Student spotlight: an essay by Sanu Dev

Throughout August, BU Today will publish pieces of student scholarship and creative work. The following essay is by Sanu Dev (CAS ’08), who is pursuing a double major in Economics and IR and plans to apply to law school. This essay appeared in the Spring 2006 Issue of The Journal of the Core Curriculum, an annual anthology of the creative and scholarly work from the Core community. Back issues can be read online at http://bu.edu/core/journal.

In The Wealth of Nations, Adam Smith discusses the concepts of value, trade, and division of labor. Smith asserts that labor creates value and that commodities should be sold in a decentralized free market. People intrinsically have “the propensity to truck, barter, and exchange one thing for another” because they continually need to satisfy their desires (Smith 25). The division of labor enables workers to specialize in a certain field of work, allowing the entire production of a commodity to be more efficient. This idea of the division of labor can be applied to the international division of labor, in which countries specialize in producing certain goods. Just as the division of labor has its limitations, there is also a limitation to the international division of labor. This limitation came about when the United Fruit Company became a monopoly in Latin America.

The introduction of the division of labor in any company produces three important results. First, each worker becomes more dexterous in his line of work through repetition and can, therefore, work more efficiently. For instance, a person assigned to make nails all day might have produced a few hundred in the beginning, but eventually his output increases as he becomes better at his job. Secondly, the division of labor saves time because each person is responsible only for one specific task as opposed to many. One no longer needs to run from one end of the workplace to the other in order to complete the entire project; instead, he can remain focused on his task. Finally, because each worker performs the same task repeatedly, he eventually devises plans to ease his job, such as simple machinery. Collectively, these three factors increase production of goods, which can then be sold in a market (17-20). However, this specialization causes people to be more dependent on each other in order to gain wealth. Without one worker in the production line, the commodity may not be completed and thus it cannot be sold for profit.

The concept of the division of labor that Smith introduced in the late 1700s is now referred to as the “detailed division of labor” or the “division of labor in manufactures” (Caporaso 13). This idea of distributing labor can be applied to other fields of the division of labor. The most primitive trade originated when one person wanted something that another person could provide. Eventually, trade increased among more people and then extended to towns. Naturally, this phenomenon did not end domestically. Over time, as travel became less difficult, countries began to trade commodities, and these interactions slowly created the international division of labor (187).

In the international division of labor, nations or regions specialize in exporting certain goods in the world market (188). As noted previously, the division of labor allows for more productivity, and thus each country produces more of their commodity through specialization. As long as there is a market available, countries can export all of their goods, and they benefit from the profits. However, the exporting country becomes more dependant on the rest of the world market’s participants to purchase the good. A problem arises when the size of the market shrinks because a smaller market limits the potential gains from trade.

In the modern market, when people desire a commodity, they can usually acquire it as long as they have enough money to purchase it. For instance, in the case of an ordinary banana, one simply goes to the local supermarket and buys one for less then a dollar. Little does the consumer realize that his pleasure in buying a banana is a result of the international division of labor. When the countries are able to specialize in producing certain commodities, they can become the dominant exporter for that good in the world market. Thus, the international division of labor allows people to enjoy goods that their own country cannot always provide.

In the Western Hemisphere, the largest banana producing regions are Central America, the Caribbean, and South America, respectively (Moberg 5). The climate in these tropical regions is suitable for growing this fruit, and therefore, these regions are considered to be “natural” producers of this crop. Though these areas are dominant producers of this fruit, the United Fruit Company, a US firm, exploited the market on this product by establishing itself as a monopolistic multinational firm. The separate nations should have produced these goods and exported them in the world market on their own, but the United Fruit Company stole this opportunity for increased trade. Instead, this monopolistic multinational corporation placed these countries under its strict supervision, and ultimately prohibited the existence of the true international division of labor.

Until the late 1800s, the market for bananas was highly decentralized because there was no single power that controlled or dominated international trade. Voluntary trade occurred in the free world market as private US and European firms purchased bananas from local growers in the Western Hemisphere, Africa, and Asia (Raynolds 25). By the early 1900s, these companies realized the enormous profits that could be gained from exporting bananas. In order to utilize this advantage, they began to build their own private banana plantations where they could produce more cheaply than buying from independent domestic growers. In 1899 two American banana firms, the Boston Fruit Company and Minor Keith’s company merged to establish the United Fruit Company, which became the strongest monopolistic force in the Western Hemisphere (Moberg10).

The United States became an economic hegemony in Latin America during the 1900s, which meant that it had a dominant influence over economic activity across the continent. In the 1800s, the dominant colonial powers such as Great Britain and France consistently traded with the countries in the Western Hemisphere. Once tensions of a European war arose, these two countries along with others significantly decreased their trade with Latin America in order to concentrate on the war effort. The United States quickly recognized the opportunity to replace Great Britain and France as an economic power in Latin America and they did so by seizing control of the banana market (Keylor 201). When the United Fruit Company established itself in the region, the countries could sell bananas in the world market only through the assistance of the company. Furthermore, in addition to dominating the economic sphere in the region, the United Fruit Company was able to influence politics because the countries relied heavily on profits from banana production (Raynolds 26).

