he came dancing across the water

The spouse and I travelled to Mexico and Colombia this year (Mexico City and Cartagena, to be precise), our first journies to Latin America. In keeping with our general belief that travel should entail and encourage learning, we read up on our destinations before, during, and since our trips. In addition to some excellent books more particular to the nations we visited (Earl Shorris’ The Life and Times of Mexico in particular is an amazing book) we also read, of course, Eduardo Galeano’s Open Veins of Latin America. If nothing else, the book makes vivid and imemdiate the scale and depth of the horrors visited upon Latin America by its conquerors, crimes comparable in their systematic brutality to almost any evil ever visited by man upon man.

In conversations with my wife, we discussed the seeming impossibility of those conquerors, most notably Spain and Portgual, to ever make substantive amends for those crimes. That got me thinking if it was possible, and since I’m apparently now the internet’s foremost specialist in reparation spreadsheets, I tried to see if and how pecuniary restitution could be made.

Unlike my calculation of the reparations for slavery, though, I decided instead to take a forward-looking approach. Rather than calculate a number equal to the crime, I instead tried to, through a very simple model, see if Spain and Portugal could ever, even over a very long time, ever put together enough cash to substantively make an impact on the whole of Latin America. Spain and Portugal are far from the only offenders on the long list of wrongdoers in Latin America, but I decided to limit my analysis to them mostly for the sake of simplicity.

The key problem facing Spain and Portugal in trying to make restitution to Latin America is that they are currently far, far smaller parties than those they might be making restitution to; their combined GDP just over a quarter of that of Latin America and the Carribean as calculated by the World Bank. To fork over enough wealth in the short term to make a dent on the fortunes of Latin America would involve a degree of impoverishment of the present citizens of those nations that most would find untenable. So I decided to give them a little time – 150 years, to be exact. Specifically, they would make annual contributions into a wealth fund equal to a fixed share of national output for a century and a half, and during that time 100% of all returns would be reinvested. In 2166, Iberian contributions would cease and Latin America would be free to do with the accumulated capital what it wished.

Would this be enough? Well, it depends – depends, specifically, on four-and-a-half variables – the averagegrowth rate of the Spanish & Portugese economies (two variables that I simplified into one), the average growth rate of Latin American GDP, the return to capital, and the size of the annual contribution. That’s a lot of moving parts, and a lot of big assumptions.

At this point, I clarified the question I wanted to ask – conditional on fixing two of those variables (Iberian growth at 1% and the return to capital at 5%), how large of an annual contribution would Spain and Portugal need to make to this fund to target a total valuation equal to one-quarter of Latin American GDP in 2166?

Where is this all going? Well, in what is a wholly unsurprising result for anyone who’s read their Piketty, the key to the answer to that question is Latin American growth. Specifically – is r>g? And by how much?

Here is a quick table of possible answers:

If Latin American Growth Is… Then The Annual Share of GDP Devoted to The Fund Needs To Be
2.0% 4.8%
2.5% 10.2%
3.0% 21.3%
3.5% 44.6%

The World Bank projects Latin American growth over the next 20 years at ~3.5%; should that growth persist for another thirteen decades, that would make the Iberian task almost impossible, nearly half of GDP being devoted to the project. But should average Latin American growth fall over that time, the Spanish-Portugese lift becomes easier and easier, to the point where if Latin American growth is still even double that of Spanish-Portugese growth, they can devote less than 5% of GDP to the fund each year and still hit their 25% target.

What conclusions can we draw from this? Firstly, it is an excellent demonstration of the long-term impact of r>g. The larger the gap between r>g the easier it is for accumulated wealth to grow relative to an economy (though this case is somewhat muddled by the annual contribution of non-return income to the fund).

Secondly, it shows how public-good wealth funds can turn r>g from an anti-social force to a pro-social force. The larger we expect the gap between r and g to be, the more pernicious it can be if most wealth is private, untaxed, and unregulated, but the more beneficial it can be if wealth is public, taxed, and regulated. In my Piketty write-up (you didn’t think you were getting away without a reference to that, did you?) I advocated for a sovereign wealth fund devoted to funding a national university system; this idea, too, becomes more compelling if you are pessimistic about growth or bullish on long-term returns to capital.

Lastly, it highlights certain ironies particular to this situation; two in particular stand out. It demonstrates most clearly to me the futility of plunder as an economic model – if all the blood-soaked gold and silver stolen from Latin America has made the lives of modern Iberians better off, it’s hard to see how. It also highlights the irony of the tradeoff between growth and wealth accumulation. If Latin America really does maintain a growth rate of 3.5% over the next 150 years, real Latin American GDP will just surpass $1,000 trillion; even if Latin American population quadruples to over two billion in that time that would still imply a real GDP per capita of nearly half-a-million dollars per person by then, ten times that of the modern American – and several times what these figures project Spanish GDP per capita to be in 2166. Indeed, for all Latin America to reach parity with Spain and Portugal in fifteen decades at most only 2.5% annual average real growth is required over that time even assuming the highest bounds of population estimates. The irony, then, is that the largest obstacle to the descendents of the conquista state making meaningful reparations to the descendents of their conquests is the conequered surpassing the conqueror.

As always, data attached. LAmerRep