The observation by André Gunder Frank which appears above, while broadly correct, neglects significant details about the war-time experience. Another broadly correct statement about this period is one by Benjamin Higgins which refers to Australia, Canada, the United Kingdom, and the United States:
In addressing Higgins' statement regarding a major shift of resources during the war, one must make several important qualifications: the state played a critical role in that reallocation; prices were regulated by the state; and the reallocation was not merely national but at least hemispheric, if not actually global. It is this last point which I shall emphasize here. While the U.S. metropolis may have been, to an important extent, "otherwise occupied", most of the countries of the Western Hemisphere and particularly Canada and Mexico were never tied as closely to the U.S. economy as they were during World War II. If Third World countries could count on the kind of cooperation from the industrialized countries that the former were called upon to provide during the Second World War, the development task would be eased immeasurably. Examination of the circumstances relating to hemispheric resource reallocation leads as well to a substantial qualification of Frank's hypothesis regarding "active capitalist involution" in Mexico.
While the United States had substantial disagreements with both Canada and Mexico during the 1930s_with Canada over tariff policy; with Mexico over the latter's expropriation of U.S. oil properties_all three declared war on the Axis forces (Canada in 1939 and 1941, the U.S. in 1941 and Mexico in 1942) and all cooperated, to an extent unequalled before or since, in meeting war-time objectives. Although Mexico exported one-third of its oil to Germany in the months following the former's expropriation of U.S. and British oil interests in 1938, this was a short-lived phenomenon, as the sympathies of the Mexican President Lázaro Cárdenas and his successor, Manuel Avila Camacho, were firmly with the Allies. Avila Camacho, for example, cooperated in July 1941 with the U.S. request that Mexican firms doing business with the Fascist powers be blacklisted.
The war years were a period of extremely rapid growth for all three countries. Real gross national product increased at an average annual compound rate of 10.6 percent in the United States, 10.9 percent in Canada and 5.9 percent in Mexico between 1939 and 1944. Both the United States and Canada experienced declines in 1945, while Mexico's growth slowed to 2.7 percent. In all three countries manufacturing was a leading sector: manufacturing production grew by 131 percent in the U.S., 118 percent in Canada and 57 percent in Mexico between 1939 and 1944. Figures I and II show the annual growth of total output and manufacturing output in the three countries. These rates moved in the same direction in all three countries for 1941 through 1943. However, whereas growth of manufacturing in Mexico lagged behind that in the other two countries through 1943, it surpassed their growth rates in 1944 and 1945. Canada and the U.S. continued to move in tandem in those two years, with negative rates being recorded in the U.S. in 1944 and 1945 and in Canada in 1945. The effect of the end of full-scale mobilization of industry in the U.S. is seen most dramatically in the production index for transportation equipment (1933-1939=100), which fell continuously in 1945 from 706 in January to 218 in December.
Figure II. Annual Growth of Manufacturing Output
Sources: Nacional Financiera, S.A. Statistics on the Mexican Economy, México, D.F.: n.a., 1966:89; M.C. Urquhart and K.A.H. Buckley, eds., Historical Statistics of Canada, Cambridge: Cambridge University Press, 1965:475; U.S. Dept. of Commerce, Statistical Abstract of the United States, 1947:816.
At the outbreak of hostilities in Europe, manufacturing production in Canada and the United States had only returned to the level of 1929 and both countries had considerable unemployment. In contrast, manufacturing output in Mexico had expanded by 61 percent in the decade from 1929 to 1939. Nonetheless, observers are unanimous in their judgement that considerable excess capacity existed in Mexico on the eve of the Second World War. Labour surpluses quickly turned into labour shortages in Canada and the United States with the expansion both of the economy and of the armed forces (a peak of 779 thousand military personnel in Canada and 12.1 million in the U.S.). Again, Mexico provides the contrast. While its population grew in the decade of the 1930s at a rate of 1.7 percent per year, employment grew annually by only 1.2 percent. Moreover, 63 percent of Mexican employment was still in agriculture in 1940, as opposed to only 20 percent in the U.S. and 29 percent in Canada. The differential in labour utilization between the U.S. and Mexico gave rise to the initiation in August 1942 of the bracero program, under which Mexican workers could work in agriculture and on the railroads in the U.S.
