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Institutions, Geography, and Terms of Trade in Latin America: A Longitudinal Econometric Analysis

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  • Nathan Perry
  • Carlos Schönerwald

Abstract

Recent World Bank reports indicate that the world has seen a severe reduction in poverty, representing not just a cutback in the relative incidence of poverty but a significant decline in the total number of “poor” people. However in Latin America, the incidence of poverty has remained approximately constant, while the number of poor people has increased. Because of this it is important to understand why Latin America is not making the same strides that the rest of the world is in terms of poverty reduction. It is also necessary to understand how Latin American countries can achieve a long-term economic development to both reduce poverty and improve income inequality. Since long-term economic development is a complex phenomenon, the paper focuses on three “deep” determinants- geography, integration, and institutions. Traditionally, authors study the impact of institutions, integration and geography on per capita income using worldwide cross-section data. Conversely, this paper employs the Hausman and Taylor (1981) estimator to examine the influence of these three determinants on per capita income in Latin American countries. That longitudinal econometric method allows us to consider unobserved heterogeneity across countries and to obtain direct parameter estimates of the time invariant independent variables, like geography or some institutional measures. Our results demonstrate that not just the quality of institutions, as much of the previous literature has claimed, but also the terms of trade both have strong impacts on per capita income. Once institutions are controlled for, measures of geography have relatively weak direct effects on incomes. Similarly, once institutions are controlled for, we find that both openness to trade and appreciated real exchange rates are detrimental to growth.

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Bibliographic Info

Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2009_04.

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Length: 34 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:uta:papers:2009_04

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Keywords: Institutions; Development; Openness; Geography; Panel Data; Latin America;

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  1. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1998. "The Quality of Goverment," NBER Working Papers 6727, National Bureau of Economic Research, Inc.
  2. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  3. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, 09.
  4. Mario Cimoli & Jorge Katz, 2003. "Structural reforms, technological gaps and economic development: a Latin American perspective," Industrial and Corporate Change, Oxford University Press, vol. 12(2), pages 387-411, April.
  5. William Easterly, 2008. "Institutions: Top Down or Bottom Up?," American Economic Review, American Economic Association, vol. 98(2), pages 95-99, May.
  6. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May.
  7. John Luke Gallup & Jeffrey D. Sachs & Andrew Mellinger, 1999. "Geography and Economic Development," CID Working Papers 1, Center for International Development at Harvard University.
  8. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2002. "Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development," NBER Working Papers 9305, National Bureau of Economic Research, Inc.
  9. Clague, Christopher & Keefer, Philip & Knack, Stephen & Olson, Mancur, 1999. "Contract Intensive Money," MPRA Paper 25717, University Library of Munich, Germany.
  10. Jeffrey D. Sachs, 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income," NBER Working Papers 9490, National Bureau of Economic Research, Inc.
  11. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  12. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  13. Easterly, William & Levine, Ross, 2003. "Tropics, germs, and crops: how endowments influence economic development," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 3-39, January.
  14. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  15. Gallup, J.L. & Sachs, J.D. & Mullinger, A., 1999. "Geography and Economic Development," Papers 1, Chicago - Graduate School of Business.
  16. Vijayaraghavan, Maya & Ward, William A., 2001. "Institutions and Economic Growth: Empirical Evidence for a Cross-National Analysis," Working Papers 112952, Clemson University, Center for International Trade.
  17. Jeffry Jacob & Thomas Osang, 2007. "Institutions, Geography and Trade: A Panel Data Study," Departmental Working Papers 0706, Southern Methodist University, Department of Economics.
  18. North, Douglass C, 1994. "Economic Performance through Time," American Economic Review, American Economic Association, vol. 84(3), pages 359-68, June.
  19. Carlos E. Schonerwald da Silva & Matías Vernengo, 2007. "Foreign Exchange, Interest and the Dynamics of Public Debt in Latin America," Working Paper Series, Department of Economics, University of Utah 2007_02, University of Utah, Department of Economics.
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