Economic Growth in Latin America: Past, Present and Future Perspectives. Andrés Solimano ECLAC, United Nations November 11, 2004

Table of Contents A.The Recent Growth Performance of Latin America B.The Growth Record of Latin America of the Last Four Decades C.Volatility D.Changes in Growth Performance E.Towards Explaining Growth Performance F.Future Prospects

A. The Recent Growth Performance of Latin America

América Latina y el Caribe: 4,5% Figure 2. PROJECTED GROWTH RATE BY COUNTRY, 2004

Rate of Growth (% per year) GDP GDP per capita Gross Capital Formation (% of GDP) National Savings (% of GDP) Foreign Savings (% of GDP) Source: Preliminary overview of the economies of Latin America and Caribbean, ECLAC Savings, Investment and Growth Latin America and the Caribbean, Table 1

B. The Growth Record of Latin America of the Last Four Decades

Economic Growth in Latin America Four stylized facts of economic growth in L.A. that define risks and prospects of growth Economic growth has been slow and very volatile. High heterogeneity in degree of development across Latin American countries. Economic growth has declined since early 1980s. Important changes in relative growth performance, including the economic collapse of some countries. Few cases of rapid and sustained growth after 1990.

C. Volatility

Economic growth has been slow and volatile Average annual growth rate of per capita GDP in Latin America: 1.6% per capita100 to 192 US: 2.5%100 to 275 South Korea: 6%100 to 990 Instability: years with recessions (negative GDP growth) Average for Latin American countries: 16 of 42 US: 8 of 42 South Korea: 4 of 42

Frequency of Growth Crisis: Unstable Growth Argentina Bolivia Brazil Chile Colombia Costa Rica Dom. Republic Ecuador Mexico Peru Uruguay Venezuela Average Korea Thailand Philippines Ireland Spain Turkey Average Source: Own elaboration based on ECLAC and IMF data. Number of years with negative GDP growth rates Latin American Countries Control group Percentage of crisis in total period Growth Crisis in Latin America and Control Group Table 4

D. Changes in Growth Performance

Changes in Growth Performance Across Countries in Latin American Economies

CumulativeContribution of growth in perTotal FactorCapital and Labor capita GDPProductivity Bolivia Brazil Chile Colombia Costa Rica Dom. Republic Ecuador Mexico Korea Ireland Spain Thailand Table 6 Growth Booms in Latin America and Other Countries Sustained growth per-capita GDP growth rates above 2 per year for 6 continuous years or more Length of the cycle in years

Country andPer capitaNationalExternalInvestmentTerm of Growth BoomsGross DomesticSavingFinancingTradeNationalExternalInvestmentTerm of Period*Product (Index 1995=100) SavingFinancingTrade (annual growth rate)(Index 1995=100) Bolivia Brazil Chile Colombia Costa Rica Dominican Rep Ecuador Mexico Source: Economic Survey of Latin America of ECLAC (various), IFC(2002) and Maddison(2003). * per capita GDP growth rates above 2 per year for 6 continuous years or more. (Percentages of Gross Domestic Product) Memo (average of four years before) Table 7 Anatomy of Growth Booms

E. Towards Explaining Growth Performance

Why so different development paths? Analysis of sources of economic growth Physical capital accumulation: high and neutral Human capital accumulation: low and neutral Technology adoption and use (TFP): main determinant TFP accounts for most of the evolution of per-capita GDP in each country the decline in growth after 1980, avg. TFP growth is 0%. changes in performance for collapses: Venezuela -1.3% per year since 1980 stagnations: Mexico -0.3%per year since 1980 booms: Chile 3.5%per year since 1980 South Korea: 3.7% per year since 1960

Table 8 Growth Accounting for Latin American Economies

Country Argentina Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador Mexico Peru Uruguay Venezuela Latin America Simple average Weighted average Source: Andrés Solimano and Reimundo Soto (2003)."Latin American Economic Growth in the Late Twentieh Century: Evidence and Interpretation", ECLAC, mimeo. Average annual GDP growth rates (%)Average annual rate of growth of TFP (%) Table 10 Latin America. Rate of Growth of GDP and Total Factor Productivity Growth (TFP)

TFP growth is policy determined Policies that reduce TFP in the long run Assessment InflationInflation has reduced with independent central banks Fiscal deficitsLarge public debt burden in several countries Exchange rate instabilityFew coverage mechanisms inhibit free floating of the currency Low human capital formationQuality of education is a main issue in Latin America Low infrastructure formationPublic investment declined Private investment is limited

F. Future Prospects

Prospects GDP Growth: “boom” (4% avg. in 2004 and in 2005) Interest rates:lowest in 50 years Inflation:low (for LA standards) and stable Exports:high and growing Terms of Trade: high, especially oil producers Capital Flows:timid and selective comeback

Risks Slowdown in China and East Asia Rising interest rates in US and China Appreciating exchange rates in LA Internal political shocks Long run factors Education Productivity and technology Infrastructure Less bureaucracy and lower transaction costs Poverty, inequality and political stability

Economic Growth in Latin America: Past, Present and Future Perspectives. Andrés Solimano ECLAC, United Nations November 11, 2004