales
No.: E/S.70.II.G.5, p. 180).
50

II.

PUBLIC FINANCIAL INTERMEDIARIES

A. THE TRADITIONAL INTERMEDIARIES

Generally speaking, there was no marked revival
of activity by the traditional government intermediaries in the 1960s, especially as regards the

tapping and allocation of resources. On the other
hand, some progress was made in administrative
organization and the provision of equipment.

toral distribution of credit have serious conceptual
limitations.
2.

1. The Central Bank
The Central Bank has continued to act as a
monetary authority along traditional lines, giving
priority attention to the over-all facets of the system,
except as regards direct loans to the private sector.
As regards attracting funds, the Bank has not
begun to issue securities, which would have enabled
it to participate in the financial market and obtain
"untied" savings from spending units. Its general
prospects for action to channel financial resources
have, therefore, been limited.
Concerning Central Bank loan activity, it should
be pointed out first of all that, up to 1967 its credit
transactions, including loans to Government, private
enterprises and commercial and development banks,
grew very slowly. Only from 1968 was there a more
rapid rise in the amount of loans granted by the
Central Bank, especially loans to Government,
development banks and, to a smaller extent, private
enterprises. In other words, the Ecuadorian monetary
authority has only recently begun to make greater
use of the possibility of acting in the financial system
through the issue of direct loans and the adoption
of complementary measures to channel and control
such loans.
Secondly, it is observed that the Central Bank
granted a very low level of credits to the commercial
banks throughout the 1960s and there was no tendency
for this level to rise.? Thus, the banks' capacity to
increase their credit was determined almost exclusively
by the amount of resources they were able to attract
directly. This must have made it more difficult for
the Central Bank to carry out its credit supervisory
function, as it had no instrument of direct action at
its disposal such as the manipulation of cash ratios.
Lastly, Central Bank direct loans to the private
sector amounted to about one-fifth of commercial
bank loans to the same sector at the end of 1969.
This proportion, which had fallen to about oneseventh at the end of 1967, is similar to that observed
at the beginning of the 1960s.>i
The data available on the evolution of the sectoral
distribution of this type of Central Bank direct credit
show that priority was given to industrial loans, while
there was a decline in commercial loans. Thus,
between 1962 and 1968, the amount of loans to
industry increased from 252 to 623 million sucres at
current prices, while loans to the commercial sector
fell from 826 to 559 million sucres at current prices.""
The figures given serve only to illustrate general
trends, as it is well known that statistics on the secp For instance, at the end of 1969, the balance of
credits stood at 106 million sucres at current prices,
equivalent to less than one-twelfth of commercial
bank reserves. See International Monetary Fund, International Financial Statistics.
a See IMF, International Financial Statistics.
••See National Board for Economic Planning and
Co-ordination, Indicadores Económicos, July 1970.

The Banco Nacional de Fomento

Under its statute, the function of this traditional
official agency is to finance the development of the
manufacturing sector. However, following the transformation of the Comisión Nacional de Valores into
the National Finance Corporation in 1963, the bank
came to deal exclusively with small-scale and
artisan-type industry. The rest of its resources have
been directed chieñy to financing agricultural growth.
Table G shows that there were ñuctuations in total
credits granted by the Bank, in terms of currency at
current prices, between 1958 and 1966, but no upward
trend is evident. Only from 1967 can a clear increase be seen in the Bank's credit activities. In
other words, for several years the chief official
credit agency waned in importance within the system
of intermediation.
This trend was influenced by the fact that, for much
of the 1960s, there was no rise in Government allocations to the Bank. Nevertheless, the Bank could not
or would not utilize its possibilities of attracting
funds through the powers granted to it to accept time
and sight deposits under conditions that made it competitive with the commercial banks.
An increasing proportion of the Bank's loans have
been going to agriculture, to the detriment of the other
sectors (see table G ) .
3. Other traditional government

intermediaries

Special mention should be made of the Caja
Nacional de Seguro Social, because of the growth
on the credit it grants. This upswing (from 6.8 to 9
per cent of total credits within the system, according
to table 12) is distinct from growth trends observed
in many other Latin American countries. Unfortunately, there is insufficient background information
to allow an analysis of the reasons for this trend.
B. THE N E W GOVERNMENT INTERMEDIARIES

1. The Corporación

Financiera

Nacional

As mentioned above, this institution owes its origin
to the restructuring of the Comisión Nacional de
Valores and from 1963 it became responsible for
promoting industrial investment, except for smallscale and artisan-type industry.
At the end of 1968, the credits granted by the
Corporación amounted to 185.4 million sucres at
current prices, or 2.1 per cent of total loans within
the financial system. Around 70 per cent of this
amount was recorded as loans to manufacturing
enterprises, while 20 per cent was directed to financing investment in electric power. The remaining
10 per cent went to other sectors.®
' S e e National Board for Economic Planning and
Co-ordination, op. cit. About 75 per cent of the loans
granted to the manufacturing sector went into traditional industries (chiefly f o o d and textile).
51

Table

18

ECUADOR: CREDITS G R A N T E D BY THE BANCO NACIONAL DE FOMENTO»
(Millions
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

17.9
14.3
12.8
22.9
19.4
20.8
20.7
13.3
16.7
19.0
23.1
23.2

of sucres at current
67.1
40.5
39.5
45.5
41.7
44.3
81.4
42.0
39.7
46.5
39.8
49.2

265.6
189.4
188.8
234.2
183.9
201.9
246.9
253.4
304.8
354.0
438.9
470.1

prices)
0.5
0.8
0.3
32.0
18.3
27.6
27.1
27.0
17.2
46.0
47.5
60.5

SOURCE: National Board for Economic Planning and Co-ordination,
Económicos, July 1970.
a Balance at 31 December.
Basically, this new development bank obtains its
income from Government subsidies, and through
external credits with international organizations and
governmental organizations in other countries. It has
not, however, taken an active part in attracting resources from spending units. For this reason, its
capacity to expand may be hampered in the future,
as happened previously with the Banco Nacional de
Fomento.
It is worthy of note that the Corporation is currently devoting special attention to the promotion of
investment projects directed to the expanded Andean
subregional market. Indeed, with that end in view,
it has started to work jointly with the Chilean Production Development Corporation (CORFO).
2. The Banco Ecuatoriano

de la Vivienda

This institution started operating in 1962, when it
was given the task of financing housing construction.
To that end, it grants mortgage loans, either directly or through mutual funds.
The Bank has developed to only a limited extent
because, on the one hand, the commercial banks
have continued to operate in this field and, on the
other, the resources available to it have been scarce,
being made up of Government subsidies and external funds. The division of functions between the
Banco de la Vivienda and the commercial banks
consists in the fact that the former is concerned
chiefly with credits of more than twenty years, while
the latter confine themselves to much shorter repayment periods.
In quantitative terms, the loans granted by the
Housing Bank have been of small significance; at
the end of the 1960s they amounted to less than
10 per cent of total loans granted by the commercial
banks.t
tSee National Board for Economic Planning and
Co-ordination, op. cit.
52

III.
A.

35L1
245.0
241.4
334.6
263.3
294.6
376.1
335.7
378.4
465.5
549.3
603.0
Indicadores

PRIVATE FINANCIAL INTERMEDIARIES
THE TRADITIONAL

INTERMEDIARIES:

THE COMMERCIAL

BANKS

The commercial banks are the most important of
the traditional private intermediaries. Their characteristic function is to grant short-term loans to finance
the current expenditure of enterprises. However, as
mentioned above, they also take an active part in
granting loans of more than one year and in financing
housing construction.
There has been no substantial modernization of
the commercial banks in Ecuador. For instance, the
establishment of branch companies up and down the
country has taken on such a dimension as to permit
the more widespread use of current accounts. In
practice, the network of banks is concentrated to a
large extent in the central areas of Guayaquil and
Quito. Nor has significant progress been made in the
methods of attracting and allocating resources.
Although the private banks have hardly been
modernized, they have continued to be of key importance within the intermediation system, particularly in respect of the acquisition of funds (see
table 12). This is an indirect illustration of the fact
that the new intermediaries have developed very
little and of the possible future importance of funds
from surplus spending units if a decisive policy is
undertaken in this field.
B.

THE NEW PRIVATE INTERMEDIARIES:

THE ECUADORIAN

FINANCE

CORPORATION

This Corporation (COFIEC) began operating in
1966. Its capital is owned by Ecuadorian residents
(with 48.9 per cent of the total), private foreign
banks (with 41.5 per cent) and international financial organizations, such as the International Finance
Corporation and ADELA (with the remaining 9.6
per cent).

The main function of COFIEC is to establish relations between international private capital and
Ecuadorian enterprises that are modernizing or expanding their productive activities. The Corporation
uses three procedures to achieve this end: granting
of loans, purchase of capital in enterprises and
granting of guarantees on external credits accorded to
certain national companies. COFIEC's activities
within the first two spheres of action have been
fairly limited; but under the third procedure it has
extended guarantees for more than 10 million dollars.
COFIEC has operated in several sectors of production, but most of its financing has gone to manufacturing, agriculture, and livestock, construction and
transport. These sectors absorbed around 90 per
cent of total financing in 1969, and rather more than
55 per cent of the same total went into industry."
It can be seen, therefore, that the activities of
this new private intermediary reflect the low level
of sectoral specialization which is generally typical
of the operations of the country's financial system.
PERU
I.

GENERAL REMARKS

In quantitative terms, the financial sector in Peru
has broadly followed the trends noted in many other
Latin American economies. Up to the end of the
1950s, the traditional financial structure was maintained, in which the central bank regulated all transactions between the commercial banks and the
sectors of production. The commercial banks were
the cornerstone of the financial system, for on them
depended the tapping of surplus resources from the
public and private sectors and their allocation in
accordance with seasonal demands—important in a
country relying on agriculture and fishing—and the
demands of the economy's growth. Other entities
that played a complementary role in the system
were insurance and capital formation companies,
and development and mortgage banks in their capacity as public law organizations. These intermediaries, however, were of small significance.
T o the above were added, in the 1960s, the types
of private intermediaries that currently form the
financial landscape of many countries. They include
savings and credit co-operatives, mutual funds
(savings and loan associations) concerned basically
with the construction of housing, investment banks
and financial associations. Moreover, the Banco de
la Nación and the Banco de la Vivienda were set up
as Government intermediaries.
The evolution of the financial sector in Peru has
brought with it an increase in the ratio of financial
assets to gross domestic product (from about 41
per cent in 1960 to 49 per cent in 1969). Most of
this increase is attributable to the development of
the Banco de la Nación, set up in 1966 (see table
11).
"See COFIEC, Informe Anual 1969 (Quito, 1970),
p. 32.

The Banco Hipotecario, the Banco Industrial and
the Banco de la Vivienda have also increased their
share in total financial assets. However, the share
of the Central Reserve Bank and the commercial
banks has fallen considerably.
The financial sector in Peru takes on a singular
aspect if account is taken of the functional features
of the system. Indeed, at the beginning of the 1960s,
the central banks ceased to play their traditional
role with regard to the commercial banks, since
their resources were reserved almost exclusively for
Government use, largely as a result of the sharp
upswing in central government spending. Moreover,
the activities of the Banco de la Nación, a financial
agent of the Government, began to acquire growing
importance in the second half of the decade.
For this reason, the operations of the private intermediaries were subordinated to their capacity to
attract resources from domestic and foreign surplus
spending units. Although the former were the main
source of funds, large amounts of private foreign
capital also flowed into the national market, in the
form of loans or to acquire shares in the capital of
private intermediaries, mainly the commercial and
investment banks.
The different types of private intermediaries began
to compete for the same domestic resources in the
second half of the 1960s, in circumstances that were
less favourable than in the first half, in view of the
fact that the growth rate of the economy had fallen
and a number of more or less restrictive financial
policies had been introduced to deal with inflationary
pressures. In this situation of a relative scarcity of
liquid funds, the traditional and also the new private
financial intermediaries were limited in their ability
to attract funds from surplus spending units.
This subject will be taken up again later, particularly in examining the reduction in the commercial banks' loan activities from 1966 onwards.
Lastly, it should be emphasized that important
changes began to take place in the financial structure
of the country in 1969, coinciding with substantial
changes in general economic policy. The repercussions of some of these changes were felt in the
same year, as will be shown below. It is obvious,
however, that the changes in the financial system
will take effect in the 1970s, and for that reason
they must fall outside the purview of this document.
II.

PUBLIC FINANCIAL

INTERMEDIARIES

Traditional public intermediaries in Peru include
a number of institutions engaged in different fields
of actions. There is thus a distinction between the
Central Reserve Bank, on the one hand, and specialized development banks of fairly long standing,
on the other (the Banco de Fomento Agropecuario,
the Banco Industrial and the Banco Minero were
set up between 1929 and 1942). The establishment
of the Banco Central Hipotecario dates from the
same period. This traditional subsystem is, therefore,
broad and diversified.

T w o new intermediaries were set up in the 1960s:
the Housing Bank^ in 1962, which was intended to
act as a sort of central bank for the housing savings
and loan system; and the Banco de la Nación in
1966, mentioned above.
A.

THE TRADITIONAL INTERMEDIARIES

1. The Central Reserve

Bank

The country's monetary authority did not undergo
a great deal of modernization in the 1960s, particularly as regards the attraction and allocation of
resources. Its action therefore continued to be centred, basically around the management and control
of the more over-all aspects of monetary expansion.
An important factor is the fact that a very high
proportion of the Central Bank's direct loans were
issued to the Government, while loans to the commercial banks were sporadic and for small amounts.
There was also a fairly sizable increase in credits
granted to development banks, particularly in the
first half of the decade."
Other Central Bank activities included the formation of special funds, using a procedure followed
in other countries of the region, such as Colombia.
The Fondo de Inversiones privadas falls under this
head, although it did not develop to any great
extent.
2.

Other traditional

intermediaries

The combined share of the agricultural, industrial, mining and mortgage banks in the issue of
credits rose from 18.6 per cent in 1960 to 21.2
per cent in 1969 (although nearly the whole of
this increase is attributable to the Banco Indust r i a l T h a t is, the relative importance of the
specialized public sector banks, which was already
great in 1960, increased even more during the last
decade.
In this connexion it should be stressed that the
increase took place despite the fact that Central
Bank credits to the development banks fell during
the second half of the decade. However, during
the same period the agricultural and industrial
banks were authorized to receive deposits from the
public at large. This authorization led to more
successful results in the Banco Industrial, as can be
seen from an analysis of the figures for deposits
in table 11.y
In addition to credits supplied by the Central
Bank and deposits from the public, the specialized
It is classified as a Government intermediary, although A I D owned 56 per cent of its capital at the
end of 1969, the remainder being Government-subsidized. Nevertheless, a legislative decree was promulgated in 1969, stipulating that the Bank's board of
directors should be appointed by government decision.
See International Monetary Fund, International
Financial Statistics.
^See table 11.
y For a comparison with the deposits received by
the commercial banks, it should be considered that
the latter had more than ten times as many offices
as the development banks at the end of 1969.
54

development banks have had other resources with
which to finance their expanding credit portfolio.
These have come directly from the Government,
from the sale of mortgage certificates, and from
their own shares and external credits. However,
the rate at which such funds have been tapped has not
been high enough to meet the needs of these institutions for the grant of medium- and long-term
loans.
During the 1960s the specialized banks gradually
took on a more active role in granting credits for
developmental purposes, despite the relative limitation on their operating capital. In addition, the
industrial and mining banks were authorized to
obtain shares in the capital of enterprises with a
view to promoting their establishment or establishing
them directly. But this procedure was very little used
up to the end of 1968.
The Banco Agropecuario was the most important
of the development banks as regards activities in
the field of credit, maintaining a share of around 10
per cent in the total credit granted by the financial
system.
This stability, which was achieved at a time when
its share in the collection of deposits declined (see
table 11) was especially important for two main
reasons: first because, as will be shown below, the
actual amount of commercial bank loans to agriculture declined from 1964 onwards; and secondly
because, in accordance with a measure adopted at
the beginning of the 1960s, half the Bank's credits
were absorbed by small-scale national agricultural
enterprises. It should be mentioned that these enterprises were the most severely affected by the natural
catastrophes that devastated Peru in the 1960s.
B.

THE NEW PUBLIC INTERMEDIARIES

Supplementing what was said above about the
Banco de la Vivienda, it may be noted that it developed slowly between 1962 and 1968. Only as from
1969 did it begin to grow faster, as a direct result
of the promulgation of legislative decree No. 17863
in October of that year. This decree empowers the
Bank to start a policy of financing new low-cost
housing projects, and to issue mortgage certificates
(bonos de fomento hipotecario). In addition, a new
set of measures is established to regulate the system
of savings and loans for housing.
T o give a general idea of the impact that the
new system of operation may have, it is worth noting
that between the end of 1968 and the end of 1969
the book value of the Bank's liabilities increased
fivefold.^
The second new public intermediary set up in the
1960s is the Banco de la Nación, whose rapid growth
and growing field of activity are explained by its role
as a financial agent of the Government. The new
responsibilities entrusted to it as of 1969 should contribute to an even greater increase in its rate of
growth. Some of the functions assigned to it were
" See Superintendencia de Banca y Seguros, Memoria 1969 (Lima, 1970), p. 63.

the collection of rents from the Central Government and from the independent government subsector and the buying and selling of bonds, securities
and other public and private liabilities.»»
The importance acquired by the Banco de la Nación—ví'hich is basically a combination of treasury
and State bank, can be appreciated from the fact
that, at the end of 1969, it held 27 per cent of total
deposits in the system of intermediation (see table
11) and, what is more, the book value of its deposits
doubled between the end of 1968 and the end of
1969.bb
There is no doubt that this increase was a fundamental factor in limiting the commercial banks'
ability to attract more funds in order to expand their
loan activities.
III.
A.

PRIVATE FINANCIAL INTERMEDIARIES
THE TRADITIONAL

INTERMEDIARIES:

THE COMMERCIAL

BANKS

First of all, mention should be made of a point
raised in an earlier study,™ namely, that the most
essential aspect of the modernization of Peru's commercial banks was the introduction of the savings
account system in the 1950s, its expansion, particularly in the first half of the 1960s, and the opening of
a large number of new bank branches during the
same period. Thus, at the end of 1969 there were
2,724,000 savings accounts books, with an average
deposit of 2,700 soles per book, since total savings
amounted to around 7,500 million soles (see table H ) .
In other words, of the total deposits collected by
the commercial banks in 1969, 28 per cent were
collected through savings accounts, which shows the
aa Superintendencia de Banca y Seguros, op. cit.,
p. 36.
bb Ibid., p. 37.
See "Mobilization of domestic resources". Economic Bulletin for Latin America, vol. X V , No. 2,
pp. 134 and 135.
Table H
PERU: NUMBER OF SAVINGS A C C O U N T
BOOKS A N D T O T A L SAVINGS"

Year

1955
1960
1965
1966
1967
1968
1969

Number of
books

828.653
1,388.766
2,098.151
2,269.745
2,430.316
2,589.345
. . 2,723.567

Total savings
(millions of
sales at
current prices)

Average per
book
(sales)

1,037.6
2,014.5
5,402.4
6,502.3
6,548.0
7,111.9
7,459.9

1,252
1,451
2,575
2,865
2,694
2,748
2,739

SOURCE: Superintendencia de Banca y
Memoria 1969, Lima, 1970, p. 228.
a Balance at 31 IDecember.

Seguros,

important influence of low-income groups in mobilizing savings and in compensating for the restrictions
on the commercial banks' ability to acquire other
funds.
However, it is worthy of note that there was a
marked regional disequilibrium between the processes
of attraction and allocation of resources originating
in savings accounts. Indeed, a large proportion of
those savings were collected from the most backward areas of the country, while the proportion of
loans directed to those areas was very small. T o
remedy this situation, the Government gave instructions in 1969 that the funds collected in each constituency (department) should be loaned within the
same department.
With regard to the commercial banks' loan activities, the first point to be mentioned is that total
loans rose from 6,785 million soles at current prices
at the end of 1960 to 19,538 million at the end of
1969. This meant, on the one hand, that the ratio
of loans by these banks to total loans by the system
of intermediation fell from 46.6 per cent in 1960
to 30.2 per cent in 1969 and, on the other hand,
that in the same period, the share of this type of
loan in the gross domestic product fell from 12.2
per cent to 9.7 per cent, while the ratio of total loans
to the gross domestic product rose from 26.2 to 32.3
per cent (see table 11).
This decline in the commercial banks' loan activities was not a feature of the entire decade. Between
1960 and 1965 the ratio of commercial bank loans
to the gross domestic product rose from 12.2 to 12.8
per cent, and then fell in 1969 to the figure of 9.7
per cent mentioned above. It can be seen, therefore,
that the seeds of this decline were sown in the
establishment and expansion of the Banco de la
Nación, on the one hand, and in the policy of refusing rediscounts followed by the Central Bank,
on the other.
As is well known, figures on the sectoral distribution of credit are not easily calculated and are not
very significant, because of serious conceptual limitations inherent in their collection. It therefore seems
appropriate to note some general trends in this connexion.
It is observed that the decline in loan activities
during the second half of the 1960s mainly affected
the financing of the commercial sector (whose share
in total financing by the commercial banks fell from
40 per cent in 1965 to 30 per cent in 1969)<J'i and,
to a smaller extent, agriculture and livestock breeding, and fishing (whose shares fell from 11 to 9
per cent and from 5 to 3.5 per cent, respectively).
On the other hand, the share of manufacturing rose
from 25 per cent in 1965 to 30 per cent in 1969,
while that of construction doubled (from 4.5 to 9
per cent).ee
aa However, this decline was partly compensated
by the increase in financing for miscellaneous
activities, which grew from 10 to 17 per cent during
the same period.
ee See Superintendencia de Banca y Seguros, op.
cit., pp. 208 and 209.
55

It should be mentioned that the increase in allocations to the construction sector is closely bound up
with the growth of the subsystem of intermediaries
specializing in financing housing construction. Indeed,
the commercial banks have increasingly been playing
the role of go-betweens by providing building firms
and urban development corporations with advances
on loans to be obtained from such intermediaries.
B.

THE

NEW

PRIVATE

INTERMEDIARIES

The two existing private development banks have
taken on great importance, as has happened in other
countries of the region. The biggest, the Compañía
de Fomente e Inversiones S.A., formed with capital
from the International Finance Corporation. A D E L A
and private investors, both foreign and domestic, had
granted credits for rather more than 6 million dollars
at the end of 1969.
It is also interesting to note the development of
mutual housing funds, which were set up all during
the last decade. In 1969, they granted 5 per cent of
the total credits accorded by the system of intermediation, while their share was zero, as is obvious,
at the end of 1960.

With regard to the above-mentioned growth trend,
it should be pointed out that it was achieved at a
time when the system of private intermediaries was
gradually being improved, and that, in comparison
with other countries, especially Chile, very little
external aid was received. It is, therefore, to be
hoped that the increased support they have received
since 1969, including the strengthening of the activities of the Banco de la Vivienda, will lead to the
more rapid growth of the savings and loan system
for housing in the next few years.
Lastly, a singular aspect of the financial system in
Peru has been the rapid development of savings and
credit co-operatives, especially in highly populated
non-urban areas. Their share in total loans granted
by the system of intermediation rose from 0.2 per
cent in 1960 to 3.8 per cent in 1969 (see table 11).
These co-operatives have established their own rules
of operation. In any case, all their loans must be
directed to participants in their savings scheme, and
resources must be allocated in accordance with previously determined priorities. With this modus
operandi they have come to compete with the commercial banks, particularly in the areas mentioned
above.

SOME REGIONAL DEVELOPBIENT PROBLEMS IN LATIN AMERICA
LINKED TO METROPOLITANIZATION
1. Purposes
Metropolitanization is one of the most
important regional development problems
affecting Latin America. Various historical,
economic and social factors have led to the
increasing concentration of the population and
of economic activities in specific urban areas.
This involves two types of interrelated problems: first, the intrinsic significance of the
process and, secondly, its implications for other
regions in view of its interdependent character.
This study presents some background data
and raises certain questions concerning the
problem. For this purpose, use is made of material that was prepared by E C L A for a more
extensive study on the subject, and advantage
is taken of other studies which, though on
different subjects, contain information related
to regional development (such as income distribution).

secondly, the increasingly acute problems deriving from population growth in the large
cities; and, lastly, the benefits which could be
obtained from exploiting potentially rich but
sparsely populated regions, or through making
better use of the resources found in backward
areas. Besides these considerations, whose relative importance varies from country to country, there is often concern for consolidating
the national frontiers and improving administrative efficiency by decentralizing the decision-making process. From a local standpoint,
it was noted that in attempts to plan or define
strategies at this level, both in physical planning and in the organization of society or the
efforts to add to the value of economic resources, many of the problems encountered
had to be considered within a broader regional
context or at a national level.

Thus the convergence of these two movements led to the definition of this new area of
activity in development programming: at a
First and foremost, an attempt is made to
national level, with considerations of an interidentify the problem, and a brief description
regional nature and those connected with the
follows of two different typical situations, acgeographical location of investment in addition
cording to whether there are one or several
to over-aU and intersectoral considerations;
large urban agglomerations in a given country.
and at a local level, with the progressive estabLastly, some questions are raised in connexion
lishment of new regional planning techniques.
with external economies, the use of urban
In this new area of work, however, social and
land, and interregional and urban-rural relapolitical considerations have contributed most
tions.
to the formulation and implementation of
policies. There is a general lack of empirical
2. General characteristics
studies and much still remains to be done
( a ) The regional problem and metropolitani- before regional development options can be
based on strictly economic criteria. In this
zation
respect, it would be interesting to determine—
Two movements converged in the concern
even if only from an analytical standpoint—
felt for regional development problems, one
what would be the most suitable geographical
from the national and the other from the local
distribution to correct the existing defects and
standpoint. The national outlook suggested the
establish healthier development patterns. In
need to consider the geographical distribution
other words, the point is to determine the best
of the population and resources in national
location for the population and capital in a
development strategies and plans in the light
particular country, given the existing natural
of three basic considerations: first, the fact
resources and other economic and social facthat there are densely populated areas in the
tors.
various countries whose per capita incomes
and living levels are far below those found in
Among the regional planning problems—at
the more developed parts of those countries; the national or regional level—^for which this
57

deficiency is most noticeable is metropolitanization.
The metropolis may be described as an exceptionally large city, either because of the
contration of hundreds of thousands of inhabitants, because of its continuing urbanization measured in hundreds of square kilometres
or because of the importance of the regions
and cities under its economic jurisdiction. A
metropolis is normally a city-region which,
starting from a main nucleus and with the
help of the industrial community's resources,
sparks off the rapid urbanization of neighbouring areas, incorporating old population centres
in a new socio-economic set-up and bypassing
their politico-administrative units.^
The metropolitanization process is very
visible in Latin America, either with the
predominance of a single national centre or
with the existence of several regional centres.
Although in some countries there is a fairly
well-co-ordinated system of cities, on the whole
the rate of expansion of the major national
centres—and certain regional centres—results
in their reaching a size which is several times
greater than the largest secondary centres, thus
leading to a state of metropoUtanization.
Table 1 shows the absolute and relative importance of the five largest cities of each
country in 1940, 1950, 1 9 6 0 and 1970. It may
be noted that—with some exceptions which
include Sao Paulo—the order of importance
of the cities has been maintained over the years.
A s regards the relative importance of the
principal urban centre, it will be seen that in
eight countries it harbours over 2 0 per cent of
the total population, in four the proportion
ranges from 15 to 2 0 per cent and in eight it
is less than 15 per cent. However, despite the
importance which the problem of metropolitanization has thus acquired in Latin America, the
existing studies on the subject focus essentially
on its social advantages or disadvantages and
the nature of its policital functions.
The purpose of this study is merely to raise
some questions of an economic nature, but
certain data on economic and social issues
such as income distribution are also included,
and an attempt is made to define some economic options involved in investment decisions
in metropolises.
First, a description is given of the essential
characteristics of the economy's operation in
iLuis Carlos Costa, "Metropole e planejamento".
Revista de Administragao Municipal, Rio de Janeiro,
Brazil, March-April 1970.

