1. NS4540 Winter Term 2019 Latin American Growth Momentum
IMF REO Western Hemisphere May 2013, Chapter 3

2. Latin American Growth I
IMF Regional Economic Overview May 2013
Overview
Growth in Latin America has been strong due to
Highly favorable external conditions – interrupted only temporarily during the global financial crisis
Prudent macroeconomic policies
Latin America and the Caribbean region has grown by
An average of 4% since 2003 compared with
Less than 2.5% annually in
Questions:
What explains this remarkable growth performance from a supply perspective?
Will this momentum be sustainable in the years ahead?

3. Latin America and The Caribbean: Real Growth Rates

4. Latin American Growth II
Questions addressed by applying Solow growth accounting:
Identifying the proximate causes of recent growth
Estimating potential growth rates for the period ahead
Key findings:
Factor accumulation (especially labor) rather than TFP growth remains the main driver of output growth
In Latin America, total factor accumulation explained 3 ¾ percentage points of annual GDP growth in
TFP accounted for only ¾ percentage points
Similar patterns observed throughout Latin America irrespective of the country’s financial integration, export base/orientation or market structure
Factor accumulation also main driver in the Caribbean, but growth performance here has been weaker than in previous decade

5. Latin American Growth III
The recent growth pickup in Latin America is mainly explained by higher TFP
During the recent period TFP has increased in most countries in contrast to the poor performance in the 1990s
Estimates suggest that:
TFP explains about % of the higher growth since compared with period
The contribution of physical capital also increased – but to a lesser extent
These patterns partially reflect
Favorable external financial conditions and
High investment (including foreign direct investment) in the primary sector associated with the commodity price boom

6. Latin American Growth IV
Growth in the LAC region remains below that of emerging Asia
Most of the growth differential being explained by differences in TFP performance
On positive side Latin America’s growth gap with respect to emerging Asia has narrowed compared with the 1990s on account of a reduction in differences in capital contributions
However large TFP growth differentials remain, accounting for most of he GDP growth gap in
The labor contribution in turn has historically been larger in Latin America (especially in Central America) than in emerging Asia

7. Comparative Sources of Growth I

8. Comparative Sources of Growth II

9. Comparative Sources of Growth III

10. Latin American Growth V
Declining unemployment is behind the strong labor contribution to growth in recent years
Much like the 1990s, labor continues to be the main contributor to growth during
However the factors explaining this high contribution to growth have changed significantly
While increases in the working-age population and higher participation rates were the main factors in
These contributions (while still positive) have been smaller in
Increases in the rate of employment – a factor hindering growth in the previous period played a key role more recently
Near record low unemployment levels in many countries
The contrition of improvements in human capital to output growth has typically been positive and broadly stable over time
Accounting for about ½% of GDP growth

11. Latin American Growth VI
TFP performance generally improved in although important differences remain
After exhibiting declines in most of the region in previous decades, TFP growth mostly turned positive with a few exceptions
Particularly strong growth in Panama, Peru and Uruguay
Strong TFP partly reflects the expansionary phase of the economic cycle in most of these economies in as well as specific factors in some cases
Panama canal expansion
In Chile – one of the few countries with positive TFP growth in Latin American during the 1980s and 1990s
TFP has turned negative in last decade
Reflects declining productivity in the mining sector
Similar declines in many commodity exporting advanced economies such as Australia, Canada and Norway – expansion into lower grade ores/deposits

12. TFP Growth by Country

13. Latin American Growth VII
Is the recent strong performance sustainable?
Methodology: decompose GDP into contribution of changes in capital, labor and TFP
If recent historical trends for capital and TFP continue and given some natural constraints on labor
Unlikely the growth momentum will be sustainable
While the region has on average grown by 4 percent during
Estimates suggest potential GDP growth for is closer to 3.5%
Indeed strong GDP growth rates in recent years are higher than (or close to the upper bound of) the potential growth ranges for most in most countries.

14. Potential Output Growth Ranges: 2013-201

15. Latin American Growth VIII
Anticipated deceleration (from recent high growth to projected potential growth rates) reflects
Lower contrition from all sources in the coming years
Growth of physical capital is expected to moderate somewhat reflecting a normalization of the easy external financing conditions and
The stabilization of commodity prices
Both factors driving the recent strong domestic and foreign investment in the region

16. Latin American Growth IX
The contribution of labor output to growth in the future will likely be limited by some natural constraints
Population aging (the dependency ratio is expected to reach its minimum over the next years in several countries
Limited scope to further increase in labor participation rates (including females) wich are relatively high already by international standards and
Record low unemployment rates (which declined significantly now representing a key driver of the labor contribution to output growth
Stronger contribution from human capital will require important improvement in the quality of schooling
TFP growth would also slow down in line with normalization of the business cycle.
Therefore TFP performance which remains a concern despite its recent improvement will be pivotal to sustain high growth rates in the region

17. Latin American Labor Dynamics I

18. Latin American Labor Dynamics II

19. Latin American Growth X
Policy Implications
In light of expected moderation in capital accumulation and the existing natural constraints on labor
Strong growth momentum in the region is unlikely to be sustainable unless TFP performance improves significantly
Although TFP contributed positively to GDP growth in recent years in most countries
Its contribution was modest especially compared with other countries
Fostering TFP growth is a key challenge and priority for the LAC countries

20. Latin American Growth XI
Causes of low TFP growth in LAC countries are many and varied -- designing a policy agenda to unleash productivity is a difficult task
Policy makers should aim at policies that help reduce distortions in allocation of resources.
Policies to be considered include:
Improving the business climate and enhancing competition
Strengthening entry and exit regulation to facilitate the reallocation of resources to new and high productivity sectors
Improving infrastructure
Promoting deeper and more efficient financial markets
Enhancing research and development and innovation and
Strengthening institutions to secure property rights and stamp out corruption
In the Caribbean efforts are needed to tackle high debt levels and weak competitiveness which have held back growth.