In all three countries rapid economic growth led to major bottlenecks which were reflected in either price increases (to the extent that these were permitted in the United States and Canada) and/or shortages. While shortages may be endured with a grumble during peacetime, certain shortages could not be tolerated during the period of full-scale military mobilization when U.S. and Canadian forces and those of the European allies had to be fully equipped and when, as well, the Hemisphere had to be defended from attack. In the circumstances, co-ordination of production and resource flows was indispensable. As Franklin Roosevelt observed in December 1941:
While co-ordination may have been based on free consent, the coordinating parties were by no means meeting on an equal footing. The United States, with its more diversified industry and resource base and its greater economic, technical and military capability, was the clear senior partner in these binational alliances. In evaluating the experience it is clear that there was more true coordination with Canada, but more vigorous protection of sovereign prerogatives on the side of Mexico. The Mexicans, for example, were the first to insist on an escape clause being written into a trade treaty with the United States.
To cite just one other instance of protection of sovereignty, the Mexicans were immovable and successful in their demands that weather, communications and radar stations be equipped by the U.S. and operated jointly by American Army technicians and Mexican personnel only until such time as the Mexicans were capable of relieving their American counterparts. Moreover, the Americans were required to work in civilian clothes and be under the direction of Mexican Army commanders. In contrast, on the Canadian side, Ottawa "appeared quite unaware of the magnitude of the projects, the breadth of penetration, and the dominant presence of the United States Army Air Force throughout the northern territories." It took the British High Commissioner to Canada, Malcolm MacDonald to draw attention in 1943 to the "Army of Occupation"_a term, according to MacDonald, which the Americans used to refer to themselves.
As for the "democratic processes" to which Roosevelt referred: while it is true that all three governments were duly elected, it is also true that what may be feasible in wartime, may be unattainable within a context of the free play of conflicting political interests. For example, two Orders in Council by the Canadian federal government established for the duration of the war collective bargaining regulations roughly comparable to those embodied in the pathbreaking U.S. National Labor Relations Act of 1935. The rights granted by the Orders were responsible for the near doubling of union membership in Canada during the war years, from 358,967 in 1939 to 711,117 in 1945. Similarly, Washington's desire for Mexico's full support in hemispheric defense led to a relatively rapid settlement of the extremely acrimonious dispute arising from the 1938 Mexican oil expropriation. The compensation agreement, which was not at all satisfactory to the oil companies whose propaganda campaign against Mexico continued, was reached in the month preceding the Japanese attack on Pearl Harbor. As part of the oil settlement, the United States and Mexico pledged to conclude a reciprocal trade agreement. Although almost a decade of prior trade negotiation had proved relatively fruitless, a trade treaty was signed within nine months of the ratification of the oil settlement. These are but a couple of instances of the ease with which objectives were achieved when the countries in question faced a common threat.
The shares of Mexican trade with the United States and of Canadian imports from the United States, which were already high prior to the Second World War, increased markedly during the War to the point that the United States was the preponderant trade partner of each (see Table 1). In 1943 and 1944 over 80 percent of Canada's imports came from the United States. Well over one-third of Canada's exports continued to go to the United Kingdom up until 1945, but war-time structural changes brought a change here as well. Despite substantial lend-lease shipments to the U.K., 1941 was the last year in which Canadians exported more to the U.K. than to the United States. The share of Canada's exports to the U.K. fell from a crisis peak of 42.9 percent in 1940, to 29.7 percent in 1945 and 15.0 percent in 1950. As Table 2 indicates Mexico and Canada assumed an increased role in United States trade as well, particularly on the import side where Canada and Mexico came to provide no less than thirty percent of U.S. imports between 1942 and 1945.
[Tables 1 & 2 here]
Import Substituting Industrialization
When the metropolis is "otherwise occupied" the opportunity for import substituting industrialization is said to arise. The curtailment of imports that tends to accompany a war provides both opportunities and limitations. The resulting effects on a country's industry are likely to be uneven, depending critically on existing capacity, capital goods production capabilities, and availability of supplies either domestically or through imports.
If one is looking for an example of Frank's "active capitalist involution", one need look no further than Canada, where a capital goods industry already existed, as did a complex state apparatus disposed to provide large contracts and generous capital cost allowances. The situation in Canada was very different from what it had been on the eve of the First World War:
In 1914, the iron and steel and manufacturing industries in Canada were
still in an embryonic state and the Canadian contribution to the Allied
effort consisted mainly of food, forest and mineral products. By 1939,
heavy industry had become well established.