58

the spatial context, then some data is furnished
on the situation prevailing in two types of
countries, according to whether or not they
have a dominat urban centre, i.e., Chile and
Colombia. This is followed by data that have
been gathered on certain economic conditions
of the metropolitanization process, considering
the metropoUs itself and its relations with
other parts of the country.
(b)

Operation
context

of the economy

in the spatial

In market economies of the type found in
most of the Latin American countries, the
economy's operation in the spatial context
presents some typical features:
( i ) There has been a clear trend towards the
spatial concentration of economic activities in
one or a few points, around which large urban
agglomerations have formed. In the early stages
of primary-export economies the binding factor
was the export sector and certain politicoadministrative activities. Later, the economic
activities which gave most impetus to these
agglomerations were associated with manufacturing and services. This trend is observable even in cases where policies designed to
reduce this concentration have been applied.
(ii) The external economies deriving from
these agglomerations provided comparative advantages for the concentration of industry, particularly a higher level of capital productivity.
Consequently, a significant proportion of the
income obtained in peripheral regions finds its
way to the centres.
(iii) The concentration in these centres of
industrial activities—and above all of accompanying services—pushes
up
employment,
which leads to an increase in the migratory
movements from peripheral regions to the
centre, consisting mainly of the most highly
skilled manpower available in the periphery of
each country. Consequently, the centres in each
individual country gain in demographic importance, in both quantitative and qualitative
terms.
(iv) A s a result of this concentration of
population and economic activities, which
generally goes hand in hand with the centralization of administrative activities, these centres acquire more political inñuence and greater
bargaining power in the decision-making process than the various parts of the periphery.
Thus, the centre obtains a larger share of the
investment resources allocated by the public

Table 1
LATIN AMERICA: URBANIZATION ACCORDING TO THE FIVE MAJOR MOST DENSELY POPULATED CITIES
{Absolute figures (in thousands) and percentages)
1970
Country

Argentina

Bolivia

Brazil

Colombia

Major city

Buenos Aires*
Rosario*
CórdobaMendoza*
La Plata*
La Paz*
Cochabamba
Oruro
Santa Cruz
Potosí
Sao Paul*
Río de Janeiro*
Recife*
Belo Horizonte*
Porto Alegre*
Bogotá
Medellín
Cali
Barranquilla
Cartagena

population
of the
country^

population
of the
principal
city"

24,352

8,400
803

4,658

93,244

22,160

791
573
556
564
123
112
97
82
7,849
6,821
1,626
1,436
1,410
2,551
1,012
872
695
307

1960
Percentages

34.5
3.3
3.2
2.3
2.2
12.1
2.6
2.4
2.0
1.8
8.4
7.3
1.4
1.5
1.5
11.5
4.6
3.9
3.1
1.4

population Population
of the
of the
country'^ principal
city"

20,850

6,700
672
589

70,327

15,877

Percentages

414
427
96
87
69
57
4,383
4,392
1,027
730
780
1,662
718
618
493
218

32.1
3.2
2.8
2.0
2.0
11.6
2.6
2.4
1.9
1.5
6.2
6.2
1.5
1.0
1.1
10.5
4.5
3.9
3.1
1.4

All

3,696

1950
Population
of the
country^

17,085

3,013

52,326

11,629

Population
of the
principal
city"

Percentages

4,500
570
426
256
325
821
81
63
43
46
2,450
2,890
650
370
430
655
328
241
276
111

26.3
3.3
2.5
1.5
1.9
10.7
2.7
2.1
1.4
1.5
4.7
5.5
1.2
0.7
0.8
5.6
2.8
2.1
2.4
1.0

Chile

Santiago*
Valparaíso
Concepción
Viíia del Mar
Antofagasta

9,780

2,781
314
183
169

7,683

2,072
253
147
115
87

27.0
3.3
1.9
1.5
1.1

6,058

128

28.4
3.2
1.9
1.7
1.3

1,413
219
120
85
62

23.3
3.6
2.0
1.4
1.0

Ecuador

Guayaquil
Quito
Cuenca
Ambato
Manta

6,028

766
532
80
71
60

12.7
8.8
1.3
1.8
1.0

4,323

511
354
60
53
34

11.8
8.2
1.4
1.2
0.8

3,207

259
210
40
31
19

8.1
6.5
1.2
1.0
0.6

Paraguay

Asunción
Encarnación
Concepción

2,419

464
22
21

19.2
0.9
0.9

1,740

310
19
18

17.8
1.0
1.0

1,337

207
13
15

15.5
0.9
1.1

Table 1

(^continued}

1970
Country

Major city

population Population
of the
of the
principal
country'^
city^
cityf!

Peru

Lima-Callao*
Arequipa
Trujillo
Chiclayo
Cuzco

13,586

Uruguay

Montevideo*
Salto
Paysandú
Rivera
Las Piedras

2,889

Venezuela

Caracas*
Maracaibo
Barquisimeto
Valencia
Maracay

10,755

Costa Rica

San José*
Alajuela
Punta Arenas
Limón
Heredia

1,798

Cuba

Havana*
Santiago de Cuba
Camagiiay
Guantánamo
Santa Clara

8,341

El Salvador

San Salvador
Santa Ana
San Miguel
Nueva San Salvador
Villa Delgado

3,441

Guatemala

Guatemala*
Quetzaltenango
Escuintla
Puerto Barrios
Mazatenango

5,179

2,815
172
141
135
113
1,415
72
64
49
48
2,277
2,277
695
328
280
245
440
440
24
24
24
24
24
24
1,963
1,963
276
276
185
185
149
149
144
144
370
370
97
97
55
55
38
38
34
34
772
772
59
59
33
33
29
29
24
24

1960
I960
Percentages

Population
Population Population
of the
of the
of the
country!^ principal
country^ principal
city^
city"

20.7
1.3
1.0
1.0
0.8

10,024

49.0
2.5
2.2
1.7
1.7
21.2
21.2
6.5
6.5
3.0
3.0
2.6
2.6
2.3
2.3

2,542

24.5
1.3
1.3
1.3
1.3
23.5
3.3
2.2
1.8
1.7

1,233

7,740

6,819

10.8
2.8
1.6
1.1
1.0

2,512

14.9
1.1
1.1
0.6
0.6
0.5

3,868

1950
Percentages

Population
Population

Population
Poptdation
of
, °f the ,
principal
Principal
city^

PercentPccentages
ages

7,969

614
77
37
32
41
800

7.7
1.0
0.5
0.4
0.5
36.4

5,330

694
236
105
89
65

13.0
4.4
2.0
1.7
1.2

180
180

21.2
21.2
1.6
1.5
1.3
1.4
1.4

of the
country^

1,784
135
100
96
80
80
1,159
58
52
41
41
1,336
422
199
164
135
320
320
20
20
20
20
19
19

17.8
1.3
1.0
1.0
1.0
1.0
0.8
0.8
45.6
0.0
0.0
0.0
0.0
17.3
5.5
2.6
2.1
2.1
1.7
26.0
1.6
1.6
1.5
1.5

849

1,607
223
150
118
114
256
73
40
27
24
24

23.6
3.3
3.3
2.2
2.2
1.7
1.7
1.7
1.7

5,520

10.1

1,922

573
573
45
45
25
25
22
22
20

14.8
1.2
0.6
0.6
0.5

2,907

2,198

14
13
11
12

2.9
1.6
1.6
1.1
1.1
1.0
1.0

1,211
1,211
163
110
65
77
162
162
52
27
18
13
284
28
10
15
11

21.9
21.9
3.0
3.0
2.0
2.0
1.2
1.2
1.4
1.4
8.4
2.7
1.4
0.9
0.7
0.7
9.8
1.0
0.3
0.5
0.4

Haití

Honduras

Mexico

Nicaragua

Panama

Dominican Republic .

Port-au-Prince
Cap. Haitien
Gonaives
Tegucigalpa
San Pedro Sula
La Ceiba
Puerto Cortez
Mexico City*
Guadalajara*
Monterrey*
Puebla de Zaragoza*
Ciudad Juárez*
Managua
León
Granada
Masaya
Chinandega
Panama City
Colón
David
La Chorrera
Santo Domingo
Santiago de los Caballeros
San Francisco de Macorís
San Pedro de Macorís
Barahona

5,229

2,583

50,718

2,021

1,406

4,348

283
50
29
223
117
35
23
8,360
1,135
920
450
403
353
53
34
30
29
412
68
35
26
671
155
44
42
38

" E C L A , Statistical Bulletin for Latin America, vol. VI, No. 1, 1969.
b ECLA, on the basis of national censuses.
* Including the suburban area.

O
N

5.4
1.0
0.6
8.6
4.5
1.4
0.9
16.5
2.2
1.8
0.9
0,8
17.5
2.6
1.7
1.5
1.4
29.3
4.8
2.5
1.8
15.4
3.6
1.0
1.0
0.9

4,138

1,849

36,046

1,501

1,021
1,021

3,129

195
35
20
134
59
25
17
4,900
737
597
289
262
262
235
44
29
23
22
273
60
23
14
370
86
27
22
22
20

4.7
0.8
0.5
7.2
3.2
1.4
0.9
13.6
2.0
1.7
0.8
0.7
15.7
2.9
1.9
1.5
1.5
26.7
5.9
2.3
1.4
11.8
2.7
0.9
0.7
0.6

3,380

1,389

26,640

1,133

765

2,303

134
24
14
72
21
17
12
2,880
378
333
211
123
109
31
21
17
13
128
52
15
9
182
57
16
20
15

4.0
0.7
0.4
5.2
1.5
1.2
0.9
10.8
1.4
1.3
0.8
0.5
9.6
2.7
1.9
1.5
1.1

16.7
6.8
2.0
1.2
7.9
2.5
0.7
0.9
0.6

sector (mainly to social and basic infrastructure projects).
( v ) Increased employment in the centres is
reflected in a rise in disposable personal income, which is a spur to the diversiñcation and
expansion of activities in the tertiary sector.
The development of tertiary activities, in turn,
helps to generate more employment and, therefore, to increase disposable income. This whole
cycle results in the continuing expansion of the
centre's internal market, which favours larger
scales of production, higher capital productivity
and, therefore, higher rates of return for the
private entrepreneur. This is an incentive to
transfer financial resources from the periphery
to the centre for purposes of capital formation,
which takes concrete shape in the establishment
of new activities in the centre; these new activities help to give more impetus to the process
described above, which thus operates in the
form of a cycle.
(vi) The fact that the economy revolves
around the activities located in the centres sets
the pattern for the basic infrastructure at the
national level, which is conceived in terms of
the centre's requirements and thus generally
favours concentration.
The way in which this process is taking
place in two Latin American countries—Chile
and Colombia—is described in the light of
these general trends.
(c)

The case of a country
national urban centre

with a

dominant

In order to illustrate the basic characteristics
and certain important features of the regional
operation of a Latin American country with a
large dominant urban centre, this section will
consider in broad outline the case of Chile.
When looking at the process of metropolitanization, what is most important is the degree of
concentration of the population and economic
activity in the large urban centre. The following paragraphs will discuss what has happened
in this respect in Santiago and in the other
regions of Chile.
( i ) General features. Table 2 shows the
differences between the various regions as regards level of habitabiilty, population density
and road density. There are major disparities
in land settlement and the country is virtually
divided into "consolidated" areas (of which^
more than 50 per cent is habitable and popula-^
tion density is above the national average) andá
62

"settlement" areas^ (of which less than 50 per
cent is habitable and population density is
below the national average).
In the "settlement" areas in the far north
and south of the country, productive activity
is normally dominated by the exploitation of
one or two basic resources. The production
areas are in the interior (copper in the north,
petroleum and livestock in the south) and on
the coast there are service cities with a small
amount of industry from where trade is organized and links are established with the rest
of the country and to a large extent with
foreign countries. Although population density
in these areas is very low, the urbanization rate
is the highest in the country (close to 90 per
cent), and this, coupled with the high level of
productivity in mining, petroleum and other
activities, makes for levels of living that are
very much above the national average.
In the "consolidated" area, on the other
hand, resources are more diversified, the physical environment is less hostile and the climate
is more favourable; these factors, together with
the past history of land settlement, have made
for a high rate of land occupation. This area,
as well as having high population and road
densities, also forms a unified land system
because of the close relation between cities and
the efficient and varied means of transport that
connect them.
In this area, the cities are spread out alternately on the coast (Valparaiso, Concepción,
Valdivia) and in the central valley (Santiago,
Rancagua, Talca, Chillán, Temuco, Osorno).
The cities in the interior grew up basically
because of farming which has traditionally been
the most stable activity. In the consolidated
area, the network of transport, communications, electric power stations and waterworks
is fairly dense and corresponds virtually exactly
to the area of the power grid running from
La Serena to Castro.
(ii) Population. As regards the distribution
of the population by region, the most recent
censuses (see table 3 ) show that, apart from
Santiago, only the Tarapacá region increased
its share in the total and that the Fiord district
and Magallanes maintained their share between 1960 and 1970. These regions, however, account for no more than 8 per cent of
2 For a definition of "consolidated" and "settlement"
areas
see
National
Planning
Office
( O D E P L A N ) , El desarrollo económico y social de
Chile en la década 1970-1980, tomo II, vol. I, pp.
25-26.

Table
CH[LE:

Level of
habitability'^
(percentage)

Region

I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XL

18

LEVEL OF HABITABILITY, POPULATION
R O A D DENSITY

DENSITY

Population
density
inhab./km'
1970

AND

Road density
km of road/
total area
1967

29.0
7.1
35.7
79.6
70.0
59.6

2.6
2.2
4.8
65.5
191.3
33.9

5.2
3.6
7.1
16.3
19.1
22.4

75.5

23.9

24.4

84.5
80.0
79.5

33.3
25.7
19.0

26.1
37.3
17.2

43.3
42.5
43.5

Tarapacá
Antofagasta
Atacama-Coquimbo
Valparaiso-Aconcagua
Metropolitan area
O'Higgins-Colchagua
Maule (Curicó, Talca, Linares and
Maule)
Bío-Bío (Ñuble, Concepción, Arauco,
Bío-Bío and Malleco)
Cautín
The Lake district (Valdivia, Osorno) . .
The Fiord district (Llanquihue, Chiloé,
Aysén)
Magallanes
Average

2.6
0.7
12.9

3.3
2.4
8.6

SOURCE: Planning Office (ODEPLAN).
a Habitable area as a percentage of total area.
Table 3
CHILE: DISTRIBUTION OF THE TOTAL POPULATION BY REGION»

1952

Region

I.
II.
III.
IV.
V.
VL
VIL

VIII.
IX.
X.
XI.

Tarapacá
Antofagasta
Atacama-Coquimbo
Valparaiso-Aconcagua
Metropolitan area
O'Higgins-Colchagua
Maule (Curicó, Talca, Linares and Maule)
BÍO-BÍO (Ñuble, Concepción,
Arauco, Bío-Bío and Malleco)
Cautín
The Lake district (Valdivia,
Osorno)
The Fiord district (Llanquihue, Chiloé, Aysén)
Magallanes
TOTAL

Percentage

I960

Percentage

1970

Percentage

Average
annual
rate of
growth
1960-70

108,751
195,544
362,135
662,977
1,856,741
385,243

1.7
3.1
5.8
10.6
29.6
6.2

129,716
226,841
448,189
798,988
2,569,046
440,549

1.7
2.9
5.8
10.3
33.0
5.6

187,600
268,032
533,942
949,378
3,450,005
507,265

2.0
2.8
5.5
10.0
36.5
5.4

3.76
1.68
1.55
1.74
2.99
1.42

509,193

8.9

593,446

7.6

660,091

7.0

1.07

1,092,817
386,246

17.3
6.2

1,325,551
415,965

17.1
5.4

1,518,668
449,030

16.1
4.7

1.37
0.77

376,337

6.0

425,604

5.5

463,401

4.9

0.85

272,417
58,408

4.5
0.9

321,103
77,319

4.1
1.0

384,846
94,418

4.1
1.0

1.83
2.02

6,277,109

100.0

7,772,317

100.0

9,455,676

100.0

1.97

SOURCE: Planning Office (ODEPLAN), Regional Planning Department, on the basis of census data,
a With census omissions rectified and brought forward to 30 June each year.
63

the total population. In other words, regional
disparities measured in terms of population
have increased in recent years, mainly owing to
the extraordinary growth of Santiago.
The more industrialized regions—after Santiago—such as Valparaiso-Aconcagua and BioBio, and the mining regions such as Antofagasta and O'Higgins had population increase
rates higher than those of the basically rural
areas but still not high enough to match the
national average; consequently their share of
the total also declined.
During the period 1960-1970, Santiago absorbed 91.5 per cent of in-migrants (324,545),
Tarapacá absorbed 8.4 per cent (29,700) and
Magallanes only 0.1 per cent ( 3 5 3 ) . Hence
Santiago is the major area receiving migrants
from the rest of the country.
A s a result of population increase and migratory movements, Chile has experienced a
rapid process of urbanization, with the proportion of the population living in urban areas
rising from 52.5 per cent in 1940 to 74.3 per
cent in 1970. The population of the principal
urban areas amounted to 62.8 per cent of the
total urban population in 1970, with Santiago
accounting for 43.4 per cent.

The urbanization process has to some extent
been encouraged by the facihties offered by
the major cities for more modern forms of life,
for example, the supply of telephones, the
number and variety of newspapers and magazines, the number of cinemas and radio stations, etc. Table 4 lists these indicators and
shows that they are highly concentrated in
Santiago, particularly telephones and the Press.
With the other two indicators—cinema and
radio—the quality and variety of programmes
are the important factors, and these are better
in Santiago.
(iii) Product and income. The growth of
the gross domestic product continues to show
marked regional disparities, with a trend
towards concentration in the metropolitan area
of Santiago. Between 1960 and 1967 the total
gross domestic product grew at a cumulative
annual rate of 4.9 per cent, while that of Santiago grew at a rate of 6.7 per cent. Santiago's
share in the total rose from 40 per cent in
1960 to 45 per cent in 1967 (see table 5 ) .
Over the same period only three regions
achieved growth rates above the national average (Tarapacá, Antofagasta and Magallanes).

Table 4
CHILE: U R B A N SERVICES

Inhabitants
fer
telephone
1965

Percentage

Cinemas
1967

31.8
41.2

3,488.6
11,294.4

1.5
4.4

86.0
26.2
19.2
89.4

4,972.3
28,538.4
162,899.1
3,418.9

1.9
11.2
63.7
1.3

9
18
31
53
130
38

33.5
9.8

19
29
5

86.3

6,046.9

2.4

16

4.1

9

7.4

72.6
85.2

20,373.9
4,948.4

8.0
1.9

51
12

13.2
3.1

16
5

13.1
4.1

100.9

4,858.3

1.9

12

3.1

7

5.7

160.5
26.5

Region

Copies of
newspapers
and
magazines
sold
1967
(thousands)

2,604.7
i,615.1

1.1
0.7

9
9

2.3
2.3

6
4

4.9
3.2

100.0

388

100.0

122

100.0

I. Tarapacá
II. Antofagasta
III. Atacama-Coquimbo
IV. Valparaiso-Aconcagua
Metropolitan area
V . O'Higgins-Colchagua
VI. Maule (Curicó, Talca, Linares and
Maule)
VII. Bio-Bío (Ñuble, Concepción, Arauco, Bio-Bío and Malleco)
VIII. Cautin
IX. The Lake district (Valdivia, Osorno)
X . The Fiord district
Chiloé, Aysén)
XI.

(Llanquihue,

Magallanes
TOTAL

SOURCE: Planning Office ( O D E P L A N ) .

64

34.2

255,526.6

Percentage

Radio
stations
1967

Percentage

2.3

6
8
8

4.9
6.6
6.6
15.6
23.8

4.6
8.0
13.7

4.1

Table

18

CHILE: GROSS DOMESTIC PRODUCT, BY REGION

Total
1967
(thousands
of E" at
1965
prices)

Region

I.
II.
III.
IV.

Tarapacá

Percentage
of
total

Per
capita
product
1967

Per
capita
productivity

E° 1965-1967

Growth rates
1960-1967
Gross domestic product
Total

Per
capita
(Annual
average)

Per
•worker

7.82

489,472

3,500

10,500

8.88

7.36

6.6

4,980

15,200

5.55

3.18

3.56

998,879

Valparaiso-Aconcagua
Metropolitan area

2.5

1,297,251

Antofagasta
Atacama-Coquimbo

5.1

1,890

6,500

4.45

2.41

2.96
0.64

1,996,545

V. O'Higgins-Colchagua
VI. Maule (Curicó, Talca, Linares
and Maule)
VII. BÍO-BÍO
(Nuble,
Concepción,
Arauco, Bio-Bío and Malleco)
VIII. Cautín
IX. The Lake district
(Valdivia,
Osorno)
X . The Fiord district (Llanquihue,
Chiloé, Aysén)
XI. Magallanes
TOTAL

10.1

2,180

6,900

2.51

0.20

8,878,928

44.9

2,770

8,200

6.71

3.35

3.61

1,049,694

5.3

2,190

7,300

4.04

2.93

3.34

861,168

4.4

1,180

4,200

2.74

0.94

1.44

2,207,147

11.1

1,430

4,800

3.09

0.82

1.25

405,847

2.0

940

3,200

0.98

0.61

0.93

673,266

3.4

1,410

4,500

2.72

1.07

1.34

496,886

2.5

1,390

4,500

3.89

2.37

2.45

410,368

2.1

4,330

10,600

5.55

2.76

3.20

19,765,451

100.0

2,170

6,800

4.94

2.63

3.09

SOURCE: Planning Office ( O D E P L A N ) , Regional Planning Department.

The regions of Valparaiso-Aconcagua and
BÍO-BÍO which, under national development
policy, are supposed to counterbalance the
growth of Santiago together account for 25 per
cent of the gross domestic product, but the
growth rate is below the national average.
Per capita incomes, measured as average
monthly family wages of the head of household, differ appreciably between rural and
urban areas and greater Santiago. With the
national average income being E° 845.5, the
figure for urban areas is E° 1,037.5, for rural
areas E ° 536 and for greater Santiago
E° 1,215.6. There are thus strong pressures on
people to move to the urban centres, particularly Santiago. Taking the country as a
whole, 30 per cent of income recipients earn
less than the minimum basic wage (sueldo
vital), but this figure rises to 46.6 per cent in
rural areas and falls to 15.5 per cent in greater
Santiago. A t the other end of the scale, 2 per
cent of income recipients earn more than ten
times the basic minimum wage, but the figure
is 0.3 per cent in rural areas and 5 per cent
in greater Santiago.

The above figures show not only that there
are disparities between rural and urban areas,
but also that internal income is less equitably
distributed in rural areas than in urban areas.
Industry is more highly concentrated than
the rest of the economy. In 1967, Santiago
accounted for 57.8 of the industrial product
but for only 45 per cent of the gross domestic
product. The figures are even further apart
with respect to employment: 55.6 per cent for
industrial employment and 38.5 per cent for
total employment.
( i v ) Public investment and bank loans.
There is less regional inequality in the overall distribution of public investment than in
the distribution of Üie product and the population (see table 6 ) . In the period 1965-1968
only 34 per cent of public investment was
allocated to Santiago, while this region accounted for 4 6 per cent of the gross domestic
product and harboured 36.5 per cent of the
population. In the Valparaiso-Aconcagua and
B Í O - B Í O regions the proportion of public investment was almost exactly the same as that of
65

Table 18

Region

V.
VI.
VI.
VII.
VII.
VIII.
VIII.
IX.
X.
IX.

Tarapacá
Antofagasta
Atacama-Coquimbo
Valparaiso-Aconcagua
Metropolitan area
O'Higgins-Colchagua
Maule (Curicó, Talca, Linares and
Maule)
Bío-Bío (Ñuble, Concepción, Arauco,
Bío-Bío and Malleco)
Bio-Bío
Cautín
The Lake district (Valdivia, Osorno)
The Fiord district (Llanquihue, Chiloé, Aysén)
loé, Aysén)
Magallanes
Magallanes
TOTAL
TOTAL

Total

Percentages

Percentage
of
total

Percentages

Absolute
figures

30.8

6.17

81.7

6.16
6.16

112.5

6.2

7.9

1.58

34.2

2.58

42.1

2.3

Absolute
figures

I.
II.
III.
IV.

Infrastructure
and other
projects^

Production
sectors'^

30.9

6.19

50.8

3.83

21.7

4.5

53.6

10.74

133.2

10.04

10.2
10.2

63.3

12.68
12.68

555.3

41.85

126.0
126.0
618.6
618.6

33.9

33.7

6.75

44.6

3.36

78.3

4.3

44.0

8.81
8.81

45.6

3.44

89.6

4.9

109.7

21.98

213.5

16.09

323.2

17.7

1. 7
n 2 .i

2.54

32.7

2.46

45.4

2.5

14.5

2.90

57.5

4.33

72.0

3.9

20.9

4.19

61.5

4.63

82.4

4.5

77.2

15.47

16.3

1.23

93.5

5.1

1,826.1
1,826.1

100.0

499.2

100.00
100.00

1,326.9

100.00
100.00

SOURCE: Planning Office (ODEPLAN).
® Agriculture, mining and manufacturing.
b Transport, housing, electricity, gas and water, education, health and internal government, etc.

the population and the product. Tarapacá was
the only region in which the proportion of
public investment ( 6 . 2 per cent) was higher
than its share of the gross domestic product
(2.7 per cent) and tiie population ( 2 per
cent).
Investment in infrastructure rose substantially in Santiago, representing 4 2 per cent of
the total. Santiago's share increased at the
expense not of the Valparaiso-Aconcagua region but mainly of the rural areas. Its large
share may be ascribed mostly to investment in
housing, which accounted f o r 53.6 per cent of
the national total, and in urban services such
as electricity, gas and water, which comprised
4 6 per cent of the total.
The behaviour of financial mechanisms, particularly bank loans, has a strong influence on
the process of concentration and, therefore,
on regional disequilibria; 65.5 per cent of all
loans are granted in Santiago, and the proportion has increased sharply in recent years. It
should b e noted that in order to assess this
fi^re more accurately, consideration should be
given to the place where these resources are
fifi

ultimately used, since it may so happen that
credit extended in Santiago is intended for the
provinces. A t the same time, in other regions
the rate of growth of bank credit declined or
was lower than the national average, except
in the extreme north (Tarapacá and Antofagasta). Deposits followed the opposite trend;
although Santiago accounts for a high percentage, the growth rate was far below the
average for the country in the period 19601968, while the rate for other regions rose more
rapidly.
( v ) Social issues. In addition to the analysis of economic variables, it is useful to note
the trends of the social variables connected
with the population's welfare, such as housing,
health and education.
The main effort in the construction of dwellings has been concentrated in Santiago, which
accounts for about 53 per cent of the total
built area (see table 7 ) . Thus, the housing
deficit in Santiago and the
ValparaisoAconcagua region declined from 36.3 to
31.5 per cent and f r o m 10.4 to 6.7 per cent,
respectively, between 1961 and 1969. In con-

Table

18

CHILE: CONSTRUCTION OF HOUSING UNITS INITIATED BY THE PUBLIC
SECTOR A N D PLANNED BY THE PRIVATE SECTOR, BY REGION,
1960-1969
{Percentages)
Population
1970

Region

I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.

