Big push or big grab? Railways, government activism and export growth in Latin America, 1865-1913

"Railways were one of the main growth engines of Latin American economies during the first globalization boom. At the time economic growth largely depended on export expansion and this, in turn, was closely associated to railway construction. However, railway investment required consistent government support in the form of subsidies, which were highly dependent on government revenues. As government revenues were mostly driven by tariffs on trade, this led to a potential multiple equilibria system. Some Latin American countries seem to have got trapped in a low level equilibrium in which the economy and government revenues did not grow enough due to insufficient railway development, and railway construction was stunted by the scarcity of public resources. The aim of this paper is to test the existence of the bidirectional causality link between government revenues and railway development. Our findings support the hypothesis of a positive two-way relationship between exports and government revenues, on the one hand, and of revenues and railway development, on the other. In an export-led growth context, this positive two-way relationship is consistent with a “big push” theory of Latin American growth before 1914. Our results are also informative of the growing divergence between economies of the region during this period."