1. Manufacturing Industry and Economic Growth in Latin America: A Kaldorian Approach Gilberto Libanio Federal University of Minas Gerais, Brazil

2. Introduction Economic reforms and growth in Latin America Manufacturing and growth Kaldors growth laws

3. Kaldors First Growth Law Relationship between industrial growth and the performance of the economy as a whole Manufacturing is the engine of growth Explained by growth of overall productivity due to labor transfer from low productivity sectors and to increasing returns to scale in manufacturing

4. Kaldors Second Law (Verdoorn) Positive causal relationship between output growth and productivity growth in manufacturing Theoretical controversies: can Verdoorn coefficient represent a measure of returns to scale? Verdoorns Law as a production relationship and a labor supply relationship

5. Kaldors Second Law (Verdoorn) Kaldor: Verdoorn coefficient indicates degree of returns to scale Effect of output growth on productivity is explained by factors such as increasing specialization among firms, positive externalities, induced technical progress, and greater scope for product differentiation

6. Kaldors Second Law (Verdoorn) Key player in models of circular and cumulative causation in the Kaldorian tradition (Kaldor, 1970; Dixon and Thirlwall, 1975): output productivity prices competitiveness exports output Once a country or region acquires a growth advantage, it will tend to keep it through the process of increasing returns and consequent competitive gains that growth itself induces

7. Empirical estimation Panel data: seven largest economies in Latin America – Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela (1985 – 2001) First law: (1) q i = c i + d i. (m i – nm i ) (2) nm i = u i + v i. m i (3)

8. Empirical estimation Verdoorns Law: (10) Returns to scale = tf i = i + 1 q i (11) Returns to scale = 1/ 1

9. Results

11. Conclusions Results confirm the manufacturing is the engine of growth hypothesis, and suggest the existence of significant increasing returns in the manufacturing sector in the largest Latin American economies Industrial activities represent an important source of potential economic growth in the region Further de-industrialization in the region may have negative effects to economic growth in the long run