Tarapacá
Antofagasta
Atacama—Coquimbo
Valparaíso—Aconcagua
Metropolitan Area
O'Higgins — Colchagua
Maule (Curicó, Talca, Linares and
Maule)
Bio-Bío (Ñuble, Concepción, Arauco,
Bío-Bío and Malleco)
Cautín
The Lake district (Valdivia, Osorno) . .
The Fiord district (Llanquihue, Chiloé,
Aysén)
Magallanes
TOTAL

Units
built

Number of
square
metres
built

2.0
2.8
5.5
10.0
36.5
5.4

1.9
2.6
3.5
13.4
51.2
3.3

1.8
2.8
3.1
14.2
53.5
3.3

7.0

3.2

2.8

16.1
4.7
4.9

10.7
3.0
3.7

9.9
2.5
3.0

4.1
1.0

2.2
1.3

1.8
1.3

100.0

100.0

100.0

SOURCE: Ministry of Housing and Urbanization, Statistical Centre.

trast, it increased sharply in the north, and on
a lesser scale in the south.
A s regards health, if the indicators of hospital beds and doctors per 1,000 inhabitants
are analysed it may be observed that the physical installations such as hospitals mainly
favour the Santiago and Valparaiso regions,
the Tarapacá and Antofagasta regions in the
north, and Magallanes in the extreme south.
The disparities are seen to be greater where
the number of doctors is calculated per inhabitant, since there is an excessive concentration
in Santiago, at the expense not only of the
peripheral regions but also of other great urban
areas such as Valparaiso, Concepción and
highly urbanized regions like Tarapacá and
Antofagasta.
Education is the sector in which the least
disparity exists between regions. The quantitative indicators available place the population
of Santiago below the national average as regards both primary and university education
(see table 8 ) . However, a more careful evaluation should take into account the quality and
range of the education provided, which favour
Santiago and Valparaiso.

( v i ) General
classification.
A n economic
classification has also been made, according to
the indicators shown in table 9. This table
reveals the extent of the existing regional disparities, since the regions with the two major
urban centres, which might have equalized
Santiago's position because of the diversified
structure of their economy and their large share
of the total population and gross domestic
product, register low rates of economic growth
that have shown no real signs of recovery during the period under review. In any case, it
should be remembered that whole regions are
being compared, and not urban areas, where
the situation could improve since regions I V
and V I I comprise important agricultural and
rural sectors which bring down the growth
indexes for the whole region.
Moreover, the settlement regions—Tarapacá,
Antofagasta and Magallanes—^have fairly high
indexes, in terms of both per capita product
and economic growth. Each region owes its
high rate of growth to a particular sector or to
one o r two products: Tarapacá to industry,
Antofagasta to copper and Magallanes to petroleum and hvestock.
67

Table 18
CHILE: ENROLMENTS IN PRIMARY A N D UNIVERSITY EDUCATION, 1969

Region

Number of
enrolments as a
percentage oi
the population
aged 6 to 14 years

Number of
university
enrolments as a
percentage of the
populaiion aged
19 to 23 years in
the main city of
the region

V.
VI.
VII.
VIII.
IX.
X.
XI.

Tarapacá
Antofagasta
Atacama—Coquimbo
Valparaíso—^Aconcagua
Metropolitan Area
O'Higgins—Colchagua
Maule (Curicó, Talca, Linares and Maule) . . .
Bío-Bío (Ñuble, Concepción, Arauco, Bío-Bío and
Malleco)
Cautín
The Lake district (Valdivia, Osorno)
The Fiord district (Llanquihue, Chiloé, Aysén)
Magallanes

97.4
86.0
84.2
87.7
79.3
78.4
76.8

29
29
59
34
16
0
23

83.0
92.3
89.5
81.8
93.5

45
37
33
1
8

TOTAL

I.
II.
III.
IV.

82.6

—

SOURCE: Planning Office (ODEPLAN).

T w o regions ( I I I and V ) are in a transitional stage. They are both situated at an
intermediate level, as regards both their
domestic product and growth rate. In region
III, mining accounts for most of the product,
but agriculture plays an important part in employment; in region V agriculture predominates, but El Teniente mine contributes a major
part of the product.
Lastly, the predominantly agricultural regions, with l o w indexes f o r the per capita
product or the growth rate, are V I , V I I I , I X
and X .
T h e regions with a high per capita product
are those which have registered the highest
growth rates in the last few years (see table
1 0 ) . They are the Santiago metropolitan area
and the extreme north and south of Chile.
However, Santiago accounts f o r 3 6 per cent
of the total population and 4 6 per cent of the
total gross domestic product, while Tarapacá,
Antofagasta and Magallanes account for only
5 per cent of the population and 12 per cent
of the gross domestic product. Moreover, there
is an appreciable transfer of income abroad
and to the rest of the country from the last
two regions.
T h e regions with l o w average indexes have
grown slowly, partly because of the particular
68

conditions prevailing there and partly because
of the transfer of income to the centre of
Chile.
In conclusion, Santiago ranks first in importance among the urban centres, and is
unquestionably the centre of the country's development. Next c o m e Valparaiso-Viña del
M a r and Concepción-Talcahuano, the only two
sizable urban areas apart from Santiago. These
are followed by Antofagasta in the north. Talca
in the central agricultural region. La SerenaC o q u i m b o in the north central area (Norte
C h i c o ) and Punta Arenas in the extreme south.
Arica is not high in the scale because the p o p u lation figures are for 1960; since then the city
has registered the most accelerated population
growth in the country ( 7 per cent annually)
and the structure of its economy has changed
radically, which would place it ahead of
Iquique and close to L a Serena or Talca (see
table 1 1 ) .
Interesting variations are observable over the
period 1960-1968: Santiago gained more
ground over Valparaiso and Concepción, in
spite of the growth of these two cities and the
decentralization policies adopted. Concepción
still occupies third place and comes closer to
Valparaiso, thus constituting a development
centre of national importance in the south of

Table

18

CHILE: ECONOMIC CLASSIFICATION OF REGIONS
Per capita
gross
domestxc
product

Hate
of
growth

Rapid
High

Average

Diversified
structure
of
production

Santiago
metropolitan
area

Predominantly
industrial
production
structure

Predominantly
mining
production
structure

I. Tarapacá

Predominantly
agricultural
production
structure

II. Antofagasta
XI. Magallanes

Slow
C Rapid

Medium .

III. AtacamaCoquimbo®
V. O'Higgins-Colchagua»

Average
Slow

r v . ValparaisoAconcagua

Rapid

Low

Average

Slow

X. The
Fiord
district

VII. BÍO-BÍO

VL Maule
VIII. Cautín
IX. The
Lake
district

SOURCE: Planning Office (ODEPLAN).
» These are both mining and agricultural regions, either on account of the product or
employment.

Chile. The northern centres (Antofagasta,
Arica, La Serena-Coquimbo and Iquique) have
gained in importance. There is a large gap
between Santiago and the other two major
urban centres, and between these and the
remaining cities, especially in the south.
The interrelationships between the urban
centres makes for the predominance of some
centres over others and the establishment of
systems and subsystems (see table 12). If
these interrelationships are measured by con-

ventional indicators, such as movements of
cargo and passengers, telephone calls, corresjwndence, etc., Chile would have a single national system with Santiago as the dominating
centre.
( d ) The example of a country with more than
one important urban centre
( i ) Population. In Colombia, the population
and production are spread fairly evenly over
four major regions. The centres of these re69

Table 18
CHILE: GROWTH OF PER CAPITA A N D TOTAL GROSS DOMESTIC PRODUCT,

1960-1967

( Percentages)
Annual per
capita growth
rate

Regions with
rapid growth
rates
Regions with average

growth rates

J

Region I
Metropolitan area
Region II
„ .
,,

^

\ Region X I

Annual
growth
rate

Tarapacá
Metropolitan area
Antofagasta

7.36
3.35
3.18

8.9
6.7
5.6

O'Higgins-CoIchagua
Magallanes

2.93
2.76

4.0
5.6

2.63

4.9

Average for the country
Region 111
Region X . !
Regions with
slow growth
rates

Atacama-Coquimbo
Llanquihue to Aysén

2.41
2.37

4.5

Region
Region
Region
Region
Region

Valdivia-Osorno
Curicó to Linares
Ñuble to Malleco
Cautín

1.07
0.96

2.7
2.7
3.1
1.0
2.5

IX
VI
VII
VIII
IV

Valparaíso-Aconcagua

0.82
0.61
0.20

3.9

SOURCE: Planning Office (ODEPLAN), Regional Planning Department.

gions are Bogotá, Medellín, Cali and Barranquilla, none of which is more than 300 kilometres b y road f r o m the most distant municipalities and villages, although the transport
difficulties are well known. The capital city
— B o g o t á — i s in the middle of the country
and the urban system comprises about one
hundred population centres with over 1,000
inhabitants, and 3 0 0 with over 30,000. In
1967, 2 2 per cent of the total population and
58 per cent of the urban population were concentrated in the four major urban centres.
Colombia has 2 , 9 0 0 kilometres of coast on
the Atlantic and the Pacific Oceans; there are
extensive lowlands, savannas and llanos in the
central, northern and eastern areas; and a large
part of its territory lies in the Amazon area.
Virtually all the population lives in the mountainous central west and south-west areas and,
to a lesser extent, o n the Atlantic coast in the
north and in other regions in that vicinity.
Thus, 97.8 per cent of Colombia's population
lives in 4 5 per cent of its territory. Table 13
shows that the Andean departments have a
high population density: over 93 inhabitants
per square kilometre in Cundinamarca, Quindio Risaralda, Caldas and Valle, followed by
Antioquía, Tolima, Santander and North Santander. In contrast, the departments of Bolivar,
70

Córdoba, C h o c ó , Guajira and Magdalena on
the coast, and Meta in the Uanos, are sparsely
populated, with 3 to 20 inhabitants per square
kilometre. If consideration is given to the
urban-rural ratio, it will be noted that the proportion of population living in urban areas rose
f r o m 39.6 to 4 8 per cent between 1938 and
1964. There has also been a noticeable trend
towards concentration in the big cities. Thus,
in 1938, 22.6 per cent of the population lived
in towns with over 100,000 inhabitants and
39.4 per cent in population centres with fewer
than 5,000 inhabitants; in 1962, the proportions had altered to 51.2 per cent and 12.3 per
cent, respectively.
Intensive migration has taken place in C o lombia in the last f e w decades; according to
the 1964 census, one-third of the inhabitants
were residing in a different administrative region from that in which they had been born,
and one-third of this number had migrated
f r o m one rural area to another. So intensive
was this process that half of the inhabitants
of Bogotá and two-fifths of the inhabitants of
other urban areas were migrants at that time.
Moreover, it has taken place very rapidly, since
about 4 0 per cent of the 6.5 million migrants
had moved during the five years prior to the
census. In 1964, the migratory movements

Table 18
CHILE: INDEX OF IMPORTANCE OF URBAN CENTRES^

Urban centre

Arica
Iquique
Antofagasta
Copiapó
Serena-Coquimbo
San Felipe-Los Andes . .
Quillota-La Calera . . . .
Valparaíso-Viña del Mar
Santiago
San Antonio
Rancagua
San Fernando
Curicó
Talca
Cauquenes
Linares
Chillán
Concepción-Talcahuano
Lota-Coronel
Los Angeles
Lebu
Angol
Temuco
Valdivia
Osorno
Puerto Montt
Ancud
Castro
Puerto Aysén
Coyhaique
Punta Arenas

Total
population
1960

43,344
50,655
87,860
30,123
79,603
43,496
47,581
422,251
2,032,188
41,474
53,318
21,774
32,562
68,148
17,836
27,568
65,112
269,169
82,563
35,511
6,248
16,637
72,132
61,334
55,091
41,681
7,390
7,001
5,488
8,782
5,488

Popula'
tion
(25 per
cent)

1.86
2.06
2.68
1.46
2.50
1.76
1.98
4.46
6.25
1.84
2.11
1.09
1.55
2.38
0.85
1.36
2.34
3.95
2.61
1.64
—

0.90
2.45
2.26
2.15
1.84
—
—
—
—

2.03

Politicoadministrative
importance
(15 per
cent)

1.54
2.31
2.31
2.31
2.31
2.31
1.54
2.31
3.75
1.54
2.31
2.31
2.31
2.31
2.31
2.31
2.31
2.31
1.54
2.31
2.31
2.31
2.31
2.31
2.31
2.31
2.31
1.54
2.31
1.54
2.31

Institutional
importance
(20 per
cent)

1.96
1.54
2.83
1.38
2.83
1.21
0.88
2.54
5.00
0.46
2.04
0.92
0.92
2.92
0.88
1.13
2.38
3.33
—

Exports
of
services
(20 per
cent)

Exports
of
goods
(20 per
cent)

Index
. of
importance

Order
of
importance

0.90
1.41
1.73

1.63
1.14
1.76

1.58
1.69
2.26
1.03
2.11
1.49
1.00
3.32
5.00
0.80
1.59
0.86
1.11
2.18
0.81
0.96
1.99
2.94
0.83
1.02
0.58
0.85
1.91
1.58
1.23
1.27
0.66
0.43
0.64
0.55
2.08

12
10
4
18
6
14
20
2
1
26
11
22
17
5
25
21
8
3
24
19
29
23
9
12
16
15
27
31
28
30
7

—

—

1.11
1.57

1.78
0.58
0.58
3.55
5.00
0.17
1.48

—

3.73
5.00
—
—
—

—

0.76
1.65

—

1.65
—

—

—

—

1.35
2.97

1.57
2.15

—

1.17
0.58
1.04
2.71
2.29
1.67
2.21
1.00
0.63
0.88
1.21
2.75

—

—

—

—

—

—

—

0.87
1.03

1.19
—

—

—

—

—

—

—

—

—

—

—

—

—

2.46

0.83

SOURCE: Planning Office (ODEPLAN).
* A combination of the population, politico-administrative importance, institutional importance, exports
of services and exports of goods. For a more detailed analysis, see ODEPLAN, Planteamientos para una política de desarrollo urbano nacional, informe preliminar, September 1970.
were almost entirely absorbed b y f o u r regions:
B o g o t á ( 3 6 per c e n t ) , Valle ( 2 6 . 7 per c e n t )
A n t i o q u i a ( 1 7 . 5 p e r c e n t ) and Atlántico
( 1 7 . 4 per c e n t ) .
( i i ) Product,
income
and social
services.
Colombia's
Administrative Planning
Office
estimates that three departments—Antioquia,

B o g o t á and V a l l e — w i t h 3 3 . 8 p e r cent of the
total p o p u l a t i o n , contributed 4 2 . 5 p e r cent
t o the gross d o m e s t i c product. A second g r o u p
of
eight
departments—^Atlántico,
Bolívar,
B o y a c á , Caldas, C u n d i n a m a r c a , M a g d a l e n a ,
Santander and T o l i m a — a c c o u n t e d f o r 4 5 . 7
p e r cent o f the p o p u l a t i o n and 4 3 p e r cent o f
71

Table 12
CHILE: ORDER OF I M P O R T A N C E OF DEVELOPMENT CENTRES
Index

Degree of importance

Centre of national importance
Regional centre of national
portance
Regional centre of multiregional
portance
Centre of regional importance»

....
imim....

Centres

5

Santiago

2.94-4.99

Valparaiso, Concepción

2.26-2.93
L23-2.25

Antofagasta
Arica, Iquique, La Serena, Coquimbo, San Felipe, Los
Andes,
Rancagua,
Talca,
Chillán, Temuco, Valdivia,
Osorno, Puerto Montt, Punta
Arenas

SOURCE: Planning Office ( O D E P L A N ) .
" A r i c a and Punta Arenas may be considered as border development centres.

the product. The remaining eight departments,
with 19.1 per cent of the population, contributed 13.5 per cent to the total product. Lastly,
the share of the so-called "national territories"
was 1.4 per cent of the population and 1 per
cent of the product (see table 1 4 ) . By way of
comparison, the three most important departments—Antioquia, Valle and Bogotá—were
responsible for 60 per cent of the manufacturing product, while Antioquia, Valle and Caldas
accounted for 31.1 per cent of the product
generated by the primary sector. Bogotá accumulated 24.3 per cent of the tertiary activities, followed by Antioquia (13.8 per cent)
and Valle (12.3 per cent).
A s regards the regional distribution of income, it is tentatively estimated that about
60 per cent of the population have incomes
that are fairly close to the national average,
20 per cent earn more and another 2 0 per cent
earn less.^ In particular, the per capita product
in Bogotá and the department of Valle, with
20 per cent of the total population, was 44 per
cent higher than the national average in 1964;
in six departments—^Boyacá, Cauca, Chocó,
Huila, Guajira and Nariño—and the "national
territories", the per capita product was much
lower than the national average (about onehalf in Guajira and Nariño, and one-third in
C h o c ó ) (see table 1 5 ) .
The position with respect to social services
was somewhat similar. In 1964, 79 per cent
3 See United Nations, Technical Assistance Programme, "Tentativa de distribución del
producto
bruto interno de Colombia por secciones administrativas del país (1964)".
Report presented by
Mr. Francesco Marabelli (Bogotá, December 1966).

72

of the enrolments in higher education and 72
per cent of the doctors in towns of over 30,000
inhabitants were concentrated in the three
major regional centres: Bogotá, Medellín and
Cali. In the three departments corresponding
to these centres, 20 per cent of the population
was illiterate, compared with 50 per cent in
others such as Córdoba, Chocó and Guajira.
(iii) Manufacturing and energy. In 1967,
65.4 per cent of the gross value added in manufacturing was concentrated in Bogotá and the
departments of Antioquia and Valle, the proportions being 21.4, 23.7 and 20.3 per cent,
respectively. A second group of five departments (Atlántico, Cundinamarca, Santander,
Bolívar and Boyacá) accounted for 24.6 per
cent. On the whole, manufacturing activities
are located mainly in the cities of Bogotá,
Medellín, Cali and Barranquilla, which altogether absorbed 80 per cent of total employment in industry m 1965. In this respect, it is
interesting to note that the most dynamic
centre of manufacturing activities has shifted
over the years. Up to 1930 there was no predominating centre, but by 1930 and 1940
Barranquilla was leading the industrial development process owing to its function as an
export and import shipping port. During the
1940s, Medellín assumed first place on the
basis of the capital formation that was made
possible by the coffee boom, and the import
substitution policy resulting from the Second
Worid War. Throughout the 1950s, Cali was
the new manufacturing centre, stimulated by
the inflow of foreign capital; the main activities estabUshed there were pharmaceutical
and chemical laboratories and related and

Table 18
COLOMBIA: POPULATION DENSITY, BY
POLITICO-ADMINISTRATIVE DIVISIONS
Number of inhabitants per square kUometre'
1961

1964

1968

Departments
Antioquia
Atlántico
Bolívar
Boyacá
Caldas
Cauca
Cesar
Córdoba
Cundinamarca
Chocó
Huila
La Guajira
Magdalena
Meta
Narifio
Norte de Santander
Quindío
Santander
Bisaralda
Tolima
Valle del Cauca
Average for departments

37
117
23
14
105
17
—
16
90
3
17
6
11
1
19
21
—
29
—
39
85
24.5

39
219

26
16

95

20
11

23
118
4

21

7
24

2

23

26

167
32
115
36

45
256
30
17
107

22

13

28

139
4
23
8
28
3
24

28

182
35

121

28.2

38
93
31.9

1
1
91

1.0
1.2
380.3

1.2
1.5
526.0

1
2
1
1
—

0.1
2.2
0.1

0.1
2.7

82

Intendencias
Arauca
Caquetá
San Andrés and Providencia
Comisarías
Amazonas
Putumayo
Vaupés
Vichada
Guainía
Average for national territories
Average for the whole country

1.4
13

0.1
0.5

0.2

0.1
0.6

0.5

0.5

15.4

17.4

SOURCE: National Administrative Department of Statistics ( D A N E ) .
«Adjusted figures.

supplementary industries
(chemicals,
containers, glassware, etc.), and other important
industries such as foodstuffs and paper and
paperboard. During the next decade, for various reasons which included political centraliz a t i o n — the most dynamic city was Bogotá.
It is pointed out that this shifting of the major
industrial centre did not weaken the previous
centres in absolute terms; they merely developed more slowly. Thus, in 1965, while Bogotá
accounted f o r 28.4 per cent of the value added

in manufacturing, Medellin still retained 2 4 . 4
per cent, Cali 16.3 per cent and BarranquiUa
8.8 per cent (see table 1 6 ) .
There is also a high degree of concentration
with respect to electric energy. In 1967, 82 per
cent of the public installed capacity was distributed among five departments, i.e., Cundinamarca and Bogotá ( 2 9 per cent), Antioquia
( 2 7 . 6 per c e n t ) . Valle (13.8 per cent). Atlántico ( 6 . 3 per cent) and Caldas (5.3 per c e n t ) .
There was much the same concentration in
73

Table 14
COLOMBIA: SPATIAL DISTRIBUTION OF THE GROSS DOMESTIC PRODUCT A T FACTOR COST A N D
OF THE POPULATION A N D STRUCTURE OF THE SECTIONS' ECONOMIES, 1964
(Percentages)

-

Election

Gross domestic product at factor cost
(Contribution of departments)
Primary

Secondary

Other
activities

Total

10.9
0.7
6.2
6.9
10.2
3.8
5.8
8.5
0.7
0.4
3.1
0.7
8.2
2.0
3.4
2.5
5.0
9.3
10.0
98.3
1.7
100.0

21.0
6.7
4.6
3.3
3.9
0.8
0.4
3.8
21.0
0.2
0.5
0.1
0.7
0.3
0.9
3.2
9.1
1.3
18.0
99.8
0.2
100.0

13.8
5.6
4.3
2.8
7.3
1.4
1.6
6.1
24.3
0.4
1.6
0.3
3.4
0.8
1.8
2.7
5.2
3.5
12.3
99.2
0.8
100.0

14.3
4.1
5.1
4.3
7.6
2.1
2.8
6.4
15.5
0.3
1.9
0.4
4.5
1.1
2.1
2.8
6.0
5.0
12.7
99.0
1.0
100.0

a

Antioquia
Atlántico
Bolívar
Boyacá
Caldas
Cauca
Córdoba
Cundinamarcac
Distrito Especial
Chocó
Huila
La Guajira
Magdalena
Meta
Nariño
Norte de Santander
Santander Sur
Tolima
Valle
Subtotal
National Territories

....

....
TOTAL

Gross domestic product at factor cost
(Share of departments in gross domestic product)

b

15/7/64

14.2
4.1
5.8
6.1
8.3
3.5
3.4
6.4
9.7
1.0
2.4
0.8
4.5
0.9
4.0
3.1
5.7
4.8
9.9
98.6
1.4
100.0

Primary

a

26
6
43
55
46
62
72
46
1
40
57
60
63
63
54
32
29
64
27
34
60
35

Secondary

b

31
34
19
16
11
8
3
13
29
14
6
7
3
6
9
25
32
5
30
22
4
21

Other
activities

43
60
38
29
43
30
25
41
70
46
37
33
33
31
36
43
39
31
43
44
36
44

Total

100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

SOURCE: United Nations, Technical Assistance Programme, "Tentativa de distribución del producto bruto interno de Colombia por secciones administrativas del país (1964)". Report presented by Mr. Francesco Marabelli, Bogotá, December 1966.
» Agriculture, hunting, fishing and forestry,
b Mining and manufacturing.
Excluding Bogotá.

Table 18
COLOMBIA:

E V A L U A T I O N OF PER CAPITA I N C O M E LEVELS BY
A D M I N I S T R A T I V E SECTIONS, 1964
Gross domestic
product at
factor cost
(millions of
pesos)

Section

Antioquia
Atlántico
Bolivar
Boyacá
Caldas
Cauca
Córdoba
Cundinamarca"
Distrito Especial
Chocó
Huila
Guajira
Magdalena
Meta
Nariño
Norte de Santander
Santander
Tolíma
Valle
Subtotal
National Territories
TOTAL

6,904.1
1,999.3
2,432.8
2,073.8
3,653.6
1,015.4
1,346.6
3,114.5
7,460.1
161.2
907.5
209.1
2,144.9
541.4
1,026.0
1,332.6
2,874.0
2,430.9
6,123.9
47,751.7
461.6
48,213.3

population
(thousands
of inhabitants)

IMA
1,006.3
1,058.2
1,455.9
607.2
585.7
1,120.1
1,697.3
181.9
416.3
147.1
789.4
165.5
705.6
534.5
1,001.2
841.4
1,733.1
17,241.4
241.6
17,482.4

Per capita
gross domestic
product at
factor cost
(pesos)

Average
national
per capita
index
= 100

2,786
2,787
2,418
1,960
2,510
1,672
2,299
2,780
4,395
886
2,180
1,421
2,717
3,271
1,454
2,493
2,871
2,889
3,533
2,770
1,914
2,758

101
101
88
71
91
61
83
101
159
32
79
52
99
119
53
90
104
105
128
100
69
100

SOURCE: United Nations, Technical Assistance Programme, "Tentativa de distribución del producto bruto interno de Colombia por secciones administrativas del país
(1964)". Report presented by Mr. Francesco Marabelli, Bogotá, December 1966.
" Excluding Bogotá.

the production of energy for the public service,
the total output of 83.1 per cent generated by
these five departments being distributed as
follows: Antioquia (28.8 per cent), Cundinamarca-Bogotá (23 per cent). Valle (16 per
cent), Atlántico (8.1 per cent) and Caldas
(7.2 per cent).
Moreover, in 1969, Bogotá absorbed 44.7
per cent of total foreign investment, whñe
Medellín and Cali together received 21.3 per
cent and other cities only 24 per cent.^ In 1969
and 1970, 49 per cent of the import licences
for machinery were allocated to Bogotá. The
capital city's growing predominance is also
observable in small and medium-scale industry;
for example, 34 per cent of the credit granted
to those sectors in 1969 went to Cundinamarca, including Bogotá.®
4 See Administrative Planning Department, document VEIA-028-IP, October 1970.
5 See Administrative Planning Department, document VEIA-029-DI.

