Economic Growth In Latin America: Sources And Prospects

Is it misleading to attribute growth to productivity and investment? This paper examines past evolution of growth using a comparative perspective and searches for an explanation for its poor performance in Latin America. It discusses potential growth for the region, presenting two methodological alternatives to address this question:

• Growth decompositions are first performed to look at the behavior of total factor productivity and examine differences across regions of the world and within Latin America
• Cross-country growth regressions are then used to compare the relative performance of Latin American countries vis-à-vis the rest of the world

The author maintains that this approach goes beyond the traditional, and perhaps misleading, straightjacket of attributing growth to productivity or investment.

Findings include:

• the rate of Total Factor Productivity (TFP) growth was the main factor explaining changes in growth rates over time within Latin American countries as well as the lower growth of Latin America relative to other regions
• Changes in capital accumulation also played a relevant role in explaining changes in growth rates over time within Latin American countries as well as the lower growth of Latin America relative to other regions
• Economic policy and institutional factors, such as macroeconomic stability and the degree of openness explain the bulk of the differences between Latin America and other regions
• Although the level and quality of human resources are important determinants of growth, they do not explain low growth in Latin America
• External factors, such as terms of trade, and convergence effects, did not play a quantitatively important role in explaining low growth in the region
• The evolution of terms of trade in Latin America did not contribute to the lower growth of Latin America relative to that of East Asia
• The difference in initial income did not explain an important part of growth differentials

Conclusions include:

• to have a higher level of growth, what is needed is to have institutions and policies conducive to growth
• relying on high investment to promote growth, or to explain high growth as just an important investment effort, as argued for East Asian economies, may be misleading
• the empirical evidence on growth determinants shows that once we control for the other that foster long-term growth, investment becomes less significant
• policy and institution factors contribute to long term growth by stimulating TFP growth as well as capital accumulation