Foreign intervention can bring stability…but stability is overrated: the United States in Latin America 1905-31

by Leticia Abad (City University of New York) and Noel Maurer (George Washington University)

This research was be presented during the EHS Annual Conference in Belfast, April 5th – 7th 2019. 

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Every time American intervention in some faraway conflict appears to be off the table, another call for it rises. Today the example is the Bolivarian Republic of Venezuela, where President Nicolás Maduro has neutered the elected parliament while causing the economy to collapse to the point of famine. The Trump administration has openly backed the opposition and the president himself has floated the possibility of military intervention.

Donald Trump is following in the footsteps of President Theodore Roosevelt, who ushered in an earlier era of American intervention with his famous 1904 call: ‘The adherence of the United States to the Monroe Doctrine may force the United States, however reluctantly, in flagrant cases of such wrongdoing or impotence, to the exercise of an international police power.’

Roosevelt’s declaration began a three-decade period of extensive American intervention, in which the United States used its tools of national power to intervene in the affairs of Latin American governments. The United States took over the fiscal institutions of no fewer than eight (out of 19) Latin American states over the period; deployed military forces in five; and took over the entire state (for a time) in three.

What can that earlier period tell us about the wisdom of modern-day calls for intervention?

In research to be presented at the Economic History Society’s 2019 annual conference, we find that US intervention in the period 1905-31 indeed reduced political instability. The number of coups and coup attempts fell, as did the severity of political violence.

More specifically, US intervention reduced the probability of an unconstitutional regime change by 10% and the intensity of political violence (measured by the number of deaths per day in political violence) by almost half. In that sense, intervention worked.

But the United States failed to accomplish its other goals. American aims were not just to reduce violence; they hoped to decrease corruption, increase government revenue and promote investment in the intervened nations.

We find that the efficiency of government institutions – measured by the ability to collect customs revenue – did not change: in fact, it appears to have fallen. That is to say, intervened governments got worse at carrying out their governing functions.

Nor did foreign investors invest more capital into the intervened countries. Neither the stock of portfolio investment, foreign direct investment nor domestic investment budged. The volume of trade did not grow. What did change, however, was an increase in the short-term profits of existing bondholders and trade diversion towards the United States.

In short, intervention provided political stability to the target countries. It also generated private benefits for American investors and traders. But it did little to improve those countries’ quality of governance or long-term growth prospects.

Two general lessons emerge from our work.

First, political stability may be overrated. Investors don’t seem to care, at least inasmuch as instability doesn’t directly affect them. The reason, we postulate, is that investors have many ways of protecting their interests in poor and unstable countries.

Foreign intervention therefore provides a nice benefit to creditors, who believe that it raises their chances of being repaid, but it does little to prompt them to risk good money after bad.

Second, improving governance is hard. It is one thing to prevent rebels from sacking customs houses or stop governments from massacring their opponents; it is quite another to stamp out corruption and make government more efficient. The United States failed at its attempts to promote long-term growth.

We use the opening of the Panama Canal, which brought the seven Pacific coast countries of Latin America closer to Washington in order to strip out reverse causality or the impact of third factors. Being closer to Washington made the United States more likely to intervene but had no independent effect on countries’ political stability or government corruption.