(iv) Order of importance of Colombian
cities. According to the order of importance
established by the National Planning OflBce,
Bogotá is the leading city in Colombia and the
only metropolis exercising a nation-wide influence. Nexi come the three "stabilizing
metropolises", Medellín, Cali and Barranquilla; and lastly the regional and local centres.
This classification was based on demographic,
economic and social indicators, which include
such considerations as urban population, value
added in manufacturing, the value of cheques
cashed directly and cleared, number of hospital
beds, enrolment in higher education and enrolment in vocational training centres. Table 17
shows the results of this study for the thirty
largest cities.
3. Some problems and questions
It may be concluded from the two cases
examined in the previous section and from the
data given in table 1 that the process of urban
concentration is extremely vigorous, even
75

>4
O
N

Table 16
COLOMBIA: INDUSTRIAL STRUCTURE OF CITIES, 1965

Urban
population

City

Total
industrial
value added
(thousands of
pesos at 1965
prices)

Percentage
industrial
value
added

Importance of
industrial employment
in relation to
the population

Per capita
industrial
value
added
(pesos)

Urban

Active
urban

Bogotá DE and Soacha . . .
Medellin and suburban area
Cali and Yumbo
Barranquilla and Soledad . .

1,789,607
972,628
678,752
514,255

3,036,776
2,617,394
1,733,486
946,045

28.4
24.4
16.3
8.8

1,697
2,686
2,554
1,840

4.60
7.00
5.60
4.40

13.31
22.44
16.98
16.63

5. Bucaramanga and suburban
area
6. Cartagena
7. Manizales and Villa Maria
8. Pereira and Santa Rosa . . .
9. Armenia and Calarcá
10. Cúcuta
11. Ibagué
12. Palmira

228,899
228,823
200,831
189,448
164,385
155,288
133,071
111,850

305,165
302,080
163,223
191,099
60,131
77,186
67,549
190,461

2.9
2.8
1.5
1.8
0.6
0.7
0.6
1.8

1,333
1,320
813
1,014
366
497
508
1,728

3.10
2.10
2.50
3.40
1.30
1.30
4.00

9.95
7.07
7.80
8.05
3.93
3.89
3.38
9.65

95,099
85,756
80,623
76,380
73,695
69,677
69,030
63,807
61,142
59,395
58,098

42,309
41,775
31,457
11,894
16,106
79,468
156,530
238,527
42,221
31,520
18,268

0.4
0.4
0.3
0.11
0.16
0.8
1.5
2.2
0.4
0.3
0.2

445
487
390
156
219
1,142
2,268
3,787
691
531
314

1.30
1.30
0.80
0.50
1.20
1.70
2.20
2.70
1.00
1.30
1.40

3.85
3.19
2.40
0.92
2.88
4.90
6.21
8.46
2.31
3.33
4.05

48,886
46,334
48,840
42,145
37,387
35,325

18,971
2,405
31,197
38,598
130,676
53,227

0.2
0.02
0.31
0.4
1.2
0.5

388
52
639
915
3,495
1,506

1.10
0.40
0.70
2.00
6.90
1.70

2.49
1.19
1.34
4.24
12.54
3.17

10,670,744

100.0%

1.
2.
3.
4.

13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

Santa Marta
Pasto
Nelva
Montería
Buenaventura
Girardot
Buga
Barrancabermeja
Popayán
Tullía
Cartago
Ciénaga
Villavicencio
Sincelejo
Valledupar
Tunja
Sogamoso and Nobsa
Duitama
TOTAL

SOURCE: National Planning Office, Regional and Urban Development Unit.

1.00

Table 18
COLOMBIA: ORDER OF IMPORTANCE OF CITIES, 1965-1966
City

I. Bogotá DE + Soacha
Medillín + Mpios. Valle de Aburrá . .
Cali + Yumbo
BarranquiUa
Soledad
Bucaramanga + Girón, Florida Blanca
Cartagena
Manizales + Villa María
Pereira
Santa Rosa
Armenia + Calarcá
Cúcuta
Ibagué
Palmira
Santa Marta
Pasto
15. Neiva
16. Montería
17. Buenaventura
18. Girardot
19. Buga
20. Barrancabermeja
21. Popayán
22. Tulúa
23. Cartago
24. Ciénaga
25. Villavicencio
26. Sincelejo
27. Valledupar
28. Tunja
29. Sogamoso
Nobsa
30. Duitama

2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.

Level
Demographic

VI
V
V
V
IV

rv
rv
rv
rv

IV
IV
III
III
III
III
III

ni

III
III
III
III
III
III
III
III
III
III
III
III
III

Social

VI
V
V

rv-v
IV-V
IV-V

rv-v
w

IV
III-IV
IIMV
IV

iii-rv
IIMV
III
III
III

ni

III
III
III

m

III
IMII
III
IMII
IMII
III
III
IMII

Economic

Over-all
- classification
adopted

VI
VI
V
V
IV
IV
IV
IV
III
III
III
IV
III
III
III
III
III
III
IV
IV
III
III
III
II-III
III
II-III
III
III

rv

III

VI
V
V
V
IV
IV
IV
IV
IV
IV
IV
IV
IV
III
III
III
III
III
III
III
III
III
III
II-III
III

ir-iii
m
III
III
III

SOURCE: National Planning Office, Regional and Urban Development Unit.
Code:
VI: National metropolis.
V : Stabilizing metropolises.
Ill and IV: Regional centres.
I and II: Local centres.

in countries such as Chile that have implemented decentralization policies. Furthermore,
it would appear that even in countries that
formerly possessed some degree of regional
balance, such as Colombia, there is a trend
towards concentration in single metropolitan
area.
The social consequences of this process,
especially as regards living conditions in the
great metropolises, are well known, although
the same is not true of all the economic issues
involved. From the economic standpoint—if
it is at all possible to look at economic issues
in isolation—there are reasonable grounds
for doubt regarding the advantages and disadvantages of the formation and growth of the
major Latin American national metropolises.

particularly when they are above a certain
size.
SuflScient data are not available to be able
to provide a categorical answer to this point,
since the necessary empirical studies and detailed breakdowns of data are lacking. Nevertheless, the present study has brought together
a certain amount of information covering the
maintenance of external economies, the c o n trol of urban land use, the economic and social
relations between urban and rural areas and,
lastly, the distribution of income within certain major cities. A n d it is thought that a
critical appraisal of these issues, which are of
course only part of the story, may be useful
— a n d may even be a determining factor—in
an over-all approach to this subject.
77

(a) External economies
Issues relating to external economies are
known to have a great deal of weight in economic analysis connected with the location of
activities and also play a decisive role in decisions regarding the regional distribution of
investment. In examining their significance
vis-a-vis the metropolitanization of the Latin
American economies, a distinction must be
drawn among all the various factors responsible
for external economies between the factors
linked most directly to specific productive units
—supply of inputs, access to financial markets
and subcontracting, proximity to decisionmaking centres and technical research and
manpower training services etc.—and the
factors associated with the general infrastructure, which is generally the responsibility of
the State, and is necessary for the functioning
of productive activity, such as roads and railways and means of communication, and also
with the urban infractructure and its ancillary
services (housing, water supply, medical services, schools, etc.).
This distinction is important both in terms
of the effective duration of the external economies concerned, and in terms of the role
played by both types of factor in private and
public decisions on the location of investment.
It may generally be assumed that the factors that are directly related to productive units
constantly increase their associated external
economies, without any limitation as to time.
The more a given urban area grows and concentrates activities—although not necessarily
within the same surface area—the greater
and more varied will be the advantages that it
can offer to new activities in terms of external
economies. The same is not necessarily true,
however, with the second type of factor, particularly those having to do with the urban
infrastructure.
Ideally speaking, once a given urban centre
has been consolidated, and has a reasonable
supply of the appropriate public services, it
should be in a position to increase its population, because new enterprises will be set up.
Thus more intensive use will be made of the
general installations already in existence and
the cost per person added to the population
will fall.
This relationship cannot be linear, however,
since there will necessarily be a series of critical points when the utilization density of
certain services becomes saturated and rela78

tively expnsive investment is needed to expand
them; tlus in turn will offer new possibilities
for external economies until eventually the next
critical point is reached. Take, for example, a
city where the drinking-water or electricity services can supply a population of 100,000; once
this point has been passed, it then becomes
necessary to invest in water-supply facilities or
to install new power stations which can supply,
say, 300,000 inhabitants; and then once that
point is reached, the process starts all over
again.
The above demonstrates that the external
economies associated with a new population
settlement in a given region vary depending
on each individual situation and on each point
in time. Over the longer term it is important
to know whether the cost of the urban infrastructure tends to rise or fall in relation to the
size of the urban population. Little empirical
research has been done into this, and the results
of what has been done do not always agree,
even for the same country. For example, a study
undertaken in Italy by SVIMEZ in 1956 estimated the cost per inhabitant of fixed social
investment in urban centres at 123,000 lire in
cities with 30,000 inhabitants, 194,000 lire in
cities with between 30,000 and 200,000 inhabitants, and 357,000 lire in cities with over
200,000 inhabitants.® Another study, on the
other hand, also carried out in Italy, indicates
that the cost of constructing, supplying and
maintaining cities is at its highest at a level of
around 100,000 inhabitants, and is less in cities
below that level and also above it.''
In Latin America, a study has attempted to
measure the cost of urbanization on the basis
of data from the city of Caracas.® Four basic
components were taken into account: land,
household services, housing and communal
services.
The main factors that push the value of
urban land upward are zoning—i.e., the allocation of land for urban uses—and changes
«See SVIMEZ, "La localizzazione industríale ed i
costi
sociali
dell'insediamento
di nueva
unitá
lavoralive", in Informazioni SVIMEZ, Rome, May
1957. Quoted by Alessandro Busca and Salvatore
Cafiero in "Costo social del asentamiento", Cuadernos
de la Sociedad Venezolana de Planificación, August
1966, p. 40.
See Tekno, Ricerca sui costi di insediamento
urbani ed industriali in varié cittá d'Italia, Milan 1963.
Quoted in Busca and Cafiero, op. cit., p. 41.
® See Central University of Venezuela, Centre for
Development Studies (CENDES), Desarrollo Urbano
y Desarrollo Nacional, Caracas, March 1971, pp.
217-248.

in zoning, the installation of services, the construction of major means of access or other
works, and demand. The combined effect of
these variables gives the cost of the settlement,
and the CENDES study mentioned above compared this cost with population density. Estimates by public agencies of the value of zoned
land in Caracas were compared with population density. The results indicated that the per
capita cost, at a density of 100 inhabitants per
hectare, is 17,000 bolívares; as density increases, the per capita cost falls to a minimum
of 8,000 bolívares, at a density of 400 inhabitants per hectare and then stabilizes, irrespective of how much density increases. This yields
landowners high profits in the most highly
populated areas.
The CENDES study considered data on the
cost of services in certain urbanization projects
in Caracas developed by the Banco Obrero and
private enterprise. The cost of water supply,
sewerage, electricity and service roads to the
settlements were considered separately and were
compared with population density. It was
found, first of all, that costs fell as density
increased until they reached a point at which
they stabilized: around 1,000 inhabitants per
hectare; above this level, costs began to rise.
The study observes that these are only preliminary figures and should be taken simply as
indicative of a trend.
A comparison of the relative cost of land,
construction and services showed—at the
lowest cost density for services, which is 1,000
inhabitants per hectare—that the per capita
cost of services is about 100 bolívares, while
that of construction ranges between 5,000 and
7,000 bolívares and that of land is 7,500 bolívares.
It must be borne in mind, however, that there
are other factors present in many Latin American countries that may hamper or frustrate the
possibility of taking advantage of the major
external economies of metropolitan areas. Suffice it to recall the extremely high levels of
urban concentration achieved already—^high
in comparison with other more developed countries and high in relation to the nature of the
urban economy concerned—the rapidity of
internal migration, and the marked shortfalls
in social services in such areas.
The rapidity of urbanization has in many
cases outstripped capacity to satisfy demand
for public services, something which is easy to
understand if it is remembered that the urban
population of Latin America expanded by

71 per cent in the 1950s9 (for Europe this
figure is only 18 per cent). It is common in
cities that have grown rapidly for there to be
a decline in the abihty to provide public services efiiciently, giving rise to serious problems, especially as regards transport and c o m munications within tiie city itself. In some
metropolitan areas, tens of thousands of people
have to travel distances of 30 to 60 kilometres
to their place of work; the cost of such commuting has not been measured but it probably
leads to longer working hours, a reduction in
wages, and a loss in individual productivity as
a result of tiredness, in addition to the direct
cost of the transport.
Furthermore, the shortfalls in social services
are huge. It has been estimated that Latin
America's urban housing deficit in 1961 was
14 million units and rising. Around 30 per cent
of the urban population does not have running
water. As regards education, in 1960 there were
40 million illiterate adults in the region as a
whole, and the adult population had spent an
average of 2.2 years at school.
In the particular case of Venezuela, taking
the data from the CENDES study, in cities
with more than 20,000 inhabitants the basic
public services deficits are 37.8 per cent in
housing, 38.9 per cent in running water, 60.9
per cent in sewerage, 16.3 per cent in electricity, 25 per cent in primary education, 51
per cent in secondary education and 25.1 per
cent in medical care (general hospitals).
In the circumstances, it is doubtful whether
there are opportunities to take advantage of
external economies in expanding many Latin
American metropolitan areas; rather the reverse, it is Mkely that in some cases the per
capita cost of the urban infrastructure for new
cities is less than the corresponding cost of
expanding the infrastructure in the existing
major urban centres.
All this shows how the importance of external economies and hence of criteria for the
allocation of resources among regions varies,
depending on whether the standpoint is that of
a particular project or enterprise or that of the
national economy as a whole. In the former
case, providing the anticipated operating results
are compared with directly productive investment, the advantages lie on the side of un9 About one-third of this increase—proportionally
less in the larger countries—is attributable to the
fact that more cities have more than 20,000 inhabitants; the remainder comes from population increase in existing cities.

79

limited expansion, and this in the final analysis
is one of the main criteria on which private
investment decisions are based. But calculations of productivity or economic return take
no account of the sometimes substantial need
for additional public investment (national or
municipal) which is tantamount to an indirect
subsidy to enterprises. In other words, the costs
of urbanization are charged to the State while
economies of scale benefit enterprises and families; and when diseconomies arise as a result
of the scale of the agglomeration, these too
are charged to the public sector. To put it
another way, it may be asked whether it would
not be more beneficial for the national economy
to locate new enterprises in development centres of a smaller scale, where they would help
in the process of modernization, rather than
to locate them in major conglomerations where
the cost of expandmg the infrastructure and
providing additional public services is greater.
Unfortunately, no data are available to show
how accurate this statement is, not even for a
few metropolitan areas in Latin America. Moreover, a look at past history indicates that
initially the urban centres served as a support
for regional development and even nation^ development. It appears, however, that once a
certain point has been passed, particularly
owing to the unchecked expansion of such centres, their operation requires public expenditure and a transfer of income from the rest of
the country, which is clearly an external diseconomy. A more detailed historical analysis
might well link up this process with the phenomenon of the concentration of the economy
and income that appears to be a feature of the
recent development of the Latin American
countries with diversified and complex industries.
( b ) Controlling

the use of urban land

In addition to the advantages and problems
that the process of urban concentration can
bring with it as regards external economies, it
has often been found that the growth of metropolises, because it is rapid and virtually always
uncontrolled, has adverse social consequences.
These include congested urban traffic, atmospheric pollution, insalubrious housing, and
eventually have the effect of lowering the level
of well-being of the population; this in turn
makes it necessary to invest in new roads,
green areas and even in urban renewal. But
the cost of such investment in the urban space
of the metropolis is very high and rising, particularly because of the large increase in the
80

value of urban land brought about by the
urbanization process itself.
One interesting point, which in isolation
might not be significant but which may indicate
a general trend, emerges from a comparison of
the movement of land costs in central and
peripheral cities. The case of Venezuela—still
on the basis of the CENDES study mentioned
earlier—shows that in the cities of the
metropolitan centre (Caracas, Valencia, Maracay, Maiquetia, La Guayra, Puerto Cabello and
Los Teques) the cost of land has risen considerably; the rise in Caracas is well above
that in the other cities, but even there the
annual rate of increase has been 10 per cent.
In the other cities of Venezuela the rate of
increase has been much less, and in some cases
there has been no movement at all.
The uncontrolled expansion of urban areas
brings with it new problems as regards means
of transport and basic urban services, and also
as regards sewerage and drinking-water systems, health services and education. Given the
limited scope of the legal instruments available
in Latin America to eiSorce stricter social control of land use, the surface area occupied by
cities tends to expand ad infinitum and this
in turn lowers population density. This means
that all the advantages of urban concentration
in terms of reducing the per capita costs of
means of transport and urban services and
facilities are lost, and that it is virtually impossible for municipalities, even with assistance
from the central authorities, to cover the investment required to maintain even a minimum
degree of balance in urban living conditions.
Moreover, the distances that commuters have
to travel cause wear and tear that affects a
significant proportion of the urban population
centres. Governments have thus found themselves forced to solve the problem of commuter
transport by installing systems that are generally costly in terms of investment, for example underground railways. In Sao Paulo and Rio
de Janeiro the cost per kilometre of line has
been estimated at 10 million dollars.
In order to be acceptable, the further expansion of metropolitan areas must be controlled so that optimum per capita costs can
be achieved for the different types of urban
service; urban planning techniques may perhaps be able to neutralize some of the disadvantages of the large agglomerations and take
advantage of their benefits, but there are wellknown limitations in Latin America as regards
urban planning controls and in achieving urban

growth in line with planned patterns. Only a
very few major cities have been able to subject their growth completely to controls. The
uncontrolled and haphazard growth that ensues
virtually always leads to a worsening of urban
living conditions, and investment becomes necessary precisely because control has been lacking. The same problems are found in the
major cities of the developed countries, sometimes even more acutely. In this connexion, it
is significant that the developed countries are
showing a growing interest in the problems of
the environment, mainly as regards preserving
the ecological balance and controlling the pollution caused by industrial wastes. It may be
said here that Latin America has barely had
time to experience the disadvantages of industrialization, and the main factors affecting
the environment in the region are the result of
underdevelopment (over-use of natural resources, marginality, shortfall in basic services,
the consequences of enclave economies, etc.).

table 18). In the first case the metropolitan
area, made up of the Federal capital and
Greater Buenos Aires, "exports" manufactures
and "imports" agricultural products, and hence
the terms of this trade have an influence on
the transfer of income. For example, the terms
of trade improved by 21.7 per cent between
1956 and 1959 for the metropolitan area. The
price index of its "imports" rose by 263.6 per
cent and that of its "exports" by 342.5 per
cent. Furthermore, the metropolitan area contains the services—^particularly those concerned with financing, insurance and export—
that are used by the other provinces.
The poorer provinces are subsidized on a
scale that is small in absolute terms but significant if compared with their gross domestic
product. The subsidies consist chiefly in the
allocation of resources by the national government for public works or the current costs of
education and health services.
The provinces from which these resources
come are those which engage in modern-type
( c ) Relations between the metropolitan area agriculture on a large scale and generate
and other regions
around three-quarters of national crop and
A basic issue within the problem of metro- livestock production (the remainder of the
politanization concerns relations between the province of Buenos Aires, Córdoba, Santa Fe,
urban area and other regions, especially rural Mendoza and La Pampa), together with the
regions. The point is not to look at each region two provinces producing wool and petroleum
(Santa Cruz and Neuquén). In all cases these
in isolation but to try to see whether the
process is interdependent and whether the are thriving provinces with high per capita incorollary of the expansion of the metropolitan comes that—^with the exception of Neuarea, for example, is a transfer of income from quén—are above the national average and
—and consequently the impoverishment o f — very close to that of the metropolitan area.
another region. While no research has been There is thus a situation in which a major indone to prove this argument, the following dustrial area—the metropolitan area—absorbs
sections will consider two studies on related economic resources from the modern agriculmatters undertaken by the Federal Investment tural areas through the payment of services
and the terms of trade, and absorbs labour,
Council of Argentina and by ECLA.
( i ) Trade in goods and services. One of mainly from the poor provinces which it is
the few studies that have tried to measure in- subsidizing, although to a much lesser extent.
terregional relationships is on Argentina,^®
In their turn the five rich agricultural proand shows how a major economic centre vinces and the two wool and oil provinces
—the metropolitan area—absorbs resources heavily subsidize the metropolitan area; they
generated in the provinces. The transfer of in- generate 72 per cent of national crop output
come, however, is not homogeneous, nor is it and 75 per cent of livestock output at a relaof the same type in all cases: it involves a tively high level of productivity. But they detransfer of income from the richer agricultural pend on the metropolitan area for financing,
areas to the metropolitan area, and a form of domestic marketing, exports and most of the
subsidy by the metropolitan area to the poorer manufactures that they need. The poorer proprovince. Two areas are thus benefited—the vinces provide labour—mostly unskilled—and
metropolitan area and the poorer provinces— recover through budgetary subsidies from the
and one area provides the income: the highly national government what they lose through
productive agricultural provinces, and two pro- the payment of services and possibly through
vinces producing wool and petroleum (see the terms of trade.
10 See Federal Investment Council, Bases para el
desarrollo regional argentina (Buenos Aires, 1963).

It is difficult to estimate to what extent this
phenomenon occurs in other Latin American
81

Table 18
ARGENTINA: PER CAPITA GROSS DOMESTIC PRODUCT, A N D
ON INTERPROVINCIAL TRADE, 1959

BALANCE

Per capita gross
domestic product
(thousands of
pesos at 1953
prices)

Total''

Internal^

7.6

-27,175

-34,477

8.1
2.8
4.1
9.3
5.3
3.1
4.2
2.9
5.2
8.2
2.9
6.5
2.1
3.8
6.2
4.0
5.0
3.8
14.8
6.4
2.3
20.5
4.2

12,750
-663

12,322
-633
468
1,284
11,970
610
-429
-32
1,107
1,956
-217

Metropolitan area
Remainder of the province of Buenos
Aires
Catamarca
Chaco
Chubut
Córdoba
.
Corrientes
Entre Ríos
Formosa
Jujuy
La Pampa
La Rioja
Mendoza
Misiones
Neuquén
Río Negro
Salta
San Juan
San Luis
Saiita Cruz
Santa Fe
Santiago del Estero
Tierra del Fuego
Tucumán
Balance

Balance on interprovincial
trade (thousands of pesos
at 1959 prices)

111

-210
9,566
293
-492
117
645
1,818
-238
2,654
-1,016
414
727
-1,266
679
-449
1,832
4,095
-739
81
-645
3,555

-720
551
860
56
906
-398
1,790
-308
-313
128
40
0

SOURCE: Federal Investment Council, Bases para el desarrollo regional argentino,
op. cit., pages 56 and 98.
a Including international trade.
b Excluding international trade.

countries, especially if it is remembered that
Argentina is not a particularly typical case
since regional differences are less pronounced
than in most of the other countries of the
region, as are the pressures of population
growth in the more backward regions. What is
clear, however, is that, even if the Argentine
experience could be extended to other countries, this would not mean that regional disparities in income and living conditions would
tend to disappear of their own accord. M o r e is
required than a transfer of real income in the
f o r m of social services f o r the backward areas
to be able to achieve more dynamic economic
growth.

medium- and long-term strategies
the model
considers the foUowing factors: demography
and education, social stratification, consumption, production and investment, external trade,
ownership of capital, technology, nationalization, income distribution and fiscal policy.
Since the population is broken down into nu:al,
low-income urban and high-income urban
groups, the results obtained can help to identify certain characteristics of urban-rural relations. The figures used in the model, convened
to a situation similar to that of several Latin
American countries and the structures, forms
and features of the current growth process were
projected into the future. A s current trends

( i i ) One aspect of
projected over the long
model. E C L A recently
experimentation model

11 See ECLA, "Un modelo para comparar estilos
de desarrollo o políticas económicas
optativa^'
(document E/CN.12/907), The equations of the
model are described on pp. 43-54 of the document.

82

the urban-rural
issue
term using an over-all
developed a numerical
f o r studying over-all

were projected over time, it was assumed that
all parameters would behave as in the past. A
specific evaluation was made of factors relating
to population, employment, expenditure, income and deficit (see table 1 9 ) .
On the basis of the assumptions adopted,
and with an annual rate of population increase
falling from 2.9 per cent in 1968 to 2.7 per
cent in 1975 and normal migratory movements,
the model indicates that the rural population
should decline substantially, with a marked increase in the low-income urban population.

With respect to unemployment, three different situations were found. A t the beginning
of the period unemployment ranges from 6.9
per cent in the low-income urban group to 8.2
per cent in the rural group, while it is minimal
in the high-income urban group. By 1975,
rural unemployment is expected to have increased dramatically (to an estimated 17 per
cent), while unemployment in the low-income
group is expected to rise but more slowly and
the high-income urban group should have a
labour shortage. By the end of the 1970s,

Table 19
INDICATORS OF POPULATION, EMPLOYMENT, EXPENDITURE,
CONSUMPTION, INCOME A N D DEFICIT, 1968-1980
(Projected

on the basis of existing structure and past trends')
196S

Unemployment
(percentage
population)
Rural
Low-income urban
High-income urban

31.6
54.8
13.6

17.0
9.6
-1.8

4.3
17.4
-1.9

55,046.6

95,104.0

147,135.4

18.2
37.6
44.3

13.1
39.3
47.6

9.1
41.9
49.0

2.6
11.9

2.8
13.5

2.8
13.7

56,026.0

100,445.3

150,267.1

13.3
32.4
54.4

8.6
28.6
62.8

6.9
27.6
65.6

197.7
594.5
3,333.3

238.1
699.6
4,885.4

330.6
763.2
5,821.9

1.432.2

2,974.6

5,174.6

1.585.3
641.8
-4,638.7

2.192.4
4.186.5
-14,694.7

1,060.6
12,349.9
-21,716.7

active

Total expenditure (in millions of monetary
units)
Structure of expenditure by group
centages)
Rural
Low-income urban
High-income urban

(per-

Per capita consumption as a proportion of
rural consumption
Low-income urban (rural — 1)
High-income urban (rural = 1)
Total income
units)

41.8
46.2
12.0

8.2
6.9
0.5

of

1980

50.1
39.6
10.2

Structure of population (by group)
Rural
Low-income urban
High-income urban

1975

(in millions of

monetary

Structure of income by group
ages)
Rural
Low-income urban
High-income urban

(percent-

Per capita income (in monetary units)
Rural
Low-income urban
High-income urban
Total subsidy (millions of monetary units)
Deficit (millions of monetary units)
Rural
Low-income urban
High-income urban

83

rural unemployment is expected to decline
significantly (to 4.3 per cent) mainly owing
to m i r a t i o n to the cities, but this will make
the situation unbearable in the low-income
urban group (unemployment of 17.4 per cent),
while the labour shortage in the high-income
urban group will remain roughly the same.
The share of the rural population in expenditure is expected to decline markedly, while
that of the urban population—^both low-income
and high-income—should continue to grow in
Une with past trends. Consumption by other
groups is also expected to follow past trends,
with the disparhies existing at the beginning of
the period remaining unchanged.
The income of the rural group is expected
to decline in relative terms by half during the
period, while that of the low-income urban
group should also decline, although less rapidly; the income of the high-income group,
on the other hand, is expected to rise. There
should be a moderate deficit in the rural sector
which should reach its peak in 1975 and then
decline; the deficit of the low-income urban
group is expected to increase rapidly and to
reach intolerable levels by 1980, while the
high-income group should produce large and
growing surpluses.
In the final analysis, the basic fact that
emerges from applying this over-aU model
—^which was developed to follow the trends of
the economy as a whole—is the intolerable
situation of the low-income urban group by the
end of the 1970s, owing both to rapidly rising
unemployment and to the income deficit which
is growing at a cumulative annual rate of 28
per cent and cannot be covered. It is perhaps
unnecessary to add that this analysis is simply
an illustration, in somewhat hypothetical terms,
of how serious matters will become if nothing
is done to modify existing structural trends.
( d ) Some characteristics of the distribution of
household income in selected
metropolitan areas^^
The previous paragraph dealt with the problem connected with the low-income urban
population. There now follows a more detailed
analysis of income distribution in metropolitan areas where, in general, although there are
marked disparities, a higher absolute level is
observable—even in the lowest strata—than
in other regions. This is one of the basic ele12 This section contains data and conclusions taken
from an unpublished ECLA study comparing the
distribution of income in some major Latin American
cities.