The Royal Commission on Canada's Economic Prospects noted that because
of supply limitations in the United States, "Canadian industry found itself
more on its own than it had ever been before. . . . In this protected hot-house
atmosphere, where costs were of relatively minor importance, secondary
manufacturing grew like a beanstalk." During the war basic steel-making
capacity increased by more than fifty percent, aluminium ingot-producing
capacity increased five-fold and production of aircraft and parts, over
thirty-fold. Among the new industries installed in Canada during the war
were electronic components, synthetic rubber, roller bearings, diesel engines,
antibiotics, high octane gasoline, and optical glass.
While total manufacturing production increased by 117.9 percent in Canada over the period from 1939 to 1944, production of durables, many destined for the war effort increased by 200.5 percent. In Canada, as in the United States, transportation equipment was the leading sector, with an output expansion of 525.2 percent, while nondurables (largely consumer goods) grew by 66.7 percent, and within that category, clothing grew by 49.9 percent through 1942 and then registered declines in each of the subsequent war years.
For Mexico, the war period is described by many as a period of either export-led growth or demand-led growth. Mexican exports had been in the doldrums since the 1920s. Indeed the value in U.S dollars of Mexican exports did not regain the levels achieved in the 1920s until after World War II. Despite the growth of exports and Mexico's trade deficit with the U.S. for all but one of the War years, Mexico's ability to import needed investment goods was severely limited. For Mexico, which was still in 1945 dependent upon imported capital goods for one-quarter of the value of gross investment, the war was a period characterized principally by industrial expansion through longer daily hours of operation of existing equipment, rather than major new investments. In some instances, even keeping industry running required deliveries from the United States of new electric power plants and equipment for existing ones:
In 1943, for example, the breakdown of electric service in Monterrey
caused a temporary suspension of virtually all manufacturing activity in
that important industrial area. Even after service was resumed, industry
had to operate at a reduced rate for some time.
Energy production in Mexico was only 11.8 percent higher in 1944 than
in 1939. Although generation of electricity increased in 1945 by more than
in the five prior years, capacity limitations were viewed as an impediment
to economic development. On the matter of new industries in Mexico, Sanford
Mosk has remarked: "Uncompleted factories were a striking feature on the
Mexican landscape. In some cases, the failure to get one or two pieces
of equipment meant that a plant, otherwise complete, could not function.
There were instances where the U.S. actively tried to support industrial diversification in Mexico to aid in the war effort, but was unable to prevent undue delays in delivery. Discussions which commenced in early 1942 concerning the construction of a high octane aviation fuel refinery in Mexico were at least two years in bringing results despite President Roosevelt's attempts to expedite matters. A U.S. Export-Import Bank loan of $8 million was approved in 1942 to finance the purchase of equipment in the U.S. for the Altos Hornos iron and steel works at Monclova, but as equipment was unavailable, the loan could not be disbursed until 1946. Nonetheless, production began at Monclova in 1944 using an idle blast furnace and other parts which had been dismantled in the U.S. and shipped to Mexico. This is dramatically reflected in steel output which grew by 31 percent in 1945 alone, after having increased by only 22 percent over the period 1939 to 1944. The Altos Hornos mill in its initial two years of production took military orders from the U.S. and fabricated steel ship plates for the U.S. Maritime Commission.
Those firms established during the war years not only benefited from the assured demand of a market without import competition, but were able to count on fiscal benefits under laws enacted in 1939 and 1941 and many had access as well to financing from Nacional Financiera (Nafinsa), the state operated development bank established in 1934. Nafinsa's role was a key one in Mexico's wartime industrialization. The value of its loans and investments in industrial enterprises at the end of 1945 represented 13 percent of that year's gross national investment and it held stocks or bonds of 49 corporations. Many of the major investments during the war involved U.S. financing, U.S. investment and/or U.S. allocation of equipment. Nafinsa was active here as well, as it actively represented credit-seeking Mexican firms in U.S. financial markets.
From the establishment of the Mexican-American Commission for Economic Cooperation in 1943, industrialization in Mexico was to be a priority for the United States, with supplies being allocated above and beyond Mexico's war needs-based allocation. In line with the Commission's 1943 recommended support for cement production, "all possible aid" was given to secure the approval of the U.S. Office of Economic Warfare and War Production Board for equipment, both new and used, for two cement factories. Nafinsa, as well, had a hand in the expansion of cement production and by war's end held shares in the ownership of six cement firms. These efforts helped bring a 67 percent increase in installed capacity in the cement industry during the period 1943 to 1945.
