The Political Economy of Latin American Economic Growth

What are the factors behind Latin America’s poor growth performance? Political reasons for Latin America’s inability to attain the high levels of investment in human and physical capital necessary for sustained economic growth are considered in this paper. It argues that a grasp of Latin American politics is fundamental for understanding the region’s poor institutions and its perverse reaction to natural resource abundance.

A historical evolution of decision making in Latin America is first presented, asking how today’s institutions came into being and how they can be associated with institutions which emerged during colonial times or later. The approach of the study of the political economy of growth is considered and alternative views of politics and of growth used in the analysis are given. The investment rate in Latin America is then anaylsed, emphasizing the role of political uncertainty and credibility in shaping investment decisions in the region. Other determinants of growth, such as investment in human capital, resource abundance, institutions, democracy, and trade policy, are then analysed exploring their political economy determinants.

Conclusions include:

• Latin America’s policy instability seems to have significantly contributed to its poor growth performance, being a main factor affecting the investment rate and investor confidence, this political instability is best exemplified in the continuous swings that the countries of the region experience between democracy and authoritarianism
• inequality in Latin America has affected the region’s investment rates as well affecting aggregate economic growth, inequality fuels policy instability and also biases policies in favor of economically powerful groups, it has also been a contributing factor to the region’s inefficiencies in human capital accumulation
• perceived corruption and rentseeking plagues these countries’ governments
• the pressure on political parties to follow populist economic policies is very high in Latin America, reflecting a greater popular demand for redistribution than in more egalitarian societies, however the power of elites to thwart this demand has been manifested in the way in which even populist policies appear to end up being distorted so as to benefit powerful vested interests
• policy reform proposals must address the reasons for the region’s high instability, its unequal distribution of political and economic powers, its prevalence of rent-seeking and its poor institutional structure