84

ments of attraction of the great cities for the
rural population and the smaller urban centres.
Migration to the big cities reflects the expectation of concrete possibilities of better living
conditions.
The general characteristics of household income distribution in some metropolitan areas
( R i o de Janeiro, Sao Paulo, Santiago (Chile),
San José (Costa R i c a ) , the Federal District of
Mexico and Caracas) are compared with
those of national distribution patterns. The recipient categories are divided into five groups
by increasing size of income: the poorest 20
per cent, the next 60 per cent split into two
halves on either side of the median, the 15 per
cent below the highest income group, and the
top 5 per cent (see tables 20, 21 and 2 2 ) .
The poorest 20 per cent of the population
receives an average of 5 per cent of total income in metropohtan areas, compared with
3.1 per cent in the whole country. Translated
into absolute levels of average personal income, these percentages indicate a per capita
income of 130 to 300 dollars, against national
averages of 50 to 110 dollars. From an overall national standpoint, in spite of the wide
range of situations, 90 per cent of this segment
consists of workers engaged in primitive agricultural activities, and the remainder of unskilled or illiterate workers employed in personal services and construction in rural or
minor urban localities. In metropolitan areas,
on the other hand, this segment is much
smaller and its influence does not seem to go
beyond the first decile. At the same time, the
share of agriculture is not only below 4 per
cent of total employment in the cities considered (except San José), but it demonstrates
greater efficiency than at the national level, in
view of the high value of the land and the
higher standard of education of urban population groups engaged in this activity.
In addition, the information for those cities
would seem to indicate that, with the exception of some households which receive pensions and of workers in personal services, a
considerable proportion of this category is
made up of households headed by women.
Moreover, there is a significant difference between the whole group of countries and the
metropolitan areas as regards the functional
structure of this group. At the national level,
about 80 per cent of it is composed of workers engaged primarily in agriculture and services; in contrast, the employment of this group
of persons in metropolitan areas is more
varied. In Caracas, for example, the workers

Table 20
LATIN A M E R I C A : PERSONAL INCOME DISTRIBUTION IN SELECTED METROPOLITAN AREAS
{Percentages)
Brazil (1961-1962)
Rio de
Janeiro

Income
groups

10
10
20
10
10
10
30
10
10
10
10
10

Total
100

30
15
5
100

Sao
Paulo

Chile
(1964)
Greater
Santiago

Costa Rica
(1961)
San José

2.0
2.0

2.3
3.5

1.5
2.8

2.0
3.0

5.0
4.0
5.0
6.1
15.1
7.6
9.3
12.3
15.7
35.0

100.0

29.2
26.6
24.1
100.0

4.2
5.1
5.9
7.0
8.3
10.9
14.3
38.5

100.0

5.8

15.2

26.2
24.8
28.0
100.0

4.3
4.1
4.2
6.0
14.3
7.6
9.5
12.1

4.0
5.0
5.5
6.8
8.7
10.0

29.2
17.3
34.9

100.0

29.2
23.0
100.0

17.0
38.0

Mexico
(1957)
Federal
District

2.2
3.1
5.0

14.5

25.5

3.9
4.8
5.5
6.3
8.7
11.7
16.3
37.5

29.0
26.0
100.0

Venezuela
(1962)
Caracas

100.0

2.2
3.5
5.3

14.2

26.7

100.0

5.7

5.0

17.3

14.8

29.3

28.4

27.7
20.0

27.5
24.3

100.0

100.0

4.6
5.8
6.9
7.8
9.5
12.0
16.5
31.2

27.8
26.0
100.0

Over-all
average

100.0

SOURCES: Brazil: Getulio Vargas Foundation, Brazilian Institute of Economics, Pesquesa sobre orgametitos familiares, 1961-1962; Chile: Universidad de Chile, Institute of Economics, 1964, Demanda de bienes durables, Gran Santiago, June 1964 (Santiago, Chile, 1965). Costa Rica: Carlos Quintana Ruiz, ^«íí/wíí dW ¡«^reio/ami/ifl/-e/¡ e/area meíropo/ííawa
(Universidad de Costa Rica, 1962); Mexico, 1957: Statistical Office,
Ingresos y egresos de la población de México: mes de octubre de 1956 (Mexico, 1958); Venezuela: Statistics and Census Office, Primera encuesta nacional sobre ingresos y egresos familiares, document 5 (Caracas, 1964).

00

00
o\

Table 21
LATIN A M E R I C A : ESTIMATED INCOME DISTRIBUTION IN SELECTED COUNTRIES
{Percentages of total income)
Brazil (1960)
Earning
population

Income
nrnutti
®

1.5
2.0

10
10
20
10
10
10
30
10
10
10
10
10

30

3.0
3.5
5.0

3.5

23.5

12.0
49.5
15
5

22.0
39.5

Costa Rica (1961)

2.6
3.4

1.2
2.3

11.5
6.5
7.3
9.7

Households'Chile (1965)

3.5
3.0
4.1
5.4

3.8
4.0
4.4
12.5

6.5
8.5
10.7
15.3
43.0

25.7
27.8
30.5

5.4
7.1
9.3
14.0
46.0

Mexico (1963)

1.5
2.1
6.0

3.6
3.1
3.8
4.9

12.2

21.8
25.0
35.0

11.8
6.0
8.1
12.0
17.0
41.5

26.1
29.5
29.0

Venezuela

(1962)

Average

1.4
1.6
3.0

3.1

11.3

10.3

27.7

24.1

31.5
26.5

29.2
33.4

3.0
3.7
4.6
6.0
8.3
13.4
17.3
40.7

SOURCES: Brazil, Costa Rica, Mexico and Venezuela: ECLA, Economic Survey of Latin America, 1968. Chile: Production Development Corporation
( C O R F O ) , Geografía Económica de Chile (first appendix), Santiago, Chile, 1966.
a Families equivalent to heads of households in housing censuses.

Table 22
LATIN AMERICA: ESTIMATED DISTRIBUTION OF AVERAGE PER CAPITA PERSONAL INCOME, BY INCOME GROUPS, 1965
(Dollars at 1960 prices)
Average income by groups
Country and region
average per capita

Brazil
Rio de laneiro
Sao Paulo
Chile
Greater Santiago
Costa Rica
San José
Mexico
Federal District
Venezuela
Caracas metropolitan area . . .
Norway»
United Kingdoma

260
480
385
475
530

100

45
805
775
660
500
1,050

85
115
85
80

870
930
1,400

Lower
30 per
cent

Poorest
cent

200
225
140
125
280
250

210
360

NOTE: Tentative estimates based on incomplete data,
a The income levels for the European countries are for 1960, ECLA.

00
<1

200
155
185
200
640
825

15 per cent
below the
top 5 per cent

Upper
30 per
cent

405
390
315
240
495
500

200
410
280
415
490
1,070
1,540

780
675
640
425
935
850

380
890
640
935
1,115
1,560
2,335

1,425
1,280
1,285
965
1,940
1,610

Top 5 per cent

2,055
2,930
2,695

3,880
4,340
3,035
2,600

2,755

2,810
2,870
5,375

5,460
3,480

represent 60 per cent of this first 20 per cent,
the remainder consisting, in almost equal proportions, of independent workers and modest
workers in personal services;^® in other cities
— S a o Paulo or Greater Santiago—the employees represent an even smaller proportion,
since there are more retired persons with old
age and other pensions.
In the next 30 per cent, the structure is
seen to be appreciably different. In countries
like Brazil, Costa Rica and Mexico, the agricultural population, although on a lesser scale
than in the composition of the first 20 per cent,
continues to exercise a virtually determining
influence. A little over half of its members
come from agriculture, and the rest are engaged in construction, the traditional industries
—especially textiles—and services. In contrast, in the other countries considered the proportions are reversed in favour of the last mentioned sectors. The share of this 30 per cent
ranges from 11 to 12.5 per cent of total income and, in terms of average absolute income, from 100 dollars (Brazil) to 200 dollars (Chile and Venezuela). In the metropolitan areas, on the other hand, this group
receives a larger share of income, owing to
the fact that the primitive sector has almost
no influence, and that its operational structure
is more diversified. Therefore, its share in
metropolitan income is higher and shows
greater disparities between the different cities;
it ranges from 14.2 to 17.3 per cent, which
means an average personal income which fluctuates around the average total for the region,
i.e., between 240 and 500 dollars.
In the upper half of income distribution,
at the national level, the influence of rural
areas is substantially smaller, owing to the
predominantly urban nature of the population.
Thus, from the functional standpoint and
considering the national total—with the proportions varying according to the country—
this segment includes medium-scale entrepreneurs in farming and certain unspecified services: skilled workers in traditional industries
and on large farms; and a high proportion of
ofiice workers and independent workers,
mainly salesmen and persons engaged in similar activities. The structure is quite different
in the large cities, where the basic nucleus of
this category consists of medium-level public
and private employees, and also skilled and organized workers in enterprises of a certain
size, some medium-scale farmers (residing in
Universidad Central de Venezuela, "Estratificación social y familia", Estudio de Caracas, vol. IV.

88

the city) and a small fraction of professionals,
technicians and similar types of workers in the
top third of the scale. This group's share of
income varies little between the different cities
concerned, fluctuating in relative terms between 25.5 and 29.3 per cent of total income,
which, expressed in absolute terms, means
from 400 to 900 dollars per head.
A n analysis at the national level of the
structure of the next 15 per cent below the
top stratum shows that not more than 6 per
cent of them are workers. They are skilled
urban groups engaged in large-scale enterprises,
particularly those controlled by the Government or foreign capital (mining, electric power,
transport and communications). Most of this
category (with some variations in Brazil and
Costa Rica) comprises executive employees
and professional staff, and some medium-scale
owner-entrepreneurs in industry and services.
A s will be noted, this 15 per cent of the population is composed mainly of skilled groups,
generally engaged in efficient activities associated or integrated with the modern sector.
Therefore, their share of income depends on
the scale of employment in this sector and on
the degree to which it affects the remuneration
of the groups near the peak of the income distribution scale.
This category's position in the income scale
in the major cities is similar to that observable
at the country level. The data on Caracas, for
example, indicate that the workers' representation is practically nil in this group, which
consists almost exclusively of medium-scale
owners and managers of agricultural, industrial
and tertiary activities, senior employees in important enterprises and a certain category of
professionals. These are groups which possess
capital and skiff, both relatively scarce resources in developing regions for which compensation is generally in accordance with international standards. Their share in income in
the countries reviewed ranges from 25 to 29
per cent of the total.
This pattern of the employment structure
in the economic and social categories reaches
its peak in the top 5 per cent of income distribution. In the countries considered, the members of this top category are essentially senior
professionals, the high echelons in the public
and private sector, managers and administrators of large-scale enterprises, and a small
proportion of retired persons with old age and
other pensions and private incomes. In addition, and by way of exception, there is an insignificant fraction (0.1 to 0.6 per cent) of

highly skilled urban élite of workers engaged
in important public or foreign enterprises,
whose remuneration is determined essentially
by institutional factors. The functional structure of this group does not vary as a whole
from country to country or between one city
and another, although it does vary as regards
the proportion of its members. The data for
the years 1964-1965 show that in Mexico this
group comprised 25.4 per cent of the owners
and managers, 31 per cent of the professionals
and technical experts, either salaried or independent, and 1 per cent of the persons living
on pensions.
A s can be noted, access to this category is
not exclusive. It includes high-level wage or
salary earning groups or independents (senior
professionals and executive employees) on the
one hand, and important owner-entrepreneurs
who tend to be concentrated in its highest
strata.
Notwithstanding the variations in the proportion of each group in the top 5 per cent,
all the members of this category belong to the
modern sector of the economy in the countries
and cities concerned, and their share depends
on the size of this sector, so that the smaller h
is the more income is concentrated in it.
In conclusion, income distribution in the
major cities is generally less unequal than in
the whole country. This is due, above all, to
the smaller size of the primitive sector, which
accounts for the lower strata's larger share oí
income, and to the "administrative" character
of the big cities, since the concentration of
employees, professionals and technicians helps
to swell the middle-income strata.
4.

Some

conclusions

(a) The first—and perhaps the most important—point that should be clarified concerns the significance and, to some extent, the
social cost/benefit ratio of urbanization. In
this connexion, it could be hazarded, as a preliminary guess, that the concentration of resources in a metropolitan area would be both
a pre-condition for the expansion and diversification of the structure of the economy, and
an "optimum" allocation from the point of
view of the over-all growth rate, as it would
provide a means of deriving maximum benefit
from external economies. Secondly, it could
equally well be assumed that the growth and
consolidation of the central development nucleus would transform it into a dynamic ele-

ment promoting the development of the rest of
the economy. In that event, there would not
properly speaking be a regional development
problem requiring the adoption of specific policies designed to overcome it, but merely a
lack of synchronization between the time
needed to build up the metropolitan area and
the time required for it to make its influence
felt in the rest of the system, in a process that
in time would lead spontaneously to the integration and greater unification of the national
economy.
Several features of the Latin American experience appear to suggest that the first aspect
is bound up with specific stages of growth,
while there are serious doubts as to the validity
of the second aspect.
It is true that, throughout a specific stage,
a form of polarized development represents an
economically justified allocation of resources
and is an important step forward from the
point of view of the prospects for improving
the levels of living of the population, but it is
no less true that these advantages will only
persist given two conditions: ( i ) that the
productive worth of the resources invested in
the most advanced poles should be greater
than the productivity that would accrue in
new or backward areas, and (ii) that there
should be a clear capacity to energize the rest
of the system and to absorb a growing proportion of the population at sufficiently high income and productivity levels. Hence, the content of a regional policy cannot be defined
without regard to the practical stage of development through which the region is passing,
which means, in other words, that the variety
of national situations that characterize the
Latin American situation may call into doubt
the validity of any generalization at the Latin
American level.
( b ) In actual fact, the urbanization process
is being carried out notwithstanding measures
to promote decentralization. Moreover, in
countries where there is a more or less balanced set of urban centres, there is a tendency
for the process to be concentrated in a large
urban area of national significance. This fact
appears to have been determined at the demographic level by the better living conditions
offered in the metropohtan area compared
with conditions prevailing in the poor rural
areas (in particular, higher income levels and
access to urban facilities); and at the economic
level, mainly by the favourable results of profitability studies for the establishment of enterprises in those areas, owing to the possibility
89

of utilizing external economies and other indirect subsidies received from the State.
( c ) The lack of checks on the growth of
metropolitan areas has caused a decline in urban living conditions and has made huge investments necessary to permit the smooth running of activities in those areas and to remedy
deficiencies provoked by the same lack of
checks. A t the same time, excessively high
and uncontrolled land values in the metropolitan area have caused the cost of urbanization
to soar to unprecedented levels.
(d) It would appear that the large urban
centres absorb resources from the periphery,
and this process appears to be dictated, among
other things, by the effects of the terms of
trade and the provision of a variety of services.
In the case on which data are available, it is
shown that the metropolitan area absorbs resources generated in the rich agricultural areas
and, to a much smaller extent, subsidies to the
poorer areas.

90

( e ) The analysis of income distribution in
certain large towns as compared with whole
countries in Latin America shows that, for
the same deciles, income levels are higher in
the large towns than in the rest of the country.
This is due mainly to the non-existence of a
primitive rural sector. If account is also taken
of the possibility of utilizing a large number of
urban facilities, it can be seen that migration
to large towns is not dictated by haphazard
personal motives but is based on access to better living conditions (always compared with
the underprivileged rural population strata).
However, in a projection of trends until the
end of the decade, it will be seen that, given
the persistence of current trends—and, particularly, the high rate of migration from the
countryside to the towns together with the low
capacity of towns to absorb labour at acceptable productivity levels—the situation of the
low-income urban population would become intolerable, owing to the excessive growth of unemployment and the enormous income deficit.

AGRICULTURAL POLICY IN THE COUNTRIES SIGNATORY TO THE
ANDEAN SUBREGIONAL INTEGRATION AGREEMENT
1.

Trends in the development of
in the subregion

agriculture

In varying degrees the development of agriculture in the countries signatory to the Cartagena Agreement is subject to the same constraints as vs^ere identified by E C L A in respect
of Latin America as a whole.^ Indeed, over-all
production is growing more slowly than the
population, particularly in the livestock sector.
This has led to a decline in the levels of per
capita consumption, the slow expansion of
agricultural exports and a steady increase in
imports of certain foodstuffs and raw materials;
insufficient use of modern farming techniques
in most of the countries and, consequently,
little improvement in unit yields; an unsatisfactory structure of production characterized
by under-diversification and, in particular, by
over-concentration of ownership of land and
agricultural income, with the result that the
levels of living of vast numbers of the population are deplorably low; under-utilization of
land and rural labour, giving rise to high unemployment and under-employment in rural
areas and to the exodus of rural workers to the
large towns; and lastly, lack of integrated and
co-ordinated agricultural development planning.
The figures given in table 1 confirm the slow
growth rate of the agricultural product (crops,
hvestock, forestry and fishing). In per capita
terms, between 1960 and 1970, growth was
positive in Colombia, stagnant in Chile and inadequate in Bolivia, Ecuador and Peru. Chile's
level of per capita income is higher than the
rest of the subregion, and accordingly, the
share of the agricultural product is notably
lower (10.8 per cent of the total domestic
product); nevertheless, in Chile, too, there is
inadequate agricultural development and heavy
dependence on imports of agricultural products. Agriculture is of much greater importance in the economies of Colombia and
Ecuador, and in both countries its share in the
i S e e ECLA, "Second United Nations Development Decade—^Agricultural development in Latin
America" ( E / C N . 1 2 / 8 2 9 ) .

gross domestic product is around 31 per cent,
while in Bolivia and Peru, as in Chile, mining
and manufacturing activities are of greater significance than in the other countries of the subregion. The total gross product generated by
the five countries of the subregion was estimated at 4,656 million dollars in 1970, of
which 52 per cent was accounted for by C o lombia, 19 per cent by Peru, 13 per cent by
Chile, 12 per cent by Ecuador and 4 per cent
by Bolivia.
Obviously, the sluggish and uneven growth
of agricultural production is one of the negative factors contributing to the very low income levels of the rural population. In the five
countries as a whole, two-thirds of the rural
population receives the per capita equivalent
of barely 100 dollars a year, with the disastrous economic and social consequences that
can be imagined.
Similarly, the agricultural labour force appears to have increased by only 926,000 workers between 1960 and 1970, that is, a cumulative annual growth rate of only 1.4 per cent,
the lowest rates being recorded in Bolivia and
Chile. Thus, there is a clear trend towards
open unemployment among the rural population, which is estimated at 25 miUion. Rural
unemployment and under-employment, particularly of a seasonal nature, are an important
problem in all the countries of the subregion,
and are particularly serious in areas of singlecrop cultivation and in areas where crop cultivation and livestock breeding are not integrated or placed on a suitable complementary
basis.
During the period under review, the over-all
growth rate of agricultural productivity was
only 1.5 per cent a year; Ecuador and Peru
recorded minimum levels of improvement. A l though there are some variations from country
to country, in over-all terms unit yields for the
subregion as a whole have been very small,
and sometimes zero, as is the case for the
livestock sector in many areas, where output of
meat and milk per animal and per unit of area
has stagnated. The fact of the matter is that
91

Table 18
ANDEAN

GROUP: GROSS AGRICULTURAL PRODUCT; EMPLOYMENT
PRODUCTIVITY OF AGRICULTURAL
LABOUR

1970

1960

Index
(1970/1960)

AND

Annual
growth
rate
(1970/1960)

Agricultural product
(Millions of dollars at 1960 prices)
Bolivia
Colombia
Chile
Ecuador
Peru
Andean Group

166.0
1,683.7
463.4
415.4
756.8
3,485.3

. . ..

202.0
2,406.4
597.7
544.9
904.7
4,655.7

121.7
142.9
129.0
131.2
119.5
133.6

2.0
3.6
2.6
2.8
1.8
2.9

105.1
119.3
108.2
123.1
114.3
115.3

0.5
1.8
0.8
2.1
1.4
1.4

115.7
119.8
119.2
106.6
104.6
115.8

1.5
1.8
1.8
0.7
0.5
1.5

Employment
(Thousands of persons)
Bolivia
Colombia
Chile
Ecuador
Peru
Andean Group

878.0
2,629.9
738.0
956.0
1,773.9
6,975.8

835.0
2,204.2
682.0
776.6
1,551.5
6,049.3

.

Productivity
(Product per person
Bolivia
Colombia
Chile
Ecuador
Peru
Andean Group

. . ..

SOURCE: E C L A a n d I L P E S

198.8
763.9
679.5
534.9
487.8
576.1

230.0
915.0
810.0
570.0
510.0
667.4

estimates.

increases in production in absolute terms have
been achieved basically through expanding the
area under cultivation and hardly ever as a result of technological progress. O n the plateaux
of Bolivia, Colombia, Ecuador and Peru, the
peasant and small farmer continue to b e tied
to traditional forms of cultivation and animal
breeding dating f r o m colonial times, and most
of the holders of latifundia are reluctant to
introduce modern techniques in their crop and
livestock production. A great deal of potential
is being wasted for lack of advanced farming
techniques.
T h e faüure to redistribute the land and the
current systems of land tenure, especially with
regard to minifundia and latifundia, are the
most serious obstacles to the modernization
of agriculture in the subregion, particularly
in areas where the main activity is subsistence
farming, and where there is a lack of the ne92

employed)

cessary transport and marketing services for
both agricultural inputs and products. There
are clearly many obstacles to trade throughout
the subregion, and these constitute veritable
bottlenecks in supply and demand.
A s has been pointed out time and time
again, these problems can only be solved by
sweeping agrarian reform which, in addition
to distribution of land and income, modernization of production techniques, expansion of
credit and technical assistance facilities and
improved marketing practices, etc., would involve the over-all planning of the sector in the
light of intersectoral relationships and, hence,
within the framework of the economy of the
subregion as a whole.
According to data supplied by F A O , the percentage structure of agricultural production
for the countries of the Andean Group in 1970
was as follows:

Bolivia

Crops
Livestock
TOTAL

Colombia

68
32

Sectors

62
38

iOO

100

It can be seen that in Bolivia, Colombia
and Pern production of crops is practically
double livestock production; in ChUe the ratio
is almost even, while in Ecuador it is three to
one. Goats, sheep, pigs and poultry have assumed great significance in Chile.
T o enable an appraisal to be made of the
relative importance of products and groups
of products, table 2 provides a list of the components of the crop and livestock sectors. Considering the subregion as a whole, cereals and
fruit are the most important crops, each accounting for about one-fifth of production. The
most important cereals are maize, followed by
wheat and rice. Bananas are the most important fruit. Lower down the scale are starchy
roots and coffee; of the former, potatoes are
the principal tuber, followed by cassava. Next
in importance come vegetables and sugar
products, followed by fibres and, lastly, other
minor crops.
Meat accounts for a relatively large share
( 5 7 per cent) of total livestock production in
the subregion. Milk occupies second place,
followed by eggs, wool and the remaining
products of the sector.
At the national level, in Bolivia the most
important crops are starchy roots, followed by
cereals, vegetables and fruit. In Chile, cereals
are the major crop, followed closely by fruit
and further down the scale by starchy roots and
vegetables. Coffee occupies the first place in
Colombia, followed by cereals, fruit, sugar
products, starchy roots, etc. In Ecuador, fruit
is the major crop, bananas in particular. Much
lower down the scale are cereals, coffee, starchy
roots, cocoa and other minor crops. In Peru
fibres are the most important crop, cotton in
particular, followed in importance by fruit,
starchy roots, cereals, vegetables, sugar products and other crops.
Table 2 shows that meat and dairy products account for more than 80 per cent of the
total value of livestock production in the subregion. Eggs also occupy an important place
in all the countries, while production of wool
is of relatively greater significance in Bolivia,
Chile and Peru than in Colombia and Ecuador. In Bolivia, production of sheep and

Chile

Siibregion

Ecuador

Peru

55
45

79
21

63
37

66
34

100

100

100

100

auchenia wool is almost as important as milk
production and twice as much as egg production. In Colombia and Ecuador, on the other
hand, egg production is much more significant
than production of wool.
The figures in table 3 show each country's
share in the subregion's production of crops
and animal products. Chile is the main producer of wheat, accounting for slightly more
than three-quarters of the subregional total,
while Colombia occupies first place in respect
of production of maize and rice, with 40 and
51 per cent of the respective totals. Chile accounts for 91 per cent of the production of
oats in the subregion. Peru is the main producer of barley, accounting for about one-third of
the total. In Bolivia, maize and barley, and in
Ecuador, rice and barley have the highest incidence in subregional production. A s regards
starchy roots, Colombia produces a significant
amount of cassava and sweet potato and Peru
commands a high share of production of potatoes and sweet potatoes. Chile occupies first
place in the production of pulses, accounting
for slightly more than 60 per cent of the output of chick-peas and lentils. Peru is the major
producer of broad beans, followed by Ecuador
and Bolivia. The bulk of the subregion's output
of peas comes from Colombia. A s regards
sugar products, Colombia produces more than
half of the cane sugar produced in the subregion, while Chile is the only country that
processes beet-sugar.
Ecuador is the most important producer of
bananas, with 70 per cent of the subregional
total, followed by Colombia with 20 per cent.
Chile accounts for total sunflower production.
Colombia produces all the sesame and most of
the cotton of the subregion, followed by Peru.
Ecuador accounts for three-quarters of castor
seed production. Colombia stands out in the
production of coffee and tobacco; Ecuador in
cocoa; and Peru accounts for 100 per cent of
tea cultivation.
In the livestock sector, Colombia is the
main producer of beef, pork, milk and eggs.
Chile has a high share of beef and wool production, followed by Peru. Bolivia produces
mostly mutton and goat meat and wool, and
Ecuador milk, pork and eggs.
3

Table

18

ANDEAN GROUP: STRUCTURE OF THE CROP AND LIVESTOCK SECTORS, 1969
{Percentage values)
Subregion

Chile

Colombia

Crops
Cereals
Starchy roots
Sugar and sugar products
Pulses
Vegetables
Fruit
Oilseeds
Coffee
Cocoa
Tobacco
Fibres and others

28.0
38.0
4.0
0.5
10.0
10.0
2.0
2.0
1.0
0.5
4.0

30.0
15.0
2.0
6.0
13.0
28.0
5.0
0.6
0.4

23.0
8.0
10.0
3.0
5.0
14.0
2.0
24.0
3.0
1.0
7.0

15.0
7.0
5.0
3.0
5.0
45.0
2.0
8.0
7.0
3.0
3.0

13.0
16.0
8.0
3.0
10.0
18.0
1.0
5.0
0.2
0.2
25.6

21.0
13.0
7.0
4.0
8.0
20.0
2.0
13.0
2.0
0.7
9.3

TOTAL

100.0

100.0

100.0

100.0

100.0

100.0

64.0
5.0
14.0
3.0
12.0
2.0

53.0
6.0
31.Ó
2.0
7.0
1.0

57.0
8.0
31.0
3.0
0.2
0.8

64.0
9.0
23.0
2.0
0.1
1.9

57.0
8.0
22.0
3.0
8.0
2.0

100.0

100.0

100.0

100.0

100.0

57.0
7.0
29.0
3.0
3.0
1.0
100.0

Livestock
Meat and offal
Eggs
Milk
Leather and skins
Wool
Other
TOTAL

—

Ecuador

Peru

Bolivia

SOURCE: FAO, Production Yearbook and Indicative World Plan, various editions.

