Monday, December 19, 2016

Actually, Jacobo Arbenz was a communist, and so was the Guatemalan land reform (Part 1)

Image: A mural in Guatemala City commemorating President Jacobo Arbenz and Decree 900. (source)

In 1952, democratically elected Guatemalan President Jacobo Arbenz signed into law Decree 900, passed by the democratically elected Guatemalan Congress. Decree 900 bought 1.5 million acres of land from private owners and distributed it to 500,000 Guatemalan families, or about one sixth of the population of Guatemala. The purchase of these 1.5 million acres of land was not voluntary, yet it was fair to landowners. Similar to the principle of eminent domain in the United States, the Guatemalan government paid the owners 100% of the value of the land that they themselves had indicated on their tax returns. And, the Guatemalan government only forced the sale of land that was not being used by its owners. Legally, any land that was actually being used by its owners could not be taken.

The logic of Decree 900 was very straightforward:
  • Those who do not have ownership of their own capital (in this case, land to cultivate) can be exploited.
  • Those who own large amounts of capital tend to manipulate the political and economic system for their own benefit.

This assessment was very accurate in Guatemala.

First, wages for rural Guatemalans were extremely low, at or below sustenance level. Because poor, rural Guatemalans did not own land, they had to work for wages for people who did. Given the choice between working for wages and starvation, this lack of ownership opened poor Guatemalans to terrible exploitation.

Furthermore, just 2% of the population owned 70% of the land of Guatemala. The American company United Fruit alone owned a staggering 42% of the total landmass of Guatemala, including some of the most productive farmland in the entire world on Guatemala's west coast. Obviously, the ownership of so much of Guatemala's productive capacity by so few concentrated a great deal of power in very few hands.

These wealthy, powerful landowners had used their power to manipulate Guatemala in order to further increase their profits. Most obviously, they carved out special rules for themselves. United Fruit, for example, had been able to secure exemptions for its massive profits from nearly all taxes. Despite owning nearly one half of the landmass of Guatemala, they paid nearly nothing to support the country.

More importantly, however, wealthy landowners realized that restricting production could--paradoxically--increase profits. This wouldn't seem to make sense; if United Fruit produced more bananas it could sell more bananas, which should result in greater profits. But higher revenues do not always translate to higher profits. In the case of United Fruit and other Guatemalan agricultural producers, greater production also meant that per acre costs increased dramatically--so dramatically that they offset the greater revenues and resulted in lower profits overall.

The central issue--producers and workers alike--was full employment. Full employment occurs when there are more job opening than there are job seekers. In full employment conditions, employers must compete with each other for employees by increasing wages, offering better working conditions, and providing more generous fringe benefits. In full employment, there is constant, upward pressure on wages; if several companies each have a job opening and there is only one person looking for a job, that applicant has a very strong bargaining position and can negotiate higher wages. Either the employer accepts the wage demands of the job applicant, or the job goes unfilled and ripe bananas rot in the fields. Or if a nearby plantation has job openings they are unable to fill, a worker could demand a raise from her current employer, threatening to quit and work for a competitor for higher pay. In full employment, workers have tremendous bargaining power and the result is increasing wages--which obviously cuts into a company's profits.

But the situation in Guatemala on the eve of Decree 900 was the opposite of full employment; there were far more job seekers than job openings. Thus, instead of employers competing for workers by raising wages, workers had to compete for jobs--in other words, they had to agree to work for less than other job applicants to have any hope of finding work. Unsurprisingly, this shortage of jobs put enormous downward pressure on wages, until wages were at or below sustenance levels--just above the point at which one would be better off not working at all. Given the choice between starvation and hard work for little pay, rural Guatemalans had a very poor bargaining position and were forced to work long hours under terrible conditions for subpoverty wages--if they were "lucky" enough to have work at all.

The reason United Fruit and others kept so much land out of production was to ensure that full employment conditions were never created. As long as there were always more job seekers than job openings, there would be downward pressure on wages and producers could pay their workers pennies. Putting more land into production risked altering that ratio towards full employment conditions--and hence greater production could result in lower profits. United Fruit and other producers reaped enormous profits as long as rural Guatemalans were destitute, and keeping land out of production was vital to running a profitable business. Decree 900 was a threat to the profitable equilibrium landowners had established.

Of course, the unfairness of this situation wasn't simply the subpoverty wages paid to workers and the misery of the rural Guatemalan unemployed. The wealthy landowners who made such immense profits were simply owners, not workers; as owners, they were entitled to all of the profits derived from the use of their land, even though they never set foot on--let alone worked--their plantations.

So the endemic poverty of rural Guatemala could be boiled down to two separate, though related, problems:
  1. First, poor, rural Guatemalans were poor because they didn't own land. If they were the owners of the land they worked, they would have been entitled to the profits derived from their work. Instead, Guatemalan workers' hard work benefited idle, absentee landowners as the workers themselves were paid pennies. If they owned the land that they worked, Guatemalan workers would be doing the exact same work, and be entitled to the profits of that labor. Instead--since they did not own land--they were forced to sell their labor in a labor market that offered appallingly low wages.
  2. The second problem was the tremendous downward pressure on wages, which occurred because there simply weren't enough jobs to go around.

Decree 900 worked simultaneously on both problems. First, it gave ownership of land to ordinary Guatemalans, and provided low-cost loans for capital investments so these new farms could get up and running. And second--by only taking unused land--Decree 900 ensured that more land was put into production. Taken together, this meant that as many workers became owners of uncultivated land, they set out to work on those new farms--but in so doing, those workers were no longer competing for existing jobs. This meant that the remaining workers--those who did not receive land from Decree 900--would be in a stronger bargaining position and upward pressure on wages should result. This upward pressure on wages, President Arbenz reasoned, should benefit even those who did not directly participate.

Though it was only in effect for 18 months before being cut short by the Guatemalan Civil War, the effects were profound. The strategy behind Decree 900 was proved correct. First, program participants saw their income and consumption rise dramatically. Decree 900 could not reach every rural laborer--there simply wasn't enough money--but direct beneficiaries were unquestionably better off. Additionally, Decree 900 successfully put upward pressure on wages, so even those rural Guatemalans who did not become landowners through Decree 900 nevertheless benefited. Though evidence is sparse, collective bargaining agreements from this brief period show a rapid increase in agricultural workers' wages. And finally, Guatemala as a whole benefited: agricultural production expanded and aggregate Guatemalan consumption, production, savings, and domestic private investment rose dramatically.

President Arbenz, himself a landowner, lost some of his land through Decree 900. And even though United Fruit only lost land they were not using and were paid 100% of the value of the land as they themselves had reported on their most recent tax returns, they moved to violently overthrow the Guatemalan government and undo Decree 900. The American Secretary of State was on the board of directors of United Fruit, and he convinced President Eisenhower to authorize a covert coup de etat of the democratically elected Guatemalan government.

The horrific results of this coup--as well as the historical lessons we have (mis)learned from this sordid history--are considered in part 2.

Note: The information on this page is either common knowledge (eg) or from Shattered Hope by Piero Gleijeses.

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