Though bananas can be found in Africa and Asia as well, the United Fruit Company decided to establish itself in the Latin American, Central American and Caribbean regions due to proximity. Because bananas spoil relatively quickly and travel by ship was slow, the shortest distance meant that more unspoiled bananas could be imported. Thus, the United Fruit Company decided to invest its capital in the Western Hemisphere (Soluri 53).

According to Smith, the value of a good is determined by the amount of labor invested in its production (Smith 47). Because bananas cannot be grown efficiently in the United States, the value of the banana is entirely related to the amount of labor required to import it into the country. The first import of bananas in the US occurred in New York in 1804, and by the 1850s small firms were importing bananas from the Latin American region (Soluri 51). Initially, importing bananas was an arduous task for the following reasons: first, the firm must buy the fruit from local growers, then ship them to the United states without spoiling, and finally, they must travel within the country to domestic stores (Moberg 10-11). Therefore, the quantity of bananas was limited, and this good was considered a luxury. People recognized the difficulty in importing this exotic and tropical fruit. Therefore, the scarcity of bananas caused their value to increase.

As technology advanced, firms were able to store bananas for longer periods of time. Cooling devices on ships and railcars emerged, which enabled increased storage time. Additionally, the expansion of railroads within the United States allowed firms to sell more bananas to domestic produce stores (Soluri 53-54). Furthermore, scientists were able to overcome the problem of the Panama Disease, which was a soil fungus that infected bananas. They were able to breed a type of banana that was resistant to the disease (67-68).

Because a lower percentage of bananas spoiled, a higher percentage of the fruit made it to American markets. As the cost of importing decreased, a larger quantity of bananas could be imported. According to the basic economic principles of supply and demand, this increase in supply caused the price of the banana to decrease. Eventually, banana prices dropped. As more consumers gained access to this tropical fruit, the popularity for bananas began to increase because of one main reason: people believed that a diet rich in fruits was more nutritious than a traditional diet of grains. While the apple was, then, the main fruit available, the banana emerged as a substitute, because it contained more nutritional value than the apple (54-55). More people wanted bananas, and companies could now respond to this demand. The banana that was once a luxury item was transformed into an ordinary commodity. Additionally, because the total supply of bananas increased overall, the total value of imports also increased. In 1871, the US imported less then $250,000 worth of bananas, but by 1901, this value soared to 6.5 million (49).

Although it is clear that Latin American countries had the potential to produce a surplus of bananas that they could export to other countries in the world market, the means of production was highly debatable. At the inception of the banana trade, small US companies bought bananas from local growers. However, as demand in the United States increased for bananas, companies had no choice but to respond to consumers. Instead of relying on private sellers, companies such as the United Fruit Company began to build their own banana plantations in these regions. All of the workers were locals, but this multinational organization controlled all levels of production. This was the only way to guarantee a steady supply of bananas to the United States (Bucheli 81-82).

By 1910, the United Fruit Company secured itself as a monopoly trade in the Western Hemisphere as it drove all domestic and foreign competition (Moberg 146). The company paid local producers higher prices for bananas than other foreign companies, which eventually drove those firms out of business. Once foreign competition was eliminated, the United Fruit Company proceeded to extradite independent local banana growers (149). By 1930, the Company owned twenty times the land that it actually needed for production. It feared that the Panama Disease might thwart plant growth, and therefore it needed more land for cultivation (150). Acquiring this land forced small local growers out of business while making the United Fruit Company the largest multinational corporation in the region.

As the United Fruit Company forged a monopoly and began to control all levels of production, it vertically integrated these regions into the United States’ economy. Banana production no longer appeared as a task done by the region, but was considered an extension of the American economy. Although domestic people worked on the plantation, an American company owned and operated the plantations (Bucheli 80). Controlling all stages of production “required substantial investments in infrastructure in Latin America and the Caribbean, including: plantations, hospitals, roads, canals, docks, telegraph lines, railways, and ships” (80). When the United Fruit Company controlled all of the stages of production, it basically forced Latin America to be dependant on foreign capital. It was the United States’ money that maintained the infrastructure, not the money of the country where the plantation existed. If an American multinational corporation controlled everything in this region, then Latin America could no longer be thought of as the producer of bananas. If the plantations were not controlled by the people of that country, there would be a disruption in the international division of labor.

As the United Fruit Company dominated Latin America, it forced Latin American countries to become dependent on the corporation. The company owned about one fourth of one percent of all agricultural land in 1955 (May 123). Therefore, local agricultural workers often worked for the United Fruit Company because they had no other alternative. Because the company was successful, it was able to pay higher wages than a domestic producer could (124), and the workers benefited from increased wages. However, the total revenue earned did not return to the host country since the United Fruit Company belonged to the United States. For example, on average, the local governments received only about 6.5 percent of the total revenue. Percentages ranged from one-fifth of one percent in Colombia to 19 percent in Costa Rica (124). If the host countries owned banana plantations, they could have earned more revenue for their country.