Table 4 shows the area devoted to the different groups of crops and the volume produced in each country. It thus reflects the
magnitude of production and how it is divided
among the different countries, all this, of
course, in relation to existing resources—of
cultivable land, for instance—to the size of the
domestic market and to traditional exports.
Table 4 could also be taken to some extent
as an indicator of the need to formulate selective production programmes that do not aggravate diíEculties of competition, especially in
tropical countries.
The data in table 4 confirm the prominent
position of Chile in the production of wheat,
oats and sunflower seed; of Colombia in respect of maize, rice, cassava, sugar-cane, cotton, sesame, coffee, tobacco, beef, milk and
eggs; of Ecuador in the production of bananas, cocoa and castor seed; and of Peru in
respect of potatoes, sweet potatoes, cotton and
tea.
2. Traditional agricultural policies
In the five countries, the means of production have traditionally been concentrated in
94

private hands. For this reason, agricultural
policies have been established and applied as
Government instruments to guide production
in the right direction and towards suitable
levels. Moreover, some groups of producers
have induced the State to establish special
policies to protect and encourage specific lines
of agricultural production. Hence, frequent
reference is made to coffee, banana, wheat,
livestock policy, etc. In this way, the trend
towards the establishment of policies in respect of individual products or groups of products in some countries has become widespread.
Policies in respect of products cover both
the technical aspects—agronomical or zootechnical—in general, and, in particular, economic aspects relating to the product, especially
as regards prices, taxation, credit, supply of
inputs, exchange policy, etc.
The application of these traditional agricultural policies has favoured the emergence of
a dual structure of production. On the one
hand, a modern, highly prosperous commercial
sector has been formed and developed, based
on the production of one or more articles for
which markets exist with relatively stable
prices. This sector handles nearly all agricul-

Table

18

ANDEAN GROUP: SHARE OF EACH COUNTRY IN THE TOTAL VOLUME
OF PRODUCTION IN THE SUBREGION, AVERAGE 1967-1969
(Percentages)
Peru

Subregion

Colombia

Ecuador

6.1

4.9
9.8
14.8
17.0
0.4

9.7
27.0
23.7
32.2

100.0
100.0
100.0
100.0

1.0

100.0

19.6
48.4
45.8

8.9
15.5

40.2
27.5
48.0

100.0
100.0
100.0

18.8

15 7
25.8
38.7

100.0

12.5

32.8
25.1
47.0
31.9
23.7

51.6

22.2

22.7

100.0

8.9
20.1

24.5
25.7

30.1
27.7

100.0

18.7

69.6

10.5

100.0

55.4

2.9

41.7

100.0

25.0

83.6
80.4
21.1

75.0
16.4
9.5
75.5

14.6

72.4

3.3

100.0
7.9

6.1
7.7
15.3

22.2
19.8
41.6

55.9
39.7
4.1

5.5
11.7
7.0

21.1

4.1
3.2
8.0

17.5
23.9
54.3

51.8
50.7
2.2

13.2

13.4

Bolivia

Chile

3.2
10.8
4.9
10.8
8.0

76.1

CROPS

Cereals
Wheat
Maize
Rice
Barley
Oats

12.8

5.4

22.1

90.6

39.6
51.2
17.9

Starchy roots
Potatoes
Cassava
Sweet potatoes

15.2
8.6
3.6
0.5
1.3
14.3
—
—

Pulses
Beans
Peas
Broad beans
Chick-peas
Lentils

16.1

32.2
11.8

36.0

68.1

63.8

2.6

100.0
100.0
100.0
100.0

Sugar and sugar products
Sugar cane
Sugar beet

3.5
—

100.0

1.4
—

35.1
26.5

100.0

Vegetables
Onions
Tomatoes

100.0

Fruit
Bananas

1.2

Oilseeds
Cotton
Sunflower
Castor seed
Sesame seed
Coffee
Cocoa
Tea
Tobacco

—
—
—
—
1.0
1.2
—
1.8

100.0

9.1
2.2

100.0
100.0
100.0
100.0

100.0
100.0
100.0

LIVESTOCK

Meat
Beef and veal
Pork
Mutton and Iamb .. .
Other livestock
Eggs
Milk
Wool

10.3
32.0

100.0
100.0
100.0

products
12.2

3.4

10.0

32.1

100.0
100.0
100.0

95

V
O
o\

Table 4
A N D E A N GROUP: AREA A N D PRODUCTION OF MAIN AGRICULTURAL PRODUCTS, AVERAGE 1967-1969
(Thousands
Bolivia
Area

Chile

Production

Area

Crops
Wheat
Maize
Rice
Barley
Oats
Cereals

70.9
200.0
34.6
95.0
10.0
410.5

50.6
234.7
67.1
57.7
11.0

Potatoes
Cassava
Sweet potatoes
Starchy roots

109.6
10.7
2.1
122.4

643.3
156.3
11.3

1.5
1.0
10.0

1.0
1.0
7.4

.. .

Beans
Peas
Broad beans
Chick-peas

—

Sugar cane
Sugar beet
Sugar and
suear Droducts

29.7
—

.

29.7

Colombia

Production

Area

720.7
79.7
26.1
55.6
86.4
968.5

1,212.5
278.9
73.0
118.3
124.4

83.0
802.7
258.9
58.3

77.8

681.4

—

—

—

—

—

1,181.9
—

61.1
9.0

—

—

11.4
9.3
87.6
—

28.8
28.8

Ecuador

6.4
5.1
—

1,085.5

Total

Peru
Area

Production

Area

96.7
865.0
698.1
96.3

78.2
372.4
131.2
148.0
0.9
730.7

78.5
213.2
202.6
91.2
0.5

156.6
360.8
85.0
183.4
1.4
787.2

154.1
590.2
322.7
172.5
1.4

1,109.4
1,815.6
535.8
540.3
98.7
4,099.8

1,592.4
2,182.0
1,363.5
536.0
137.3

80.7
148.7
12.3
241.7

833.3
883.3
143.3

46.4
36.0
2.5
84.9

375.6
282.3
8.1

271.3
41.9
12.8
326.0

1,703.9
502.3
149.9

585.8
237.3
29.7
852.8

4,237.5
1,824.2
312.6

69.7
48.1

39.3
27.6

32.8
19.8
20.0
—

63.8
21.1
23.5
4.6
1.7
114.7

68.4
19.2
24.3
3.0
1.9

259.6
113.3
67.7
16.0
14.1
470.7

208.7
76.6
51.7
9.4
8.0

51.0

7,700.0

531.5
28.8

33,896.0
1,085.5

—

54.8
12.1

tons)

Production

1,202.9

77.8

12.5

Pulses

of hectares and thousands of

—

69.8
31.0
34.2

—

—

—

—

—

117.8
342.8
—

342.8

17,500.0
—

Production

3.1
138.1

1.0

108.0

7,514.1

—

108.8

—

—

51.0

Production

—

Area

560.3

1.4

Onions
Tomatoes
Vegetables

L4

Bananas
fruit

4.0
4.0

5.9

Cotton (seed)
Sunflower
Castor seed
Sesame
Oilseeds
Coffee
Cocoa
Tobacco
Cotton fibre
Tea

5.0
4.1
9.1

_

50.0
50.0

58.7
58.7

—

195.3

—

—

24.7

34.8

—

—

—

—

—

—

—

—

—

—

24.7

16.7
212.0

,

813.5

6.2
1.1
1.1

n.o
0.8
—

Livestock
Beef and veal
Pork
Mutton and lamb .
Meat

—

! ' 1
46.0
15.7
15.0
76.7

593.3

—
—

—

2.6
—

23.4

8.7
—

1 1 i 1 !
166.5
40.1
40.7
247.3

5.9
133.2

Eggs
Milk
Livestock products
Over-all total

3.3
3.0
6.3

145.0
62.0

25.6
1,012.7
1,199.1

3,019.1

SOURCE: FAO, information contained in charts sent from Rome.

•J

36.7
47.1

6.7
1.9
8.6

101.1
60.1

7.6
5.8
13.4

124.4
64.9

24.0
14.8
38.8

413.1
234.1

768.0
768.0

187.7
187.7

2,852.0
2,852.0

32.9
32.9

430.0
430.0

283.3
283.3

4,100.0
4,100.0

10.7

161.9

151.8

380.4
24.7
25.5
20.0
450.6

363.9
34.8
28.0
14.0

1,119.5

593.2
88.7
59.7
214.6
1.4

201.4
—
—

11.7
477.0
18.7
43.2
117.2

23.2
—

—

21.6
3.3
48.1

21.0
2.3

193.0

56.0
67.0
2.0
5.9

2.0

—

3.9

419.7
80.3
4.0
504.0

7.0

—

165.8
101.0
4.6
2.5

—

•III 1 1 ' I
il!
li

—

54.0
1.9
4.7
91.5
1.4

33.4
2.5

'

1,501.1

77.7
42.7
31.3
151.7

750.8
202.5
97.9
1,051.2

19.3
516.2

75.7
1143.0

40.9
23.7
6.0
71.5

19.6
423.3

146.1
4,228.4

1,599.1

7,911.7

tural production for export and is chiefly responsible for the increase in domestic demand.
On the other hand, there is the sector comprising a multitude of small holders who produce
for the domestic market, and only in exceptional cases, for export, as they consume most
of what they produce and what they sell is
not of high quality.
Most of the commercial enterprises occupy
highly productive agricultural land; on the
other hand, the small farms (especially subfamily units) are naturally low productivity
on account of the nature of their soil, uneven
landscape, unfavourable climate, etc. There is
an obvious contrast between the two types of
agriculture and the two types of farmer. The
owner of a modern farm enjoys the benefits
and facilities offered by agricultural policies,
whether of a general or specific nature, while
the smallholder is confined to the traditional
pattern of subsistence farming, and practically
never, or only very occasionally, receives assistance from the State or other government
agencies concerned with agricultural development. As a result of the proliferation of agricultural policies on products, a wide variety of
organizations have been set up to implement
them. These organizations depend on the central Government and are linked to it through
a number of ministries; this has led to the
creation of centralized and decentralized services, autonomous corporations. State enterprises, limited companies and private institutions that operate with State financing. These
institutions not only have varying degrees of
autonomy, but frequently maintain fundamental differences of policy, overlap geographically, perform the same tasks and are rarely
complementary.
In the circumstances, co-ordination and imity
in State management of production are difficult to achieve. Each organization tries to
achieve its own objectives and to that end applies its own institutional policy, and makes
no attempt to adapt itself to an harmonious
national plan. Traditionally, the ministries of
agriculture have been the authority responsible
in theory for agricultural development, but
their influence has been scanty, except as
regards the regulation and application of
administrative restrictions.
In recent years, national agricultural development plans have emphasized the importance of structural and administrative reforms
to permit the establishment of a system of sectoral planning capable of guiding the private
sector in the fulfilment of the productive pro98

cess and of channelling the activities of the different public and semi-public organizations
towards common objectives.
An immediate effect of agricultural planning
in the countries of the subregion has been the
restructuring of the ministries of agriculture:
to facilitate their task of efficient implementation of national agricultural policy. Thus, Colombia restructured its agricultural sector in
1968 and the Ministry of Agriculture was
made responsible for formulating and coordinating national agricultural policy, in
accordance with national development programmes and through credit, marketing, technical assistance, research, protection of natural
resources and reform of the land tenure
system. To meet these different needs, the
Ministry has attached to it the following specialized organizations; Instituto Columbiano Agropecuario; Instituto Colombiano de Reforma
Agraria; Instituto de Desarrollo de Recursos
Naturales Renovables; Instituto de Mercado
Agropecuario; Servicio Colombiano de Meteorología e Hidrología; Fondo de Desarrollo y
Diversificación de Zonas Cafeteras and autonomous regional corporations. Also attached to
the Ministry are the Banco Cafetero and the
Banco Ganadero, the Corporación Financiera
de Fomento Agropecuario y de Exportaciones,
etc.
In addition to the above-mentioned public
and semi-public institutions, a number of
private organizations concerned with agricultural development are also connected with the
Ministry, such as the national federations of
cotton planters, rice planters, cocoa and coffee
growers, cattle breeders, African palm growers,
banana growers, cultivators of cereals and
poultry farmers; national associations of cane
planters, barley growers, sheep farmers, potato
growers, rice millers, manufacturers of concentrated animal feeds, producers of pesticides,
etc.
The group of public and private sector
organizations in Colombia are bound, on a
co-ordinated and inter-related basis, to apply
policies in respect of prices, marketing, foreign
trade, agricultural taxation, irrigation, sectoral
infrastructure and physical inputs.
Agricultural reform in Colombia has been
mentioned by way of illustration. Similar administrative reforms have been carried out in
Chile, Peru, Ecuador and Bolivia, and in each
of those countries such reforms have served
to regulate and simplify the implementation
of agricultural development policies.

The variety of crop and livestock production
in the five countries of the subregion explains
the different priorities assigned by each of
them to the same product or group of products.
In Colombia, coffee policy is traditionally
assigned maximum priority, and representatives
of nearly all the economic sectors of the
country have a hand in the annual adjustments
of that policy, in view of the overriding importance of such changes. Though not of such
great significance as coffee policy, sugar, cotton and livestock policy are sdso very important, as these crops constitute the basis of
the economic and social life of large areas
of the country, such as the Cauca valley and
surrounding areas for sugar, the hot, humid
valleys and Caribbean area for livestock and
cotton.
In Ecuador, a similar significance attaches
to banana-growing policy, which is practically
the keystone of the economy, particularly as
regards the trade balance and the exchange
situation, apart, from its implications for thousands of largely small- and medium-scale producers, who are scattered all along the country's coastal belt. Great importance is also
attached to policy on coffee, cocoa, sugar and
livestock, etc.
Cotton, sugar and livestock policy have the
greatest influence in the economy of Peru.
In Chile, a country which imports a large
part of its food consumption needs, especially
meat and tropical foods, import policy has important repercussions on production; the country's sugar policy has a far-reaching social and
economic impact on areas producing sugar
beet; plans to replace consumption of beef
with pork, mutton and poultry affect Chilean
production of maize and imports of that cereal
to make up for the growing deficit provoked
by its use as a livestock feed.
In Bolivia, high priority is assigned to
livestock policy in agriculture, with a view to
achieving the aim of increasing Bolivian exports
of meat to the subregion. The rice programme
has been successful, but stocks have accumulated because of high production costs
which prevent prices from being competitive
on the international market.
These examples of country trends serve to
illustrate the complexity and importance of
policies aimed at developing and regulating
production of specific crops.
3. Recent trends
In the last five years, positive advances have
beca achieved in the agrarian policy of some

of the countries of the Andean Group. In this
connexion, the changes that are being devised
or developed in agrarian reform are worthy
of special mention.
The conviction is growing daily in official
circles and among the public of the subregion
that a reasonable economic and social growth
target cannot be achieved imless sweeping
changes are made in the feudal structures
that still prevail in different areas of agriculture.
For this reason, agrarian reform policies, as
instruments of change and development, should
be aimed not only at providing an equitable
and well-ordered distribution of agricultural
land and income, but also at achieving improved productivity, increased production, expanded markets and, of fundamental importance, the establishment of social justice among
the rural population.
Each of the five countries of the Andean
subregional market has established laws and
regulations to govern agrarian reform, some
in relatively recent times. The scale and characteristics of those reforms, and the extent to
which they are applied, vary from country to
country. Because of their deep significance and
scope, particular mention should be made of
some of the main aspects of agrarian reform
in Chile and Peru.
There was a significant swing in C M e a ^
agricultural policy in the second half o i l l i e
1960s, as recognition was given to the importance of agricultural development planning, and
unprecedented progress was made in agricultural price, credit and marketmg policy, in
lowering the prices of inputs and in their
distribution.
The outstanding feature of recent agrarian
policy is the radical restructuring of the sector.
A process of rapid agrarian reform is under
way, affecting 1,500 agricultural holdings, with
a total area of around 3.5 million hectares,
which contain about one-quarter of the irrigated
land and one-quarter of the cultivable land
of the country. About 20,000 families used
to live in this area; this figure is being raised
to 31,000, and there has been a significant
increase in production and income levels compared with the situation before these farms
were expropriated. The present Government
plans to carry out more radical, far-reaching
and rapid reforms, with particular emphasis
on the equitable distribution of land and redistribution of income. Moreover, much work
has been done in the sphere of dissemination
of culture, creation of social awareness and
training, which is transforming the marginal
99

broad masses of the population into an influential and pugnacious class. Rural workers'
organizations are being energetically promoted,
to equip them as instruments of economic and
social power, and at the same time, a vigorous
trade union movement has sprung up, covering
more than 130,000 rural workers. Co-operatives
are accoimting for an increasingly large share
of the supply of agricultural products, and
a decisive share in the case of some products,
such as poultry, meat and pork.
Apart from these important changes in the
sphere of agrarian reform and agricultural
trade unionism, the real value of agricultural
wages has gone up substantially in recent
years, and there has been an increase in the
quantity and value of social security contributions; all this has led to the improvement,
to a large extent, of the economic and social
situation of the rural population. Moreover,
there has been an increase in infrastructural
works designed to improve marketing services,
speed up the development of technology and
extend irrigation works.
These recent structural and social reforms
in agriculture have caused the growth rate of
production to rise much more rapidly than
heretofore, despite the severe drought that
affected the country between 1967 and 1969,
and have led to a considerable increase in
levels of agricultural employment and income.
The employment problem, however, has not
been solved. Although the renewed activity of
the sector, agrarian reform and reafforestation
have created more jobs, insufficient attention
has been devoted to this aspect in policy on
technology, inputs and mechanization. The
owners of many large and medium-sized farms,
out of fear of the effects of agrarian reform
or because of labour conflicts, lay off workers,
avoid labour-intensive areas of production, and
piechanize production beyond economically
justifiable limits.
No solution has yet been found to the problem of the holders of minifundia, either.
With their low income levels, they continue
to be the most backward class in rural Chilean
society, despite the expansion of technical
assistance and credit facilities and of efforts
to organize such assistance, with a view to
improving gradually the economic and cultural
life of the country. These measures will ensure
that, in future, the benefits ot agrarian reform
will reach them, too. However, the limited
availability of agricultural land will prevent
a solution from being found on an exclusively
agricultural basis.
ICQ

In the case of t P e ^ , legislative decree
17716, promulgated o y ^ e Government at the
beginning of 1969, constitutes a profound
reorientation of policy. Previous policy could
be described as one of agricultural modernization, with some very basic reforms in respect
of land tenure and other facets of the structure
of agriculture. The new poUcy outlined in the
above-mentioned legislative decree gives priority
to a reform of the agrarian structure based
on the elimination of latifundia and the redistribution of land among rural workers.
The agricultural plan for 1971-1975 summarizes this pohcy in the following terms:
"In view of the national objective of
transforming the current pattern of development, the main role of the agricultural sector
shall be to incorporate the rural sector into
the mainstream of economic activity, in such
a way as to permit the gradual incorporation
of those sectors excluded from production and
those that today form the periphery of the
urban centres. At the same time, rural workers
shall be encouraged to take an active part
in decision-making at the national level, with
a view to achieving a new economic and social
order.
"These two central objectives shall be related
in the medium term to the aim of achieving
a substantial rise in the level of rural income
and intensive mobilization of labour in the
rural sector. To that end, measures should be
carried through designed to:
"Complete the process of agrarian reform with
a view to achieving a better distribution of
ownership and rural income, and the transfer
of political power from the groups of landowners to the peasants. In addition, this
process would permit the removal of obstacles to the assimilation of new techniques in
the countryside and would facilitate better
use being made of the production resources
available to the sector;
"Increase production considerably by raising
the level of technology and making greater
and more rational use of the water resources
of cultivated land, in order to ensure the
supply of agricultural foodstuffs and raw
materials, substitution in respect of most
current imports of agricultural goods and
increased exports;
"Create a stable market guaranteeing adequate
price levels for products and to eliminate
faults and defects in the system of marketing;

"Reduce rural under-employment by making
better and more intensive use of the country's
land and water resources;
"Promote the mobilization of rural labour so
• as to achieve a shift in the balance of
political power and thereby to enable the
rural worker to emerge as a new man in
society;
"Consolidate the reform of public administration in the sector so that it may serve to
promote the planned development of agriculture.
"Over the long term, the national strategy
calls for the transformation of the current
pattern of growth, and places emphasis on
exploiting as quickly as possible the potential
market represented by that part of the population currently excluded from the system. The
agricultural sector shall embark upon a process
of dynamic growth with a view to generating
the income needed to enable the marginal
rural population to be assimilated into the
national economy".^
The number of expropriations carried out
during the last two years are evidence of the
seriousness of the Peruvian Government's
efforts to achieve agrarian reform. At the end
of December 1970, the Government had started
expropriating more than 2.5 million hectares
capable of accommodating more than 100,000
beneficiaries. Of this total, more than 900,000
hectares had been allocated to some 50,000
beneficiaries. These lands included the sugar
plantations on the coast, which were previously
the richest agricultural holdings in the country.
The aim is to allot more or less 11.5 million
hectares to at least 300,000 families between
1971 and 1975. Less than 1 million hectares
were expropriated between 1964 and 1968,
of which only 353,000 hectares were allocated
for the benefit of around 11,000 families.
The biggest difficulty facing the new Government is the magnitude of the problem of rural
unemployment. Even if its objectives for the
reallocation of land are fully realized, mote
than 500,000 poor rural famihes will still not
have been benefited directly by agrarian reform. To meet this problem, some zonal agrarian reform projects are being prepared with
the technical assistance of an FAO mission and
the Inter-American Development Bank, with
a view to providing employment for all the
rural workers m each area. However, these are
2 Resumen del Plan Agropecuario a Mediano
Plazo 1971-1975 (Ministry of Agriculture, Lima,
August 1970). (Unofficial translation.)

basically experimental projects and, in order
to combat the problem of under-employment,
further study of agrarian reform plans as a
whole win be required.
Another problem claiming the Government's
attention concerns the active participation of
rural workers in the new system. Unless the
number of beneficiaries is increased to include
nearly all holders of minifundia, workers on
co-operatives and landless labourers, those not
favoured by the scheme will obviously be excluded from any kind of effective participation
in it. Moreover, it would be necessary to
obtain the full participation of all members of
agricultural co-operatives and this would call
for large-scale mobilization and training.
4. Demand for agricultural products: trends
and prospects
In several studies carried out by the Joint
ECLA/FAO Agricultural Division, it has been
claimed that, as long as the levels of effective
demand for agricultural products do not rise,
at least among the lower-income strata of the
population, the agricultural product will continue to grow very slowly in the region and
per capita consumption will decline. In other
words, only a significant increase in the purchasing power of the lower-income strata,
through an equitable redistribution of personal
income, will enable more rational use to be
made of the factors of production in agriculture
and will permit an improvement in the deplorable nutritional conditions that prevail in
those strata.
Although the aim of the present section is
to present projections of future demand for
agricultural products in the countries of the
Andean Group, a brief, qualitative analysis
wiU first be made of some research results
obtained by FAO in this field.
As part of the provisional regional study
for South America and within the framework
of the International Development Strategy,
FAO made two projections of the demand
for foodstuffs in 1980; one is a projection of
the conventional type based on the average
level of per capita consumption and on the
probable growth rate of the population. In the
second projection, an analysis is made of the
invigorating effect of the redistribution of income on levels of consumption.
A population growth rate of 3 per cent
a year is forecast for the five countries of
the subregion as a whole in the period 19701980. The estimates are higher than 3 per cent
for Colombia, Ecuador and Peru, 2.5 per cent
101

for Bolivia and 2.2 per cent for Chile, virtually
the same as in past trends, although a slight
drop in the growth rate may be expected
between 1975 and 1980.
According to the first projection, the consumption of foodstuffs in the subregion as a
whole would increase only slightly. Obviously,
there are variations from country to country.
In Bolivia, taking account of the high growth
rate of consumption in the basic reference
period (1965-1970), the most that can be
hoped for is a continuation of that trend.
The prospects for Chile would be somewhat
similar, with a slightly lower annual growth
rate. A slight decline is forecast for Colombia
and Ecuador. A considerable increase in consumption is projected for Peru, which naturally
pushes up the average rate for the subregion.
The projection of consumption based on
the assumption of a redistribution of income is
being revised, and for the time being only
some preliminary findings are available in
respect of fourteen products, demand for which
is greatly influenced by income levels. According to this projection, the annual growth rate
of consumption in the subregion of the fourteen
products considered would be 5.5 per cent
during the period 1970-1980, compared with
an estimated 4.5 per cent in the projection
based exclusively on population growth. In
relation to the value of consumption of those
fourteen products (at 1965 prices), this would
represent an over-all increase of 72 per cent
in the case of a redistribution of income, and
of 55 per cent if there is no change in the
income variable.
Logically, the redistribution of income at
the national level implies its redistribution
within each sector of the economy. In the
agricultural sector, income levels are closely
bound up with land ownership; therefore, such
redistribution should be taken to mean the
restructuring of the traditional system of land
tenure. In other words, the minifundia and
latifundia cannot continue to exist side by
side, and the restrictions affecting the access
to the land of vast numbers of rural workers
must be abolished.
The redistribution of agricultural income
would affect the rural population in different
ways. The improvement of the income levels
of those workers who continue as wage- and
salary-earners would be achieved by increasing
the real value of wages and social security
contributions, the latter being taken to include
such services as education, medical care, etc.
102

An essential condition for such an increase
m real wages to be effective would be a drastic
cut in the surplus unemployed agricultural
population. Even if laws are introduced to
protect a minimum rural wage, they will not
be respected in practice so long as there is
an almost unlimited supply of unskilled labour,
as has been the case in many countries. Since
the agricultural population will continue to
grow in absolute terms, the surplus population
can only be absorbed into the sector as independent operators. To that end, it is essential
to provide them with land, technical and
financial assistance and, of course, the possibility of marketing their products.
It is estimated that about one-half of the
actively employed rural population in the subregion comprises landless wage-earners, most
of them unskilled labourers; the remainder is
made up of minifundia holders, medium- and
large-scale farmers. It is also estimated that
at least one-third of the agricultural labour
force in the subregion is virtually unemployed.
Much of the unemployment (both permanent
and temporary) is accounted for by the holders
of minifundia who cannot employ the whole
of their available labour force in the operation
of their diminutive holdings. The rest of the
unemployed are landless labourers, many of
whom move about in search of temporary
work.
The implications of the traditional agrarian
structure for employment, income and sectoral
production are fairly well known in the five
countries; for this reason, h i ^ priority is
assigned to agrarian reform policy within the
framework of agricultural planning. The countries are conscious of the fact that the scanty
development of the sector in the past cannot
be attributed to a lack of productive resources,
particularly land and labour, but rather to the
ineffective use made of them.
Restricted access to land is a more or less
marked feature in all the countries, varying in
intensity according to geographical areas. There
are few remaining uncultivated areas capable
of sustaining migratory settlements to relieve
the pressure on land, and physical and social
infrastructure works have in many cases been
carried out on the best land, which is already
occupied. The prospects and demands of migratory workers are changing; although
thousands still continue in the role of hapless,
disorganized peasants, they are nowadays the
exception rather than the rule, and their way
of life does not reflect the aims of most rural

workers who aspire to join some kind of well
constituted settlement.
The process of agrarian reform, particularly
if it is far-reaching, goes beyond the bounds
of the agricultural sector and calls for decisions
and action on a complementary basis, in view
of the marked intersectoral relationships that
characterize the economic system as a whole.
The technical, financial, human and legal
resources required in a process of agrarian
reform are numerous and the time-limits and
terms and conditions of implementation are
manifold and are subject to pohtical decisions.
Only then will it be possible to obtain the
desired results through direct and indirect
measures parallel and supplementary to a
process of agrarian reform.

