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The Latin American Development Problem

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  • Diego Restuccia

Abstract

By international standards, gross domestic product (GDP) per capita in Latin America is low -- around one fifth of that of the United States. Moreover, in the last five decades, Latin America has failed to catch-up in wealth to the level of the United States while other countries at similar or even lower stages of development have been successful. The failure to attain higher levels of relative income represents what I call the development problem of Latin America. Using a variety of data, I find that the bulk of the difference in GDP per capita between Latin America and the United States is explained by low GDP per worker and, in particular, low total factor productivity (TFP) in Latin America. I calculate that to explain the difference in GDP per worker, TFP in Latin America must be around 60 percent of the level in the United States. I consider a model with heterogeneous production units where institutions and policy distortions lead to a 60 percent productivity ratio between Latin America and the United States. Removing the barriers to productivity can increase long-run relative GDP per worker in Latin America by a factor of 4. This increase is equivalent to 70-years worth of U.S. post WW-II development.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-318.

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Length: 46 pages
Date of creation: 14 May 2008
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-318

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Keywords: labor productivity; capital; schooling; plant heterogeneity; policy distortions;

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References

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Cited by:
  1. Ferreira, Pedro Cavalcanti Gomes & Pessôa, Samuel de Abreu & Veloso, Fernando A., 2010. "The Evolution of TFP in Latin America: High Productivity when Distortions Were High?," Economics Working Papers (Ensaios Economicos da EPGE) 699, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  2. Busso Matias & Madrigal Lucia & Pagés Carmen, 2013. "Productivity and resource misallocation in Latin America," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 30, June.
  3. Perez Caldentey, Esteban & Pineda, Ramon, 2010. "Does Latin America lag behind due to shaper recessions and/or slower recoveries?," MPRA Paper 25036, University Library of Munich, Germany.
  4. Daniel Chiquiar & Manuel Ramos Francia, 2009. "Competitiveness and Growth of the Mexican Economy," Working Papers 2009-11, Banco de México.
  5. Bhattacharya, Dhritiman & Guner, Nezih & Ventura, Gustavo, 2011. "Distortions, Endogenous Managerial Skills and Productivity Differences," IZA Discussion Papers 5963, Institute for the Study of Labor (IZA).
  6. Ferreira, Pedro Cavalcanti & Pessôa, Samuel de Abreu & Veloso, Fernando A., 2011. "On The Evolution of TFP in Latin America (revised)," Economics Working Papers (Ensaios Economicos da EPGE) 723, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  7. Carlos Gustavo Machicado & Paúl Estrada, 2012. "Fiscal policy and economic growth: a simulation analysis for Bolivia," Analítika, Analítika - Revista de Análisis Estadístico/Journal of Statistical Analysis, vol. 4(2), pages 57-79, Diciembre.
  8. Alain Gabler & Markus Poschke, 2013. "Experimentation by Firms, Distortions, and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 26-38, January.
  9. Leal Ordóñez, Julio C., 2010. "Informal sector, productivity, and tax collection," MPRA Paper 26058, University Library of Munich, Germany, revised Oct 2010.

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