Income Convergence under the New Economic Model: The Experience of Latin American and Caribbean Countries

The World as such and the region of Latin America and Caribbean in particular, has witnessed in recent times a turn around from import substituting inward looking growth strategy towards a liberalized open new economic policy. The emulation of the East Asian development model is in the hope that this will attain for them what it did for the newly industrialized East Asian economies viz., high rates of growth enabling bridging the income gap with the developed high income countries. However with liberalization in Latin America came increased competition, and for most of the economies in the region hitherto accustomed to basking under the umbrella of state protection this was a severe challenge. Hence after over two decades of the new economic model, it is important to see whether the Latin American and Caribbean region has indeed succeeded in meeting the challenge and reducing the income gap with the more developed countries. This paper is an attempt in this direction. The study uses the data on GDP per capita purchasing power parity (PPP) from the World Bank electronic data set, World Development Indicators for the period 1980 to 2000 for the 23 countries of Latin American and Caribbean region as well as 17 OECD countries. Information on trade and FDI also is collected from the same data source. The success of the NEM of Latin America and Caribbean region is measured here in terms of their ability to catch up with other developed countries in terms of real per capita 2 income or income convergence. Beta and Theta estimates are used in the paper as the measures of convergence. Theta convergence measure indicates an increase in the disparity between OECD and the Latin America and Caribbean region during the years preceding and following the crisis of 1984-85. However a decline can be perceived in the post reforms period. Beta convergence measure for the region as a whole does not show evidence of narrowing income gap with the OECD. However the Beta convergence measure of the sub-sample of the Latin American and Caribbean countries that were found more integrated with the world economy as compared to other countries in the region, indicate that they have been catching up with OECD countries in the recent years.