The geographical area of the five countries
of the subregion is 450 milUon hectares, or
4.5 million square kilometres. As regards individual countries, Peru is the largest in area,
followed by Colombia, Bolivia, Chile and
Ecuador.
It is worthwhile to distinguish between agricultural land and non-agricultural land, the
former being taken in the broadest sense of
the term to include arable land, land supporting perennial crops, natural grasslands and
forested areas. Non-agricultural land predominates in Chile, while the situation is reversed
in Bolivia, although non-agricultural land accoimts for nearly one-half of the total area of
that country. This ratio is lower in Colombia
and Peru (one-fifth) and in Ecuador (onesixth). In absolute terms, Peru has the largest
area of agricultural land, followed by Colombia, Bolivia, Chile and Ecuador, thus conserving the order of geographical size. The
subregion as a whole has about 300 million
hectares of agricultural land, exploited by an
estimated 55 million inhabitants in 1970.
An examination of the current use of potential agricultural land in the subregion shows
that forests cover 79 per cent of the potential
agricultural area; natural grasslands 15 per
cent; and perennial crops and arable land
only 6 per cent.

5. Need to increase agricultural production
It has been observed, particularly with reference to the countries of the Andean Group,
that one of the main obstacles to the growth
of the agricultural product is the sluggishness
and limited scope of domestic demand and,
consequently, of domestic markets. However,
the supply of agricultural products is determined, in addition, by the characteristics of
the physical environment; the type, quality
and availabiUty of natural resources, the prevailing levels of technology and employment,
etc., all factors that contribute to restricting
The above figures show the predominance
demand. Foreign trade, through agricultural
imports from the subregion, partly makes up of natural forests, which cover much of the
for the lack of foodstuffs and certain raw tropical humid land in Bolivia, Colombia, Ecuamaterials on the domestic market, in so far as dor and Peru. These forests may be exploited
foreign exchange assets and programmes of without detriment to their function of supplying
self-supply allow. Exports, also within certain forest products, or they may be replaced by
limits, encourage the production of articles for crops or livestock breeding, as long as due
regard is given to their function of protecting
the external market.
the soil and plant life. Land settlement, in
In the pages that follow, a brief analysis accordance with the different patterns of enwill be made of the prospects for the five largement of the farming area that are characcountries under consideration to increase their teristic of it, has led to the incorporation into
domestic supply of and foreign trade in agri- the productive process of fairly large areas of
cultural products.
land that were originally covered by natural
Agricultural production may be increased forests, and there is no doubt that this practice
by enlarging the farming area, as new land will continue in the future. Moreover, irrigais incorporated into the productive process, tion and drainage have enabled natural grassmaking production more intensive, that is, lands in arid or flooded zones to be brought
basing it on a substantial rise in unit yields, under cultivation. Mechanization, the use of
new, hardier varieties of seeds, and the improveor by a combination of these two methods.
ment of the level of agricultural technology
Table 5 shows the land resources available in general have enabled many areas of natural
to all the countries in the subregion.®
grassland to be converted into crop or pasture
land. In the agricultural development plans
3 It has not been possible to bring the figures up
to date, but the author is convinced that they con- of the countries, mention is made of the need
tinue to reflect the current situation, which has not to push forward the agricultural frontier, and
been altered significantly by changes in the last few these aims are translated into projects.
years.

103

Table 5

Subregion

Peru

Ecuador

Colombia
MilHons
of ha

Total geographical area
(land and inland waterways)
Area of non-agricultural land
Area of agricultural land:
Total
Forests
Natural grasslands

Millions
of ha

Percentage

Millions
of ha

Percentage

Millions
of ha

Perceniage

109.9
48.5

100
44

74.2
38.9

100
52

113.8
24.7

100
22

27.8
4.5

100
16

128.5
30.1

100
23

454.2
146.7

100
33

61.4
47.0
11.3

56
43
10

35.3
20.7
10.1

48
28
14

89.1
69.4
14.6

78
61
13

23.3
18.2
2.2
2.2

84
66
8

98.4
87.0
8.8

77
68
7

307.5
242.3
47.0

67
53
10

3
—
3

4.5
1.3
3.2

6
2
4

5.1
0.3
4.8

4

2.9
0.2
2.7

10
10

2.6
2.6

—

2
1
1

18.2
18.2

—

1
—
1

2.2
1.3
0.9

3
2
1

3.5
0.3
3.2

1.4
0.1
1.3

1

—

—

9.7
2.4
7.3

'
Arable land and perennial i 1
crop land:
Total
3.1
—
Irrigated
—
Not irrigated
3.1
Cultivated area»:
Total
Irrigated
Not irrigated

Percentage

0.8
—
0.8

—

SOURCE: FAO, Indicative World Plan and Regional Study for South America.
a Includes irrigated pasture land.

4
3
3

10
5
5

0.9
1.7
1.8
1.8
0.7
1.1
1.1

—

1

2.7
15.5

4
0.6
3.4
2.1
2.1

0.5
1.6

In national terms, Peru has the largest area
of forests, covering 88 per cent of the potential
agricultural area; forests cover around 78 per
cent of that area in Ecuador, Bolivia and
Colombia, and only 58 per cent in Chile.
The situation is different as regards the ratio
of natural pasture land to potential agricultiual
land: in Chile it is 29 per cent, in Bolivia
18 per cent, in Colombia 17 per cent, in Ecuador 10 per cent and in Peru 9 per cent.
In absolute terms, the order of size of
forest cover in the five countries is the same
as the order of geographical size, namely,
Peru, Colombia, Bolivia, Chile and Ecuador.
The order changes in respect of the area
covered by natural pasture land: Colombia
occupies first place, with around 15 milHon
hectares, followed by Bolivia, Chile, Peru and
Ecuador. The order again changes with regard
to the number of cattle per hectare of natural
pasture, as the following figures show:
Natural
grasslands
( millions
of ha)

Bolivia
Chile
Colombia
Ecuador
Peru
Subregion

CaHle
inventory
(millions
of head)

Head of
cattle
per
100 ha

11.3
10.1
14.6
2,2
8.8
47.0

2.8
2.9
16.2
1.9
2.8
27.6

25
28
111
83
43

59

Implicit in the figures is the proportion of
cultivated or artificial grasslands to the total
area of grasslands; thus, Colombia and Ecuador have the highest cattle density, as they
also have a higher proportion of cuhivated
grasslands.
The subregion has less than 20 million hectares of arable land and land used for perennial crops, out of a total geographical area
of 454 miUion hectares; Colombia has 5.1
million, Chile 4.5 million, Bolivia 3.1 million,
Ecuador 2.9 million and Peru, the largest
country of all, only 2.6 million. If a distinction
is made between irrigated land and land that
is not irrigated, it is observed that there are
less than 3 million hectares of krigated land
in the subregion, and only two coimtries, Chile
and Peru, have close to 1 million hectares of
irrigated land.
Irrigation is one of the most important
factors of production in areas where there is
insufficient rainfall, or rainfall is unevenly
distributed throughout the crop year. Nevertheless, only 0.6 per cent of the geographical
area of the subregion is irrigated, that is, less

than 1 per cent of the potential agricultural
land and barely 15 per cent of the arable land
and land supporting perennial crops. The enlargement of the area imder irrigation is another
feasible means of enlarging the farming area
in the countries of the Andean Group.
Lastly, the area under cultivation, which
obviously does not include pasture land, constitutes only 2 per cent of the geo^aphical area,
3 per cent of the potential agricultural land,
and 53 per cent of arable land and land supporting perennial crops. This is because of
the existence of large areas of fallow land and
land used extensively for seasonal crops, the
limitations inherent in the micro-topography
and unfavourable micro-climates. Apart from
these obstacles in the physical environment,
the failure to use arable land intensively is
largely due to the inadequate structure of
agrarian ownership. Barely 13 per cent of
the area of arable land under cultivation is
irrigated, and this low fi^re shows that the
expansion and more intensive use of such land
is feasible as irrigation prospects increase.
The remarks made in connexion with table
5, together with a more or less detailed knowledge of the availability of natural resources
and the productive characteristics of the soil
in each country, lead to the conclusion that
it is easy to increase agricultural production
to satisfy increasing demand, since there is
sufficient margin for the enlargement of the
farming area. However, other obstacles present
themselves, such as the cost of absorbing new
areas of production, the need to create luban/
rural development poles in them, infrastructural
requirements, time-tables for execution of
projects, etc. Thus, in the early stages at least,
it is to be expected that much of the increase
wiÜ stem from stepping up production or from
technological progress, from the better utilization of resources and from an increase in imit
yields.
In order to achieve an increase in agricultural productivity, together with a rise m the
level of living of a large number of rural
workers, in addition to the objectives that the
sector is expected to fulfill within the economic
system as a whole, it would be necessary to
define an action strategy concerned chiefly
with products and markets, with the use of
resources, with the zonal distribution of production and with the manner of participation
of the public and private sectors.
The countries of the subregion have agricultural development plans at varying stages
of completion, and in some of them existing
105

plans are being revised. This means that the
analyses carried put by the national agricultural
plannmg departments have made it possible to
identify the agricultural poHcy measures needed
to change the behaviour pattern of the most
important variables that determine demand
and supply in agricultural and forest products.
In other words, the countries have a frame
of reference for long-range activities in respect
Of the over-aU orientation to be given to
transformations in the agricultural sector, and
short-term measures must be made consistent
with those activities.
The importance of the instruments needed
to achieve the objectives of national agricultural
development plans varies with time, in accordance with various factors and circumstances.
The basic objectives may be summarized as
the transformation of traditional agrarian
structures, the modernization of the economic
and social facets of the rural environment,
import substitution and the expansion and
diversification of exports.
With the initiation of a process of agrarian
reform, it is hoped to release more idle
capacity for production and to make it more
flexible, especially land, labour and irrigation
water, which could be better utilized and
subjected to technological improvements to
ensure greater productivity. Agrarian reform
win requh:e fresh investments which will be
slow to bring in returns and which should
therefore be initiated in the early stages of
the implementation of sectoral development
plans. In other words, they should be carried
out with due consideration for the volume,
composition and destination of production over
a number of years.
Short- and medium-term measures that affect
the structure of production are constantly
being adopted in agricultural policy; they relate
to the manipulation of agricultural prices,
marketing and product control, foreign trade
in agricultural products, availability and supply
of physical inputs, especially agrochemical products, etc. In brief, these measures tend to
improve the organization of the pubhc and
private institutions responsible for agricultural
development, while at the same time expanding
and strengthening economic incentives to producers and encouraging their formation into
co-operatives, associations, trade unions, etc.
As the different systems are transformed,
increasing emphasis is placed by governments
on the economic incentives that most benefit
or affect producers, such as credit, prices and
taxation.

lOfi

Although agricultural policy measures favour
the production process in general, several
measures are applied in different ways, according to the extent to which it is desired to
promote a specific product.
In the case of crops, yields are normally
increased by improved use of the soil. The
expansion of production may be accelerated
with rapid-return crops, on account of the
growth and elasticity of internal and external
demand, and the possibility of increasing productivity as improved cultivation techniques
and better genetic material are introduced, etc.
The short cycle of production of annual
crops may increase their productivity over the
short term, particularly if suitable use is made
of research findings within the country or in
other countries with similar ecological conditions.
In the case of perennial or tree crops,
improved cultivation techniques lead to a small
increase in yields: the characteristics of each
plant or tree cannot be changed quickly owing
to the longer duration of the productive cycle,
and the change-over to improve varieties is
a medium- to long-term process.
In the livestock sector, a rapid increase may
be achieved by actively promoting the production of pork, mutton and poultry, and of
eggs. These species respond rapidly to measures to encourage their development. An
increase in the production of beef and milk
calls for basic improvements in operating
conditions, in the first place, through timely
investment in the creation of artificial pastures,
or at least in improved pastures, installations,
equipment and materials to permit improvements in the handling, feeding and sanitary
conditions of cattle.
With regard to the most desirable levels of
productivity increases, the countries of the
subregion devote special attention in their
national agricultural development plans to unit
yields, and projections of agricultural supply
often demonstrate a certain amount of optimism
as regards possible future levels.
There is no doubt that the developed countries have made considerable progress in the
fields of science and technology over the last
twenty or thirty years. New crop, livestock
and forestry techniques are allowing sometimes
spectacular increases to be made in unit yields
and, hence, in the gross value of over-all
agricultural production. Especially important
advances have been made in the use of fertilizers, pesticides, improved seeds, machinery,
improvements in crop types and animal species,

migation, etc. The onset of this "green revolution" has even been considered by some as
the solution to the threat of famine posed by
the population explosion in many regions of
the vs'orld.
In the developing countries, technoloj^cal
innovations in agriculture evoke a wide variety
of comments and controversies. In the case of
the countries of the Andean Group, the idea
is slowly taking root that the advantages or
drawbacks of new technologies should be considered not only from the point of view of
production, but also, and especially, from the
angle of their economic and social implications for the rural population.
In this connexion, it should be recalled that
not all agricultural producers and rural workers
benefit equally from the transfer or application
of technical innovations. Although they have
yielded significant advantages to a handful of
producers in respect of a few products in
Latin America, it is also clear that the indiscriminate appUcation of advanced technology
has served to accentuate the problems of rural
unemployment and concentration of income.
As has been pointed out recently,^ the brief
experience of the "green revolution" in some
countries shows that it is the large-scale farmers—who possess more land and financial
resources and have easier access to credit and
technical assistance—who are the main beneficiaries of the new technology, while smallscale producers and landless workers see a daily
reduction in their opportunities of access to
markets and jobs, respectively.
Generally speaking, the new technology is
labour-saving, that is, it permits greater production with less labour. This is most obvious
in the field of farm mechanization: tractors,
seed sowers, combine harvesters, etc.; but also
—albeit indirectly—in the case of fertilizers
and new varieties of high-yield seeds, since
the great increase in productivity obtained by
their use results in a reduction in the amount
of labour employed per unit produced.
On the other hand, as the incidence of
wages in the cost of producing agricultural
goods with a high technological content tends
to be less, it might be expected that real
wages per worker would rise in the same proportion as increases in productivity. But this
is true only of a very small group of specialized workers who are indispensable for imple* Solon Barraclough and Jacobo Schatan, "Polítíca
tecnológica y desarrollo agrícola", Cuadernos de la
Realidad Nacional, No. 5, CEREN, Catholic University of Chile (Santiago, September 1970).

mentmg new techniques. In view of the high
rate of unemployment in the subregion, unskilled workers have to accept the prevailing
minimum wages because they have no other
work prospects. Thus, the new technology
inevitably leads to a rise in the average wages
of the modernized sector and to the stagnation
or decline of wages in the traditional agricultural sector. Th^e latter trend in the traditional sector is Ukely to be accompanied by
an increase in unemployment levels, which
further accentuates the problem, in view of the
fact that the rural population does not stand
stül, but tends to increase.
6. Subregioml trade: its limitations
and prospects
(a) Qualitative analysis of agricultural trade
in the subregion
Owing to the lack of data on recent trends,
it is not possible to estimate the current
volume of value of trade in agricultural products within the subregion. By looking at the
number of products traded, however, an idea
can be gained of the nature, structure and
coverage of intra-subregional trade.
The features that stand out in an examination of the qualitative structure of trade in
crop-farming, stock-farming, fisheries and forest
products among the Andean countries and with
third countries are that the number of products
is small; that more products are imported
from outside the subregion than from within
it; and that more products are exported to
third countries than to Andean countries. There
are, of course, marked differences between
countries, as can be seen from table 6. For
example, Chile, because of its special ecology
and geographical location, is more diversified
in its intra-subregional trade; it is the largest
importer of tropical-zone products and, naturally enough, the largest exporter of temperate-zone products. Peru, because of the
shortage of water in the coastal regions, is
the largest over-all importer and halfway up
the scale as an exporter, while Ecuador,
because of its geographical location, exports
a number of products to Chile and Peru.®
It is somewhat difficult to make an accurate
assessment of the volume of intra-subregional
trade in agricultural products, not only because
of the lack of statistical data, but also because
trade is usually discontinuous and seasonal
B See Informe sobre la situación y perspectivas del
comercio agrícola de los países andinos, report by
the FAO/ECLA mission to the Board of the
Cartagena Agreement, August 1970.

107

Table
ANDEAN

GROUP;

Country

18

STRUCTURE OF INTRA-SUBREGIONAL
AGRICULTURAL
PRODUCTS
Total
imports

Imports from the
subregion

Total
exports

Number of products or groups of

Bolivia
Colombia
Chile
Ecuador
Peru
Subregion

29
28
28
27
32
38

13
17
20
17
24
33

19
20
18
25
21

34

TRADE

IN

Exports to the
subregion
products

10
11
17
21
14
33

SOURCE: FAO/ECLA, Informe sobre la situación y perspectivas del comercio
agrícola de los países andinos, report to the Board of the Cartagena Agreement.

and because there is a large amount of border
trade, much of which is not officially recorded.
In order to provide a clearer picture of
the short-term prospects of intra-subregional
trade, products have been grouped into four
categories: (a) deficit products with little
prospects for subregional trade; (b) deficit
products with better prospects; (c) products
that do not form part of traditional trade flows;
and (d) products traded across borders.
Group (a) comprises, on the one hand, commodities not produced or produced in insufficient quantities in the subregion, either
because the immediate productive capacity is
lacking or because of limited natural resources,
such as wheat and wheat flour, some qualities
of long-fibres cotton, spices, cattle feed and
blond tobacco in the leaf; and on the other
those products which for reasons of quality,
price or trade agreements are imported from
outside the subregion, even though some
Andean countries may export them, for example, coffee beans, raw cocoa, walnuts and
almonds from Brazil; oilseeds, mostly from
the United States under Public Law 480; highquality bottled wines from Europe; some grades
of fine wool, essential oils and tea from Argentina; beef cattle on the hoof and carcass meat
(imported by Chile and Peru from Argentina).
The products in group (b) are generally
traded in relatively smaU volumes, although
they do form part of regular and traditional
trade flows between two or more of the countries of the subregion. They include brewer's
barley, fish oil, castor oil, copra, certain qualities of medium and long fibre cotton, greasy
wool and llama skins, temperate-zone fruit,
bananas, pineapples and other tropical fruit.
108

dried pulses, fresh vegetables, high-quality coffee, cocoa and tea, some types of black tobacco, wines, beef, hides, fish, shellfish, sawnwood and sawnwood products. It is expected
that trade in these products will expand, in
some cases as a result of increased trade with
third countries, and in others as a result of
a rise in intra-subregional demand. Without
restricting current trade flows with third countries, it is clear that an increase in the volume
of imports could be met out of subregional
supply, i.e., that the two trade flows can
coexist. There may also be a marked expansion
in intra-subregional trade as the quality of
products, marketing channels and transport
facilities are improved and production costs
fall.
The products in group (c), which are not
part of traditional trade flows, include maize,
rice, potatoes, oats, citrus fruit, some tropical
fruit (mangos, papayas, etc.), ground-nuts,
sesame seed, hard fibres, tomatoes and other
fresh vegetables, table grapes, pyrethrum and
protein concentrates for animal feed. Most of
the Andean countries are self-sufficient in
these products, although occasionally they have
temporary shortages or surpluses. Over the
short term, their needs could be met out of
subregional production, while over the long
term specialization within the region could lead
to a regular flow of trade in such products.
Encouragement might also be given to trade
in seasonal products that are harvested at
different times in each country.
The products in group (d) are either regularly or occasionally part of border trade which,
as noted earlier, is not officially recorded and
can therefore not be quantified. These products include wheat and wheat flour, maize for

human consumption, animal feed and brewers'
barley, greasy wool, citrus fruit, drupes and
pomes, tropical fruit, dried pulses, vegetables,
unprocessed cocoa, tea, bananas, round and
sawnwood, and also cattle, sheep, pigs, poultry,
eggs, dried milk, butter, cheese and hides.
Oyer the longer term, the prospects for expanding intra-subregional trade in agricultural
products might well improve considerably.
Projections of the growth of internal demand
for foodstuffs and other agricultural products
indicate that the total agricultural consumption
of the subregion will double in about twenty
years, with the increase probably being greater
for some products with a comparatively higher
income-elasticity of demand. These projections
may be considered conservative, for they do
not take account of the policies the Andean
countries must adopt to ensure a more equitable distribution of economic and social benefits among the different strata of the population, which will necessarily have repercussions
on future demand for agricultural products.
If these projections are to become fact, the
subregion wiU have to eliminate the barriers to
intra-subregional trade in agricultural products.
Quite apart from the social conditions prevailing in agriculture, health and quality problems
and the lack of proper statistical and economic data, disparities ia domestic price levels
and inadequate marketing systems are serious
obstacles to the early establishment of a generalized and properly organized system for
trade in agricultural products.
Added to the lack or incompleteness of the
data and the wide range of weights and measures used in each country, there are the problems raised by subsidies for certain products
and distorted exchange rates, aU of which
makes it difficult to draw up a meaningful international price comparison. A survey of
wholesale price levels and marketing systems
in the Andean countries, which was undertaken simply with the aim of providing an illustration of the wide range of price levels,
leads to the conclusion, with aU the appropriate caveats, that with certain exceptions
there are marked divergencies in the domestic
price levels for a number of agricultural products. These may be due to the fact that prevailing exchange rates are under- or overvalued, to differences in ecological, technical
or structural factors, or to inefficiencies in
marketing.
The price structure of agricultural products
in the subregion in a certain sense reflects the

wide variety in marketing services and systems.
The inefficiency of marketing is attributable to
a number of factors, including imbalances between production and demand during the year,
or from one year to the next, as a result of
weather conditions; the fact that production
may be concentrated in a particular season; a
lack of capacity for storing and preserving
products; an inadequate physical and transport
infrastructure; the high margin added on by
intermediaries; and also the instability of prices.
Given the difficulty of projecting demand for
agricultural products over the long term in
order to show the prospects for intra-subregional trade with a reasonable degree of
accuracy, the only other possibility is to work
out rough estimates of internal demand in
fifteen years' time. For this purpose, some
estimates have been developed for the subregion on the basis of average apparent consumption in the period 1962-1966. The results
are as follows: wheat consumption would rise
from 2.8 to 4.7 million tons; maize consumption from 2 to 5.8 million tons; prepared
rice consumption from 0.8 to close to 2 million
tons; cocoa consumption from 44,000 to
101,000 tons; bean consumption from 192,000
to 418,000 tons; sugar consumption from 1.2
to 2.5 million tons; and cotton consumption
from 120,000 to 376,000 tons; while the total
apparent consumption of bananas and beef is
expected to double.
(b) Trade possibilities for a number of
products
(i) Products of vegetable origin.
For certain products the intra-subregional
trade prospects are quite clear, namely those
iroducts which for ecological reasons can only
3e grown in particular areas. For many other
products, the situation is rather more complex.
All, or virtually all, the Andean countries are
in a position to step up production and the
trend of their development plans is towards
self-sufficiency and the generation of exportable
surpluses. As table 7 shows in outline form,
the trend is towards self-sufficiency or expanding exports for many products, while in only
a relatively few cases does the need appear to
maintain or increase imports, for it does not
seem very likely that subregional deficits can
be covered out of subregional exports (for
example, wheat, and cattle feed).
Table 8 is based on material collected on
the situation and prospects of trade in agricultural products among the Andean countries and
foreign trade projections to 1985 prepared by
109

Table

18

CHILE, ECUADOR, PERU A N D COLOMBIA: TRENDS OF SELECTED PRODUCTS
IN NATIONAL AGRICULTURAL DEVELOPMENT PLANS
Chile

Product

Wheat
Maize

Self-sufficiency

Rice

Sugar

Increase exportable
surplus
Decrease imports

Bananas

Import

Cotton
Beef

Dried pulses

...

