NS4540 Winter Term 2016 Productivity Growth in Latin America Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Latin American Productivity I Henry Bruton, “Productivity Growth in Latin America” American Economic Review, December 1967 Wants to determine sources of Latin American growth Focus is on the relative contribution of labor, capital and technological change/efficiency (the residual) Argument built around an aggregate production function – the Solow approach Wants to look at sub-periods to see if sources of growth have changed 1940-1964 1946-64 1955-64 Also wants to make comparisons with the advanced economies

Latin American Productivity II Findings: For the period as a whole (1940-64) Latin America and the advanced countries had similar sources of growth Residual in Latin America about one half that of the advanced countries Finds that for the later sub-periods the residual in Latin America is increasingly negative Growth in these periods increasingly dependent on direct factor inputs Explanation: During WWII, the Latin American economies were cut off from supplies of equipment from the advanced countries Receipts from exports to the advanced countries put in blocked accounts.

Latin American Productivity IV During the war years, Latin American companies had to make due with what they had Lack of imports of machinery provided incentives to develop capital goods industries – develop new domestic technologies This effort paid off in creating an environment conducive to innovation and improved efficiency After the war, most Latin American countries adopted import substitution as their industrialization strategy Incentives – overvalued exchange rates, low interest rates. Minimum wage laws and unions forced wages up. Result, foreign capital substituted for domestic capital and labor

Latin American Productivity V Import substitution By making foreign capital relatively inexpensive, few incentives to use it efficiently Also because foreign capital created in very different factor proportions setting, not designed to use abundant labor Result – many of those predicted by Marx, but for very different reasons Few jobs created in manufacturing High wages attracted migrants into urban areas Increasing unemployment Concentration of capital due to smallness of domestic market and inability to export Eventual stagnation in late 1960s and 1970s