Markets and Growth in Latin America

The purpose of this paper is to explore the role of distortions to capital accumulation in explaining the development experience of Latin America between 1960 and 1997.

The paper attributes differences in the relative price of capital across countries and across time to government policies. These prices reflect a broad range of policies such as import tariffs and quotas on capital goods and other disincentives to invest such as corruption, and bureaucratic obstacles. Differences in interest rates across countries, country risk spreads, are attributed to distortions such as the lack of legal certainty and the inability of governments to commit not to tax future capital income.

The paper uses a neoclassical growth model and a growth model with vintage capital to evaluate the effects of these distortions on LA development. The authors claim that variations in the relative price of capital and its opportunity cost can explain much of the income differences across countries as well as economic miracles and disasters.

Conclusions include:

• the study of the sources of economic growth in LA De Gregorio and Lee (1999) prepared for the Global Development Network which concluded that “economic policy and institutional factors, such as macroeconomic stability and the degree of openness” explain the bulk of the differences between the growth of Latin America and East Asia
• economic policy and institutional factors swam the effects of investment in their growth regressions
• economic policy and institutional factors have a profound effect on development because they distort the incentives to accumulate capital, through their impact on the relative price of capital and real interest rates