Import
Self-sufficiency
Increase exportable
surplus
Self-sufficiency

Import
Self-sufficiency;
possible exportable surplus
Decrease imports

Import

Maintain level of
exports (United
States quota)
Maintain level of
exports
Decrease imports

Export

Import

Export

Import

FAO, and indicates the projected level of consumption and imports or exports aroimd 1985
for selected products. These projections may
well contain a considerable margin of error,
given the changes that are likely to occur in
all the complex factors involved—^particularly
population increase which affects demand—
over a period of twenty years. They are vaMd,
however, as a rough order of magnitude of
the domestic needs and total trade of the
trade of the Andean countries. The following
paragraphs consider the intra-subregional trade
prospects of selected products.
Cereals
Wheat. Officially, the subregion does not
export wheat, but there is a small amount of
border trade in it. Small quantities of wheat
move from Ecuador to Colombia and from
Peru to Bolivia owing to favourable prices and
domestic distribution problems. The subregion
will continue to import wheat from third countries to satisfy its domestic needs.
Maize. Bolivia, Colombia and Ecuador are
self-sufficient, and there is a complementary
unofficial seasonal border trade in maize beween Bolivia and Chile, Ecuador and Colombia,
and Peru and Bolivia. Bolivia has a large
maize potential and expects to continue and
even increase its border trade with the north
of Chile and the south of Peru. Chile's
agricultural development plan provides for

110

Peru

Ecuador

Colombia

Import
Import
Increase exportable
surplus

Maintain level of
exports (United
States quota)
Maintain level of
exports
Maintain level of
exports
Maintain level of
exports

self-sufficiency in maize over the long run but
until that point is reached it will have to continue importing at a rate consonant with the
growth of its livestock industry. Colombia has
a programme to expand the planting of hybrid
varieties in the coastal valley and is applying a
price policy designed to stimulate production
with a view to reducing the volume of its unofficial imports from Ecuador. Ecuador itself
has long been self-sufficient in maize and its
occasional surpluses will help to sweU its
habitual border trade with Peru and Colombia.
Rice. Trade in rice within the subregion is
not very sizable and mostly consists in border
trade. Small quantities of rice move across the
border either legally or illegally between
Colombia and Ecuador, in both directions; from
Ecuador to Peru, and from Bolivia to Peru and
the north of Chile.
As the process of subregional integration
proceeds, trade in rice may become more important. The Peruvian authorities consider that
over the medium term Peru will become selfsufficient, and that the annual deficit could be
covered through negotiations between individual
Governments of the subregion, assuming that
questions of quality and price were not a factor.
With the construction of the Digua reservoir,
Chile expects to bring new land under irrigation and by 1985 to have 50,000 hectares sown
to rice. This, together with the use of improved varieties and fertilizers, should even-

Table 18
ANDEAN GROUP: APPARENT CONSUMPTION OF A N D TRADE IN SELECTED PRODUCTS,
1962-1966 A N D PROJECTIONS TO 1985
(Thousands of
Apparent
19621966

Wheat
Bolivia . .
Colombia
Chile . . .
Ecuador .
Peru

220
293
1,566

tons)

consumption
1985

Exports

Imports
19621966

TOTAL

631
2,826

435
613
2,175
285
1,200
4,708

151
164
343
47
484
1,189

501
2,400
948
610
1,380
5,839

TOTAL

28
386
63
102
262
841

70
910
125
300
640
2,045

TOTAL

2
42
74
28
48
194

3
98
137
67
113
418

84
390
295
101
336

166
830
523
229
720
2,468

1985

315
399
425
173
969

14
17
3

TOTAL

247
859
213
163
540
2,022

1985

19621966

116

Maize
Bolivia ..
Colombia
Chile . . .
Ecuador .
Peru
Processed rice
Bolivia
Colombia . .
Chile
Ecuador . . .
Peru
Beans
Bolivia . .
Colombia
Chile . . .
Ecuador .
Peru
Sugar
Bolivia ..
Colombia
Chile . . .
Ecuador .
Peru
TOTAL

Cotton
Bolivia . .
Colombia
Chile . . .
Ecuador .
Peru

1,206

2
60
28

TOTAL

Bananas
Bolivia
Colombia
Chile
Ecuador
Peru

8
22
120
90
383
32
1,496
418

TOTAL

2,419

4
227
60
20
65
376
200
887
75
2,600
940
4,702

2,281

18

52
2
14
1

42

100
100

0.7
0.4
0.1
1.4

163
2
4

21

70

47

50

16

336
336

3

60
4

37

64

32

75

7
39

7
82

28

20

1

0.2

163

2
5
14

15

1
1

47

4
80

80

56
416
556

85
512
677

15
116
131

125
125

223

400

1,258
1
1,482

1,400
1,800

111

Table 8

(.continued")

(Thousands of tons)
Apparent
19621966

Coffee
Bolivia
Colombia
Chile
Ecuador
Peru

2
106
8
22
12
TOTAL

Cocoa
Bolivia
Colombia
Chile
Ecuador
Peru

150

consumption
19S1

TOTAL

Beef
Bolivia
Colombia
Chile
Ecuador
Peru

44

101

1
29
8
2
3

Tobacco
Bolivia
Colombia
Chile
Ecuador
Peru

4
63
5
21

1985

43

726

8

67
883
297
98
201
1.546

19S5

11
2
1
14

1
550

36
38
440

'44
35
630

60

35

17

2
364

35

17

3
60
11
4
5
83

34
391
176
42
83
TOTAL

Exports
19621966

60

12

4
246
17
50
31
348

2
28
2
9
3
TOTAL

Imports
19621966

20
2

12
1
41

28

24

75
103

66

22

1
5

100

4

7

10

115

8

SOURCE: E C L A a n d F A O .

tually enable it to become self-sufficient. Meanwhile, it wiU have to import a certain amount
of rice to meet its domestic needs.
In Colombia, domestic consumption in the
1970s should be met out of domestic production; however, if Colombia wishes to compete
in the subregional market without subsidizing
its producers it will have to lower its production costs. Over the medium term, Ecuador
may become a regular exporter of rice to the
subregion, provided it changes its antiquated
cultivation systems and improves the quality of
its product.
The above would indicate that only Chile
and Peru will continue to be hnporters and that
eventually they too will become self-sufficient.

They currently import from third countries for
reasons of quality and price, but it is to be
hoped that intra-subre^onal trade in rice will
be stepped up in line with the provisions of the
Cartagena Agreement.
Barley. Feed grains are not traded among
the countries of the subregion, although there
is some unofficial border trade between
Ecuador and Colombia; Ecuador and Peru;
and Bolivia and southern Peru. ChUe exports
brewer's barley in the form of malt to Bolivia,
Colombia, Ecuador and Peru. These imports
are shrinking, however, owing to the development of local production in recent years. Given
its level of specialization, Chile is likely to continue offering its surpluses to the other Andean
countries.

Oilseeds, oils and jats. With respect to these
products, the subregion is a net importer of
light oils and animal fats from third countries,
and a large-scale exporter of fish and specialpurposes oils to them. Intra-subregional trade
in oilseeds and oils in general is not on a very
large scale, except for Peru's exports of fish oil
to Colombia, which amount to over 4 milhon
dollars in value. Chile imports small quantities
of castor oil from Ecuador and coconut oil
from Peru. All the Andean countries plan to
expand their domestic production of light oils
with a view to reducing their dependence on
third countries or reaching a level of selfsufiiciency at which they will generate siirpluses.
Fruit
There are good trade prospects for such fruit
as citrus fruit, fresh and dried grapes, apples
and pears, bananas, pineapples and certain
tropical fruits.
Citrus fruit. Trade in citrus fruit among the
Andean countries, particularly between bordering countries, has been on a very small scale
in recent years. It is expected that as income
expands the consumption of citrus fruit will
also expand and seasonal trade among the
Andean countries will increase, given that
production in each country reaches its height
at different times of the year.
Apples and pears. The subregion is a large
market for Chile's exports of apples and pears,
Peru being the main importer, absorbing twothirds of Chile's exports of apples and onesixth of its exports of pears to the subregion.
In absolute terms, Ecuador and Colombia do
not import a great deal of Chilean apples and
pears. According to projections prepared by the
Agricultural Planning Office (ODEPA), over
the medium term Chile will be in a position
to sell 10,000 tons of pears to Peru armuaUy.
It may also sell more to Ecuador and Colombia,
provided purchasing power increases and there
are improvements in marketing conditions and
facilities for refrigeration, transport and storage.
Bananas. The subregion is the major exporting area in the world for bananas. The two
largest exporters being Ecuador and Colombia.
As regards trade in bananas within the subregion, Ecuador's exports to Chile stand at an
annual volume of 6,000 to 7,000 tons, for a
value of over 8 miUion dollars. Chile also imports from Bolivia and Peru, but in smaller
amounts. Ecuador also exports bananas to
Peru and there is also some unoflBcial trade in
bananas between Ecuador and Peru.

Chile is the only country that does not
produce bananas, and is therefore the main
market for the producer countries. As Chile's
annual per capita banana consumption has now
reached the same level as in the United States,
its imports are likely to grow slowly over the
short term, while in the long term their growth
will depend solely on population increases.
There are prospects that in the future
Ecuador may develop trade in banana byproducts for both human consumption and
animal feed.
Vegetables
There is a small amoxmt of trade in vegetables among the Andean countries. Peru imports onions from Chile in small quantities, but
also exports up to one thousand tons of onions
in certain years to Bolivia and Ecuador. Chile
and Colombia do not export garlic to the subregion, while Peru exports a small amount and
Ecuador is virtually self-sufl&cient. All the
countries are self-sufficient with respect to
tomatoes, and even export small quantities of
fresh tomatoes to third countries. Since the
Andean countries will remain self-sufl&cient as
regards onions, garlic and tomatoes, it is not
likely that there will be any increase in trade
among them in such products. It might be
worth while, however, developing a seasonal
liberalization programme for onions and fresh
garlic since the peak periods for these products
are different in Chile and Colombia, Ecuador
and Peru. The tomato processing industry may
be able to develop under the protection of the
external tariff and lead to greater subregional
trade in tomato products.
Sugar
Most of the trade in sugar in the subregion
is from Peru to Chile in the form of raw sugar
for refining, and takes places at world market
prices. Chile's total sugar imports have been
shrinking in recent years, falhng from a value
of 26 million dollars in 1964 to their current
level around 2.5 million. The subregion
accounts for only 700,000 dollars of this total.
Chile also occasionally imports small quantities
from Colombia, and is the subregion's only net
importer of sugar. All the other Andean countries export to the free market under the
provisions of the International Sugar Agreement, or to the United States market under its
quota system.
Chile, however, has plans to achieve selfsufficiency by expanding sugar-beat production
with a twofold objective: import substitution
113

and the use of by-products as fodder for livestock. There are, however, some aspects of
Chile's sugar policy that lead to the conclusion
that Chile will have to continue importing a
certain amount of sugar, apart from the rise
in demand resulting from population increase
and rising incomes. It should be noted that
sugar is sold in Chile at prices fixed by
DIRINCO for all stages of marketing and that,
since the costs of domestically produced sugar
are higher than those of imported sugar,
domestic production has to be subsidized, part
of the subsidy being financed out of funds
derived from imports. Consequently, if imports cease, this may eliminate a source of the
resources used to support the domestic sugar
industry. Chile might possibly reserve part of
its import market for subregional exporters, at
preferential prices, but this seems somewhat
doubtful since it would require radical changes
in Chile's sugar policy.
Given the above, the problems of sugar are
among the most difficult within plans to
liberalize subregional trade in agricultural
products.
Coffee and cocoa
With the exception of Chile, all the Andean
countries produce coffee and cocoa; and the
subregion is the second largest exporter of
coffee in the world. Chile imports only
a few hundred tons of coffee from the other
Andean countries, and buys virtually all the
coffee it requires from Brazil. Since the consumer price of coffee is regulated and kept at
a low level, Chile's demand is mostly for lower
cost coffees than the "mild Arabicas" produced
in Colombia, Ecuador and Peru. Freeing trade
in unprocessed coffee (beans, green) should
not lead to a major shift of demand towards
imported coffee. There will not be competition
within the subregional market among the
different coffees for export; but there might
be undesirable price competition among
coffees for domestic consumption entering
intra-subregional trade. As diversification programmes are due to be initiated in 1972-1973,
it is recommended that the parties concerned
should hold meetings with a view to avoiding
conflicting decisions as regards substitute crops.
As regards cocoa, Colombia is the major
market in the subregion for Ecuadorian cocoa
which is imported both legally and illegally.
Peru and Chile occasionally import from
Ecuador, while Chile also imports small
quantities from Colombia. Bolivia is virtually
self-sufficient as regards cocoa. Liberalization
114

of trade in cocoa, which is already in effect,
may generate an increase in Ecuador's exports
of cocoa beans and other primary cocoa
products to the other Andean countries, especially to Colombia and Chile whose markets are
expanding owing to the fact that their annual
per capita consumption of cocoa is comparatively low (less than 750 grammes).
While there are good prospects for expanding trade in cocoa among the Andean countries, principally for Ecuador, there is the
possibility that conflicts may occur if production increases in both Ecuador and Colombia.
Wines
Chile exports wine to the other Andean
countries in bottles and other types of container. The main importer of bottled wine is
Colombia, which purchased 200,000 dollars
worth of Chilean wine in 1969. Ecuador,
however, is the main importer of Chilean wine
in casks and other containers, for a value of
some 15,000 dollars per year. The subregion's
wine imports from Chile, however, represent
only a small proportion of its total wine imports from third countries.
There are good prospects for increasing subregional trade in wine. Chile is the only supplier, and this places it in a very special position
since under the Cartagena Agreement it can
increase its intra-subregional trade in wine
given that the five Andean countries apply high
import duties and other restrictive measures
to wine.
Cotton
Two countries in the subregion, Colombia
and Peru, are net exporters of cotton, while the
other three are importers. Chile imports over
3,000 tons of cotton (9/10 Pima cotton and
1/10 Tanguis). Ecuador imports 600 tons
from Peru of the two types in roughly the
same proportions, while Colombia imports
600 tons of Pima and 250 of Tanguis.
Colombia's cotton exports to the subregion are
valued at 1.7 million dollars.
Only one-quarter of Chile's imports from the
subregion, a total value of 20 milUon dollars
per year, come from the subregion. Liberalization of trade in cotton may mean that Chile
will supply itself exclusively from the subregion, but over the long run this might lead
to difficulties given that the importer countries—excluding Chile which is not a producer—currently producing different types of
cotton are considering developing a long-fibre

cotton crop and competing in the international
market.
Over the short run, these plans will not affect
intra-subregional trade, but in the long run the
Andean countries will have to develop a joint
)lan for cotton production at the subregional
evel in order to avoid problems.
Tobacco
The subregion imports processed tobacco
from third countries and intra-subregional
trade in non-processed tobacco is very small.
Peru exports some 210 tons to Ecuador, and
Colombia exports leaf tobacco to Peru and
Ecuador, for a value of 68,000 and 136,000
dollars respectively. Chile imports small
amounts from Ecuador.
At first sight, it would appear that liberalizing trade in tobacco in the subregion would
not create problems over the short and medium
term: all the Andean countries are producers
of tobacco and import Burley and Virginia
tobaccos from outside the subregion. In the
long run, however, they might be able to produce tobacco of the kind they now import and
thus save foreign exchange, if they decide to
develop a joint plan.
Wood products
The subregion is a net exporter of wood
products. Chüe exports parana pine, pine and
veneers to Peru and pulp to Colombia and
Peru. Peru also imports sawn hardwood from
Bolivia, sawn deodar and round balsa wood
from Ecuador; veneers and boards from Colombia and Ecuador. Part of Colombia's imports of pulp and Bolivia's imports of newsprint come from Chile. Within the subregion,
Chile is in the best postion to expand its forest
industries based on softwoods and to export
wood products to the other Andean countries;
but the high cost of transport is a disincentive
to exports. Peru, however, considers that part
of its imports of wood products from third
countries could be replaced with subregional
products, with Chile as the preferred supplier.
As Peru is also moving towards self-suflSciency
in kraft and many other papers, it also hopes
to export medium-weight corrugated paper and
banana boxes to Ecuador. It will remain an
importer, however, of special-purpose papers.
(Ü) Products of animal origin
Cattle and beef
Colombia is the major exporter of the subregion, its total exports, including its exports

of beef on the hoof to Venezuela, ranging between 75,000 and 80,000 tons of carcass meat.
Most of its exports of beef on the hoof go to
Peru, amounting to some 84,000 head in 1970
for a value of approximately 16 million dollars.
Colombia's exports to Ecuador run at an
aimual volume of 20,000 head, which are not
legally marketed. Colombia's exports of carcass
meat go partly to Peru but mostly to the
Caribbean and Europe. Between 20,000 and
30,000 head of cattle are exported unoflBcially
by Ecuador to Peru; while Bolivia also exports
smaller quantities, also unofficially, to Peru
and Brazil. Owing to the growing volume of
regular imports of cattle and beef by Peru and
Chile, the subregion is a major importer, the
annual volume of imports in the period 19621966 standing at 66,000 tons. Chile imports
cattle and beef mainly from Argentina, and
smaller quantities from Bolivia, Paraguay,
and Uruguay. Peru imports cattle and beef
from Argentina and also from Colombia and
Ecuador, and in smaller quantities from Bolivia, Brazil, Paraguay and Uruguay.
Milk products
The subregion is a net importer of milk products, mainly powdered and condensed milk,
butter and cheese. Powdered milk imports in
1967 amounted to 30,000 tons from the United
States, Europe, Australia and New Zealand.
Peru is the major importer of milk products,
imports accounting for one-third of its consumption of milk. Ecuador's imports of powdered milk obtained on the open market and
on special terms were recently the equivalent
of some 33 million litres of reconstituted milk.
Chñe also imports sizable quantities of milk
products. Ecuador imports a small amount of
cheese and butter as part of unofficial border
trade with Colombia and Peru.
Sheep, wool, pigs and poultry
The Andean countries import only to improve breeds, and both breeding stock and
eggs for incubation and industrial purposes
come exclusively from third countries.
As regards wool, the subregion is an exporter of greasy sheep wool and fine alpaca
and vicuña hair. Chile mainly exports greasy
wool, as does Peru which, together with Bolivia, exports hair of the llama species (auchenia). There is virtually no trade in wool within
the subregion, and import and export trade is
carried on with third countries.
115

Imports consist mainly of fine wools, with
Colombia being the main importer, followed
much lower down the scale by Chile and Peru.
Skins and hides
Bolivia, Colombia and Peru export hides
and skins for a total value of 5 million dollars,
most of the exports consisting of special products such as skins of reptiles, wild cats and
other wild animals. The subregion imports
ordinary skins and hides, especially cattle hide
from Argentina and tanned hide from third
countries.
Fisheries products
The subregion is a net exporter of fisheries
products and imports only small quantities.
Peru and Chile have developed a very advanced fishing industry, accounting for 20 per
cent of the total world catch. Intra-subregional
trade in fish, however, is on only a small scale.
Chile exports fresh and frozen fish to Bolivia
by air and fish meal by rail; while Peru does
not export fish meal to the other Andean countries. Ecuador exports tunny to Colombia and
shrimps to Bolivia and Chile. The subregion
imports very little from third countries, and
imported products are confined to the highincome group market. Hence, the question is
not so much of import substitution, but rather
of expanding domestic markets.
Consideration is being given to the establishment of a mixed Chilean and Ecuadorian
enterprises to fish Ecuadorian tunny and a
mixed Chilean and Peruvian enterprise to fish
bonito, so that fishing can take place during a
greater number of months in the year. In general, the countries of the Pacific seaboard are
tending to co-ordinate their fishing activities
as a subregion. and under the terms of the
Cartagena Agreement with a view to achieving
complementarity and making a joint stand visa-vis the external market.
(iii) Limitations of and prospects for intrasubregional trade
The above illustrates that for many products,
such as rice, maize, legumes, vegetables and
various oil-bearing plants, all the Andean countries possess sufficient natural resources to
increase production, achieve self-sufficiency
and even generate exportable surpluses. In
theory, however, it would be advisable for each
to concentrate its eiforts on those products
where it has the greatest advantage, and thus
116

satisfy the needs of the less favoured areas. In
practice, however, this would cause serious
social problems since it would intensify the
already chronic unemployment and underemployment prevailing in the region. If, instead
of concentrating all the production effort in
the countries with the greatest advantages,
such countries were to be assigned only the
major proportion of anticipated increases in
production, leaving the remainder to domestic
efforts and taking the necessary measures to
improve quality and achieve competitive prices,
it then might become possible gradually to
reserve a growing share of the market for such
countries.
Similar questions arise with respect to differences in the seasons when these comparative
advantages occur, and thus it should be possible to engage in trade on the basis of seasonal
complementarity in, for example, fresh fruit,
pulses and green vegetables. Once this kind of
arrangement is extended to a large number of
products, it is possible that a certain degree
of natural complementarity will arise among
the Andean countries and will iron out any
excessive imbalances in agricultural trade. Such
arrangements wül of course require lengthy
and detailed studies on the location and potential of natural resources and the production
costs under alternative technologies, and also
a gradual rearrangement of the productive efBciency of farming units.
Over the short term, there are no clear
prospects for a substantial increase in intrasubregional trade in forest products. It is difficult to evaluate the real potential of forest
resources because there are no systematic and
comprehensive forest inventories of large areas
in the Andean countries and because of the
problems of logging and transport. There is a
trend in the subregion, however, towards replacing roundwood exports with wood products containing a certain degree of processing.
There are clearly favourable conditions for
establishing various forest industries based on
both natural and man-made forests with a view
to expanding the output of wood products over
the long term. As regards animal products,
there are no technical limitations that prevent
a sizable expansion of production; rather the
reverse, the subregion has very large livestock
potential sufficient to satisfy not only its growing internal consumption needs but also, as in
the case of meat, to generate surpluses for
export to other countries of the subregion
with a meat deficit and to third countries.

Table 9 gives production, consumption and
trade estimates for beef in the subregion in
1985.
Intra-subregional trade in cattle and beef
may be limited over the long-term if national
plans for achieving self-sufficiency are successful. Chile and Peru, for example, are endeavouring to replace imports while Bolivia,
Colombia and Ecuador are promoting exports.
This means that the main direction of the meat
trade will have to be towards third countries.
Other problems may have some impact as a
result of the low level of productivity in stockfarming in the subregion and the relatively
high cost price of cattle and beef, together
with serious marketing problems that may
place the subregion, as an exporter, at a disadvantage vis-a-vis third countries in which
stock-farming is more developed. Be that as
it may, a great deal can be expected from the
mtegration of stock production and complementarity arrangements in livestock production
and trade within the Andean countries. Everything turns on how they direct and harmonize
their production, consumption and trade policies.
With respect to milk and milk products, the
prospects for intra-subregional trade are quite
uncertain even over the long term; first, because any increases in production will have to
be used to raise the low per capita consumption levels in the subregion, and, secondly,
because the low level of productivity in herds
and the poor quality of products can only be
raised over a long period to a level at which
it will be possible to compete with third countries at a reasonable advantage, especially in
this type of production.
The fact that there are large surpluses of
milk products on the world market at very
low prices may be another factor hampering
intra-subregional trade. The subregion has
areas that are very suitable for sheep farming
and in all five countries wool production could
be substantially expanded as well as improved
in quality. This would enable the subregion to
expand its exports of fine wool to third countries and also expand intra-subregional trade,
thus stemming a sizable drain of foreign exchange.
The prospects for increasing trade in fisheries products are encouraging as regards
exports outside the subregion, owing to the
h%Ii fishing potential of the Andean countries
and technological improvements in boat construction and methods of fishing, and also the

modernization of installations, equipment and
plant. The domestic market for fisheries products, however, is small, owing to dietary
habits, and little has been done to promote
their consumption; the situation has been made
worse by shortcomings in means of communication and a lack of facilities for refrigerating
and storing fish.
The subregion also imports very few fisheries products from third countries and so it
is less a question of import substitution and
rather more a question of expanding the domestic market.
(c) Expanding exports to third countries
The five Andean countries have surpluses
of many products that are cultivated mainly
for export to the developed countries. They
do not produce enough of certain foodstuffs,
however, to satisfy domestic consumption and
hence have to import either regularly or occasionally. National development plans, in particular those sections relating to the agricultural sector, ascribe great importance to trade
policy for agricultural products. Owing to the
fact that the Cartagena Agreement came into
effect only recently, subregional agricultural
integration has only just begun to be made a
part of national agricultural planning, and this
partly explains why the subregion's exports to
third countries account for roughly four-fifths
of its total trade in agricultural products.
The main aspects of integration relate to
trade policies, participation in the regional
(ALALC) and subregional integration procesces, and equipping the institutions required to
implement integration pohcies. It is recognized
that achieving a better level of living will depend, inter alia, on developing more advanced
and complex plans for production and trade
policy as a means of raising the level of agricultural activity. The slow growth of agricultural
exports in Colombia and Ecuador, chiefly, and
to a lesser extent in Peru, Bolivia and Chile,
coupled with the unfavourable terms of trade,
has been a key obstacle to the over-all development of the Andean countries. Balance-ofpayments difiiculties and the problem of creating new employment opportunities can be
alleviated if efforts are made to increase foreign
exchange revenue by expanding and diversifying exports" and replacing imports.
In line with these objectives, the Andean
countries have drawn up programmes to stimulate exports through exchange measures, export
subsidies, price stabilization, export credit, etc.
117

Table 9
ANDEAN GROUP: BEEF PRODUCTION, TRADE AND CONSUMPTION, 1962-1966 AND PROJECTIONS TO 1985
(Thousands of tons of carcase meat)
Production
Country

Annual
rate
. of
increase

19621966

Bolivia
Colombia
Chile
Ecuador
Peru

/
TOTAI
/

1985

34
396
135
46
59
670

75
983
269
105
126

3.8
4.4
3.4
4.0
3.7

1,558

4.1

19621966

1985

Annual
rate

19621966

1985

1
5

. "f

increase

8
100

1
—

Apparent

Exports

Imports

—

-1.8

41

28

—

—

24

75

5.6

—

66

103

2.1

10

—

115

Per capita (kg. per year)
Annual
rate
of
increase

19621966

1985

Annual
rate
of
increase

—

67
883
297
98
201

3.3
4.0
2.5
4.1
4.3

8.4
22.3
20.5
8.4
7.3

10.0
23.9
24.2
9.8
9.3

0.5
0.3
0.8
0.7
1.2

12.3

726

1,546

3.7

15.5

17.4

0.6

7
—

19S5

consumption

34
391
176
42
83

10.4
15.3
—

—

4

—

Annual •
rate
1962of
1966
increase

Total

2.7

SOURCE: Joint ECLA/FAO Agriculture Division, Situación actual, problemas y perspectivas del comercio de la carne bovina en los países de la
ALALC.

Agricultural development plans give an idea
of the volume of products that countries expect to export or to replace as imports. As
regards import substitution, there has been
some success in defining the level at which
foodstuffs and agriculture products should be
considered essential and therefore eligible for
special treatment. The idea is also gaining
ground that imports should be at a level consonant with the quantity needed to cover shortfalls in domestic supply and should therefore
be handled through official marketing channels
such as the Chilean Agricultural Trade Enterprise (ECA), the Colombia Agricultural Marketing Institute (IDEMA) and the Peruvian
Agricultural Services Enterprise (EPSA). The
products handled by ECA, IDEMA and EPSA
are, with some exceptions, those imports on
which the subregion is highly dependent, and
usually come from third countries and from
other Andean countries, such as cattle, beef
and rice.
Hence, the official marketing organizations
for agricultural products in Colombia, Chile
and Peru, and those which are expected to be
set up shortly in Ecuador and Bolivia, can
play an important role in promoting the subregional integration of the agricultural sector.
Since they control trade in a number of imported products, they can take decisions and

measures that will redirect trade in favour
of the subregion and make trade policy an
integral part of over-all development policy.
The State marketing bodies can also play a
very important role in developing a joint strategy for trade in agricultural products with third
countries, since, with respect to certain products, markets outside the subregion will continue to be of key importance to the Andean
countries for some time. Harmonizing bargaining positions and working out a common front
in order to improve the terms on which products are exported or imported would have
undeniable advantages for the subregion as a
whole and each country, individually.
If the official marketing bodies are to follow
this kind of policy, they must gradually adapt
and harmonize their operations and functional
structure. At present, although they are very
similar in many respects, they differ in some
important aspects, including one of their
objectives namely, the search for imports at
optimum conditions of price and quality, which
may curb increases in intra-subregional trade.
Moreover, many of the products marketed by
these official bodies are mass consumption
items and hence politically sensitive. This
means that Governments will have to consider,
discuss and even negotiate trade in them in
advance.

119

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