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The Latin American Development Problem: An Interpretation

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  • Diego Restuccia

Abstract

By international standards, gross domestic product (GDP) per capita in Latin America is low: around one fourth 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 in Latin America. Using a development accounting framework, I find that the bulk of the difference in GDP per capita between Latin America and the United States is accounted for by low GDP per hour and, in particular, low total factor productivity (TFP) in Latin America. I estimate that to explain the difference in GDP per hour, TFP in Latin America must be around 60 percent of that in the United States. I then 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 GDP per hour in Latin America by a factor of 4 relative to that of the United States. This increase is equivalent to 70-years worth of post-world-war-II economic development in the United States.

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  • Diego Restuccia, 2012. "The Latin American Development Problem: An Interpretation," Working Papers tecipa-466, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-466
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    1. Archawa Paweenawat & Thitima Chucherd & Nakarin Amarase, 2017. "Uncovering Productivity Puzzles in Thailand: Lessons from Microdata," PIER Discussion Papers 73, Puey Ungphakorn Institute for Economic Research.
    2. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    3. Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina M., 2023. "Policy distortions and aggregate productivity with endogenous establishment-level productivity," European Economic Review, Elsevier, vol. 155(C).
    4. Murat Ungor, 2017. "Productivity Growth and Labor Reallocation: Latin America versus East Asia," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 25-42, March.
    5. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    6. Ling-Yun He & Xiao-Feng Qi, 2021. "Resource Misallocation and Energy-Related Pollution," IJERPH, MDPI, vol. 18(10), pages 1-19, May.
    7. repec:zbw:bofitp:2017_018 is not listed on IDEAS
    8. Hofman, André & Aravena, Claudio & Aliaga, Vianka, 2016. "Information and communication technologies and their impact in the economic growth of Latin America, 1990–2013," Telecommunications Policy, Elsevier, vol. 40(5), pages 485-501.
    9. Ilya B. Voskoboynikov, 2020. "Structural Change, Expanding Informality and Labor Productivity Growth in Russia," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(2), pages 394-417, June.
    10. Carlos Esteban Posada Posada, 2021. "Could the Colombian economy grow faster? How it would be possible?," Documentos de Trabajo CIEF 19683, Universidad EAFIT.
    11. Peiyuan Xu, 2020. "Do SME Policy Improve Firm Productivity? Empirical Evidence from Latin America and China," International Business Research, Canadian Center of Science and Education, vol. 13(3), pages 1-47, March.
    12. Kaiji Chen & Alfonso Irarrazabal, 2015. "The Role of Allocative Efficiency in a Decade of Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 523-550, July.
    13. Nuvolari, Alessandro & Russo, Emanuele, 2019. "Technical progress and structural change: a long-term view," MERIT Working Papers 2019-022, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    14. Kaiji Chen & Alfonso Irarrazabal, 2015. "The Role of Allocative Efficiency in a Decade of Recovery," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 523-550, July.
    15. Pedro Bento & Diego Restuccia, 2017. "Misallocation, Establishment Size, and Productivity," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 267-303, July.
    16. Mendez-Guerra, Carlos, 2014. "On the Development Gap between Latin America and East Asia: Welfare, Efficiency, and Misallocation," MPRA Paper 62588, University Library of Munich, Germany.
    17. Diego Restuccia & Richard Rogerson, 2013. "Misallocation and productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 1-10, January.
    18. Ilya B. Voskoboynikov, 2020. "Structural Change, Expanding Informality and Labor Productivity Growth in Russia," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(2), pages 394-417, June.

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    Keywords

    productivity; capital; schooling; establishments; distortions;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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