When the United Fruit Company vertically integrated Latin America into the American economy, it also forced the region to be dependant on United States capital. Maintenance and further innovations came from the company itself, and funding originated from America as well. The countries relied on the US market to buy these bananas from the United Fruit Company, which could become a problem if the company no longer felt it needed a particular plantation because the costs of production becomes too high. For example, the colony of British Honduras “constituted no more than 3 percent of the United Fruit’s total banana imports to the United States” (Moberg 151). If the company decided to shutdown its plantation there, the government of British Honduras could take control of it. However, it probably would not earn profits since it could not compete with the United Fruit Company. Thus, the host countries are at the mercy of the company to drive its economy.

When the United Fruit Company accumulated more land for banana production, it inevitably hindered the production of other crops that could be traded in the world market. Data shows that in 1955, the production of cacao in Costa Rica was significantly below banana production (May 144). Had the Company not monopolized in this region, Costa Rica could have specialized in cacao production and sold it in the world market, which would have integrated it into the international division of labor. Additionally, other products such as timber, rubber and sugar were limited in production because of the company’s existence (145). The United Fruit Company did not foster the production of other crops, but instead forced the economy to depend on banana production for revenue.

Though the United Fruit Company hindered the international division of labor, its presence in Latin America increased economic development and improved social welfare. The company helped the region economically because it was able to transform heavily forested terrain into arable land for banana cultivation and production. Additionally, the company introduced better roads, railways, and communication systems. Socially, the United Fruit Company created jobs for workers in undeveloped areas. Furthermore, it recognized the needs of its workers, and therefore provided housing, education, recreation, and places of worship (183).

According to Adam Smith the implementation of the division of labor increases productivity via specialization. As the divisions become smaller, the tasks became easier. Therefore, workers are more easily replaceable and can be compensated with a lower wage. On an international scale, countries have unique commodities that can be traded in the world market. Ideally, the country itself should be the producer of the good which would allow it to fully gain the benefits of trade. When foreign firms such as the United Fruit Company produce these goods on behalf of the host country, they impede the economic success of the country.

Although the United Fruit Company was an economic hegemony in the 1900s, by 1956 its monopolistic power slowly declined, as it only controlled 40 percent of its original share in the world market for bananas. Competition increased as other companies were able to increase productivity, which resulted in over 160 competitors today (245). The existence of multinational corporations in today’s world does not necessarily indicate hindrance to the international division of labor, but monopolistic multinational corporations do. Numerous multinational corporations have less power to control all the means of production than a single multinational corporation, and therefore not hurt the host country as severely. 

In the end, the United Fruit Company hindered the international division of labor because it monopolized banana production in Latin America. Commodities are sometimes linked to specific regions, and no outside corporation should have the ability to produce on the behalf of that nation. In the case of the United States and Latin America, the United Fruit Company should have continued to buy bananas from the independent producers and allowed them to develop larger, more efficient plantations. This analysis of the United Fruit Company demonstrates one major problem in the international division of labor: should multinational firms manufacture goods in other countries when the country itself should be the producer? It is often argued that because the nations in the Latin American region are not fully economically developed, they cannot produce goods efficiently. Therefore, more industrialized countries such as the United States apply their manufacturing techniques in order to foster efficiency. According to Adam Smith, once someone is given a specific task to perform, he naturally will become better at it through repetition. Similarly, when Latin American countries were given the “job” to produce bananas, they too over time would have become more efficient, with or without the help of another country. Instead, the United Fruit Company quickened the rate of efficiency, but it resulted in the dependency of Latin American countries on the United States.

The United Fruit Company’s interference in the international division of labor raises an important question for today’s world. What is the future of the multitude of multinational organizations that currently exist? One solution is to limit the number of multinational organizations in the region or regulate the percentage of total revenue that is returned to the host country. Another possibility is to allow the host country to have total control of the multinational corporation. The answer to this question may be crucial in order to secure the international division of labor.

Works Consulted

Bucheli, Marcelo. “United Fruit Company in Latin America.” Banana Wars: Power, Production, and History in the Americas. Ed. Marl Moberg and Steve Striffler. Durham: Duke University Press, 2003.

Caporaso, James A. A Changing International Division of Labor. Boulder: Lynne Rienner Publishers, 1987.

Keylor, William R. The Twentieth Century World: An International History. New York: Oxford University Press, 2001.

May, Stacy and Galo Plaza. The United Fruit Company in Latin America. Washington: National Planning Association, 1958.

Moberg, Marl and Steve Striffler, eds. Banana Wars: Power, Production, and History in the Americas. Durham: Duke University Press, 2003.

Raynolds, Laura T. “The Global Banana Trade.” Banana Wars: Power, Production, and History in the Americas. Durham: Duke University Press, 2003.

Smith, Adam. An Inquiry into the Nature and causes of the Wealth of Nations. Ed. R.H. Campbell and A.S. Skinner. Indianapolis: Liberty Fund, 1981.

Soluri, John. “Banana Cultures: Linking the Production and Consumption of Export Bananas 1800-1980.” Banana Wars: Power, Production, and History in the Americas. Ed. Marl Moberg and Steve Striffler. Durham: Duke University Press, 2003.