The phrase “banana republic” is commonly used today, but its origins are perhaps less well understood, yet at the time, the behavior of the United Fruit Company was sufficiently infamous to coin the term we know and love today. The fruit exporter managed to secure dominance in its market due to a combination of land concessions and tax breaks, such that by 1930 the company had around 3.5 million acres of land across Latin America.
The company has a dismal reputation across Latin America, with the possible exception of Costa Rica, where greater labor competition and the ability of workers to move between jobs forced the company to make large investments in local amenities, which greatly improved its reputation.
Positive impact
Indeed, the researchers note that the impact of the company in Costa Rica was actually positive in the long term. What’s more, this impact persisted even after the company went bankrupt in 1984. This sustained impact was due to the investment the company made in things like hospitals, schools, and roads, both for workers and their families. The researchers believe that the company made these investments primarily to ensure that workers weren’t tempted to join rival employers.
The researchers measured the economic wellbeing of people in the communities where the company operated between 1973 and 2011. This gave them access to three decades worth of data after the company closed down.
The analysis showed that households in the area where the company operated appeared to have significantly higher living standards than nearby regions, whether in terms of education, sanitation, or housing quality. Indeed, households were 26% less likely to be poor than those elsewhere. What’s more, by 2011, this poverty gap had only shrunk by around 63%.
To try and understand why this was, the researchers looked at shareholder reports issued by the company. These reports revealed that company leaders explicitly highlighted the investments they made in local amenities in order to attract and retain workers. What’s more, these investments appeared to be much more likely in areas where the firm had competition for workers from other companies.
Less competition
The researchers then built a model to test what might have changed if the firm had had less competition for workers. The model suggests that if workers were even half as mobile, the overall welfare of the region would have fallen by around 6%.
“The model offered a clear message that, with competition in the labor market, the company can have a positive welfare impact,” they explain. “However, in another setting with lower labor mobility, it’s not necessarily a no-brainer to bring the company in, because it could decrease local welfare.”
The results suggest that when it comes to attracting and admitting a multinational, regional authorities might want to consider the inherent competition for talent in that region. It’s by no means guaranteed that the company will have a positive impact, especially if the region has an uncompetitive labor market.