The Mexican-American Commission's "Minimum 1944 Program" consisted of twenty projects, both private and public. In keeping with the U.S. commitment, U.S. export licenses were secured for practically all the materials required for these projects. The Commission's work was not limited to the immediate needs of the war years, but involved projections of needed capital imports through 1948 for a Mexican program for the development of electric power and irrigation. Nonetheless, as the scarcity-born priority system was relaxed, the Commission's influence diminished and as the American government's attention turned more intensively to European reconstruction, the Commission was disbanded in January 1945.
The experience of relatively rapid inflation in World War I together with that of rapid price increases in the initial years of World War II led both the United States and Canada to organize elaborate systems for controlling prices. Mexico, which was not fully mobilized for the war effort, did not control its prices. The following numbers show the annual percentage increase in wholesale prices in the three countries:
From mid-1942 through 1945, price increases were substantially checked
in Canada and the U.S., while Mexico experienced double-digit inflation
from 1942 through 1945. Crop Failures were a contributing factor in Mexico's
inflation in 1943 and 1944. Price increases in the latter year would no
doubt have been even more rapid had Mexico not relieved domestic shortages
by recourse to a trade deficit equal to 4.9 percent of its gross domestic
product. Price increases in Mexico also reflected the inability of a shortage-plagued
Mexican industry to keep pace with the growth of demand. These price increases
also triggered a shift in the functional distribution of income, with the
share of net domestic product received by profits increasing annually from
26.2 percent in 1939 to 41.3 percent in 1945.
The United States extended its system of price controls to both exports and imports. For numerous commodities the U.S. even entered long-term fixed price contracts with many Latin American countries for the purchase of a nation's entire exportable surplus of a commodity. By this expedient the U.S. avoided the extra cost of waging war that sharp price increases for raw materials occasions in the First World War. Mexico and the U.S. agreed in May 1941 (prior to the oil settlement), that Mexico would provide the U.S. with its entire exportable surplus, not absorbed by other American republics, of antimony, arsenic, bismuth, cadmium, cobalt, copper, fluorspar, graphite, henequen, lead, manganese, mercury, mica, molybdenum, tin, tungsten, vanadium, and zinc at prices to be negotiated with the Mexican government. In 1941 these products amounted to no less than 48.8 percent of Mexican exports; in 1945, 81.7 percent. In 1942 Mexico undertook to limit the widespread domestic use of rubber products in exchange for an American commitment to purchase, at a price to be periodically adjusted, Mexico's entire exportable surplus of rubber until the end of 1946. Mexico's exports of rubber jumped from $2.1 million or 1.1 percent of total exports in 1942 to $7.1 million or 2.5 percent of total exports in 1945. In 1943, Mexico supplied over ten percent of the drastically reduced rubber imports of the U.S.
Canada chose not to establish export price controls in World War II, in part, because the prices of its exports to the U.S. were subject to the controls of the U.S. Office of Price Administration (OPA). As U.S. import prices tended to be set at higher levels than Canadian domestic prices, Canada experienced periodic difficulties in assuring the adequacy of supplies to its home market. For the United States, higher import prices represented a way to "export" its inflation. By this means, the U.S. was able to reduce its own shortages and divert the pressure of excess demand away from domestic goods. It was believed that the additional funds spent on foreign goods would tend not to find their way back into increases in demand for U.S. goods. The resulting differential led to a shortage of meat in Canada in early 1942 as Canadian cattle were being exported to the U.S. where the prices were higher. The Canadian response was to have the Wartime Food Corporation, a Crown company, buy the cattle at the U.S. price up to the amount of the U.S. import quota and divert the cattle, to the extent necessary, to the domestic market at the lower Canadian price. In another case, the Canadians restricted the price-induced flow of wood pulp to the U.S. in 1944 as a bargaining step to induce the U.S. to reduce its higher price for pulp.
What may have been the most revolutionary contribution of hemispheric defence activities was the extension of Mexico's road system by 7,500 kilometres in the years from 1941 to 1945 inclusive, an absolute quinquennium increase not matched again until 1955-59. The numbers don't tell the story as eloquently as maps do: the National Geographic Society May 1942 map of North America shows only one short cross-border road in Baja California, no road along either Mexico's east or west coast, only one from the United States border to Mexico City, and only one road connecting the Gulf and Pacific coasts, from Veracruz to Acapulco. Indeed Acapulco is the only Pacific coast settlement shown to be connected with the interior by road. For Yucatan only three roads are shown: all from Merida; one to the sea and one each to the Mayan ruins of Chichen Itza and Uxmal. No road link to the rest of Mexico appeared on the map for Yucatan.
