Aggregate Productivity: The Key to Unlocking Latin America’s Development Potential

Most countries in Latin America and the Caribbean have been growing slowly for a long time and consider themselves increasingly poor relative to the rest of the world, including both advanced countries and peer countries in other regions. Actual declines in income per capita for substantial periods of time have been common. However, it would be misleading to blame low investment for this failure. Low and slow productivity, as opposed to impediments to factor accumulation, is the key to understanding Latin America’s low income relative to developed economies and its stagnation relative to other developing countries that are catching up. A fortiori, the main development policy challenge in the region is to diagnose the causes of poor productivity and attack their roots. This chapter documents the key dimensions of weak productivity at the aggregate level in an analytical framework that helps this diagnosis, and in that way provides a basis for the rest of the book. It draws heavily from Daude and Fernandez-Arias (2009), where the statistical and technical details are spelled out.