Economic Growth in Latin America Latin American GDP

Economic Growth in Latin America

Latin American GDP Growth GDP growth, productivity and factor accumulation 2/47

Latin American GDP Growth v The improvement in the 1990 s is because of the recovery from the ‘lost decade’. v But even before the ‘lost decade’, the performance was not outstanding. v The region fell from second place in terms of average per capita income in the 1950 s, surpassed only by the developed countries, to fifth place in the 1990 s, ahead only of the poor countries of Asia and Africa. 3/47

Sources of economic growth Y Technological advance Capital accumulation Efficient allocation of resources K 4/47

Sources of economic growth v Y = AK (HL)1 - v d. Y/Y = d. A/A + d. K/K + (1 - )(d. H/H+d. L/L) v is assumed to be equal to 1/3 5/47

Sources of economic growth 6/47

Determinants of Growth Investment Fertility Democracy Inflation Capital Labor GDP Rule of Law H. Capital Openness Technology Financial Sec. Crisis

Inflation and Growth v Inflation reduces growth 1. 2. A government which tolerates high inflation is one which has lost macroeconomic control, and this circumstances is likely to deter domestic investment in physical capital. High inflation means unstable inflation and volatile relative prices, reducing the information content of price signals and thus distorting the efficiency of resource allocation and reducing TFP. v Barro: 10% increase in inflation reduced long-run growth rate by 0. 025. v lower inflation rate would lead to higher economic growth, but with a likely lag.

Openness and growth v With financial openness, trade openness may reduce the risk premium and result in a larger steady-state capital stock. Technological advance. TFP v Dollar: Both increased trade distortions and increased real exchange rate variability have statistically significant and economically large negative effects on economic growth. v Sachs and Warner: Safeguarding property rights and maintaining an open trade regime are not only conducive to growth, but constitute sufficient conditions for the attainment of rapid economic growth.

Exports and growth Slide 10

Natural Resource Abundance and Growth v Sachs and Werner n n Economies abundant in natural resources have tended to grow slower than economies without substantial natural resources. Economies with a high ratio of natural resource exports to GDP in 1970 (the base year) tended to grow slowly during the subsequent 20 -year period 1970 -1990. 11/47

Natural Resource Abundance and Growth v v v 12/47 GEA 7090: Average annual growth in real GDP divided by the economically active population between the years 1970 and 1990. SXP: Share of exports of primary products in GNP in 1970. SOPEN: The fraction of years during the period 1970 -1990 in which the country is rated as an open economy according to the criteria in Sachs and Warner LINV 7089: Natural log of the ratio of real gross domestic investment to real GDP, averaged over the period 1970 -1989. RL: Rule of Law index DTT 7090 Average annual growth in the log of the external terms of trade between 1970 and 1990.

Financial deepening and growth v The deregulation of capital markets affects economic growth through two channels: n n higher savings allow an increase in capital accumulation improved allocation of investment results in higher marginal productivity of capital. v By allowing the sector to develop, it is expected that financial intermediation increase and that firms be able to finance expansion programs more easily. Also, by creating a transparent market-based system of credit allocation, lobbying activities are expected to decline and the productivity of investment to increase. v Additionally, financial institutions have an advantage in processing information regarding the potential degree of creativity and inventiveness of entrepreneurs, therefore would lead to a higher productivity.

Exchange rate unification and growth v Removal of restrictions on internal asset trades (restrictions on inflows + outflows) leads to larger inflow. n n Undertake less liquid but more productive investment projects. Deeper financial markets. v Levine and Zervos: foreign exchange restrictions exert an independent negative effect on growth.

Government size and growth v Both the level and composition of government expenditures may matter for long-term growth. health and education versus distortionary taxation ambiguous v Barro: Government investment has a positive and statistically significant partial correlation with growth, while government consumption net of defense and education has a correlation that is negative and significant.

Public Expenditure and Growth v Barro(1990): n n Analyzed the relationship b/w size of gov’t, rates of growth, saving Concluded that an increase in resources devoted to non-productive government services is associated with lower per capita growth v Devarajan, Swaroop, and Zou n An increase in the share of current expenditure has positive growth effects, whereas the relationship between the capital component of public expenditure and per-capita growth is negative. v Tazi and Zee(1997): n Found no relationship between government size and econ. growth v Aschauer(1989): n n non-military public capital stock is substantially more important in determining productivity than is the flow of military spending military capital has little relation to productivity, and that the basic stock of infrastructure of streets, highways, airports, and water systems has the most explanatory power for productivity

GROWTH AND ADJUSTMENT IN EAST ASIA & LATIN AMERICA v José De Gregorio & Jong-Wha Lee (2003) compares the experience of growth performance and macroeconomic adjustment between East Asia and Latin America from 1970 to 2000. LA EA Investment Low High Human Resources (schooling) Low Quality of Education Higher Quality of Education Fertility Rate High Low Institutional/Policy Factors • low degree of openness • High government consumption • Low indices for rule of law • high degree of openness • higher indices for rule of law Income Distribution (Inequality) High Inequality Low Inequality Initial Income Quantitatively insignificant Patterns of recession/recovery from BOP crisis V-pattern but highly recurring crisis n V-pattern: growth rates tend to fall only temporarily following a BOP crisis and then rebound to the pre-crisis levels

Regression Results 18/47

1. 5 2 Openness 0. 62 1 Inflation Rate 0. 31 0. 5 Government Consumption 0. 31 Rule of Law 0. 37 0 Democracy -0. 04 -0. 5 To. T 0. 02 BOP Crisis 0. 24 Institutions and Policy 1. 57 Human Resources 0. 29 Fertility 0. 5 Investment Rate 0. 6 Initial Income -0. 14 Contributions to per capita Growth Differentials Between East Asia and Latin America 1970 -2000, %, annual average 2. 5 3 3. 5