The National Geographic October 1947 map of the Countries of the Caribbean
shows Mexico literally transformed: a road the length of Baja California,
roads down the east and west coasts, roads from several U.S. Border crossing
points to Mexico City, several major Pacific coast ports connected directly
to the interior, a road across the isthmus of Tehuantepec, and extension
of the roads in the Yucatan, including one connecting Merida to Campeche
Support for road construction in Mexico was yet another of the provisions of the 1941 oil settlement. The settlement was quickly followed by a U.S. Export-Import Bank loan in 1942 of $10 million, an amount equal to over 30 percent of the sum Mexico spent on road construction that year. Transportation became a priority area for the Mexican government during the war years: its share of public investment was 57 percent during the 1939-44 period. Most of the road construction in the period consisted of main trunk lines which served the goal of hemispheric defence. It was not until 1948 that Mexico turned to a systematic program of construction of farm-to-market roads.
The exigencies of war led the U.S. to completely finance and build in less than half a year the 2,560 kilometre Alaska Highway, two-thirds of the length of which is in Canada. The route chosen through Alberta, rather than British Columbia, reflected American concerns for defence, not Canadian concern for maximizing postwar use of the road. Another major undertaking was the Canol project, which involved, inter alia, construction by the U.S. government at no direct cost to Canada of a 960 kilometre oil pipeline and service road from Norman Wells in the Northwest Territories to Whitehorse in the Yukon. The route over the uncharted Mackenzie Range reached elevations over 1500 metres at two points. Approval for this project of the U.S. War Department was secured within three weeks of its being presented to the Canadian Government, despite serious reservations on both sides of the border. The U.S. Secretary of the Interior Harold Ickes viewed the project as "impractical and wasteful" and was concerned about possible hazards in the operation of the pipeline.
The Second World War brought Canada and Mexico closer to the U.S. than they have ever been before or since. While these continued to be relations between unequals, there was during that period a sense that the well-being of each was necessary to the well-being of all. The needs of war led the U.S. into long-term contracts to purchase a wide-range of primary commodities at fixed prices. The spirit born of war led the Mexican-American Commission for Economic Cooperation to suggest in its 1943 report that "the days of economic imperialism . . . are past," to be replaced by aid to "new industries primarily designed to serve Mexico's own needs."
In Mexico, the contribution of the war was not in the expansion of major
industries, but rather in setting the stage, physically, psychologically,
and organizationally for import substitution. Improvements in transportation
and communications provided the springboard for post-war expansion. War-time
production and supply conditions significantly altered atttitudes about
the possibilities of industrial success, particularly if imports were to
be controlled. For Canada, the war brought major industrial expansion,
a definitive shift in economic orientation away from the United Kingdom
toward the United States, and a new-found wariness about initiatives by
its southern neighbor.
The habit of hemispheric cooperation did not end with the war, but the intensity diminished significantly, particularly in the face of the need for European reconstruction. The wartime solidarity required to meet a common threat has not been replaced by a comparable peacetime commitment to foster development. Washington was eager to abandon market prices for commodities in order to reduce the cost of waging war. It is not disposed today to make comparable concessions to assure that the human needs of development are met.
The future is no more likely than the past to provide us with a "moral equivalent of war." Building the new order, whether it is cooperation on a North American or global scale, will still require hard bargaining and horse-trading. The value of an examination of the wartime experience is to demonstrate that many avenues that are fiercely resisted today, were considered entirely fitting and proper when one's fate was perceived to be in the balance. The wartime experience should serve to remind us that more can be accomplished and, in fact, has been when the determination was present.
Sources: Nacional Financiera, S.A. Statistics on the Mexican Economy,
México, D.F.: n.a., 1966:89; M.C. Urquhart and K.A.H. Buckley, eds.,
Historical Statistics of Canada, Cambridge: Cambridge University Press,
1965:475; U.S. Dept. of Commerce, Statistical Abstract of the United States,
Table 1: Mexico and Canada: Trade with the United States
Sources: Combined Mexican Working Party, The Economic Development of Mexico, Baltimore: The Johns Hopkins Press, 1953:373, 375; México, Presidencia de la República, 50 Años de Revolución Mexicana en Cifras, México, D.F.: n.a., 1963:144; M.C. Urquhart and K.A.H. Buckley, eds., Historical Statistics of Canada, Cambridge: Cambridge University Press, 1965:183.
Table 2: United States Foreign Trade
Exports (including reexports)
Source: U.S. Dept. of Commerce, Historical Statistics of the United States: Colonial Times to 1970, Washington: Government Printing Office, 1975, Part 2:903, 905.