ECONOMIC GROWTH IN LATIN AMERICA AND THE CARIBBEAN

ECONOMICGROWTHINLATINAMERICAANDTHECARIBBEANSTYLIZEDFACTS,EXPLANATIONS,ANDFORECASTS*PreparedbyNORMANLOAYZAWorldBankPABLOFAJNZYLBERUniversityofMinasGeraisandWorldBankCÉSARCALDERÓNCentralBankofChileWASHINGTON,D.C.JUNE2002*ThisresearchhasbeensupportedbytheWorldBank’sLatinAmericaRegionalStudiesProgram.FranciscoGallegoprovidedexcellentresearchassistance.WearealsogratefultoMarcoArena,PatriciaCortés,andPedroTuestaforcomments,suggestions,andgeneralassistance.TheopinionsandconclusionsofthisstudydonotnecessarilyrepresentthoseoftheWorldBank.2EconomicGrowthinLatinAmericaandtheCaribbean:StylizedFacts,Explanations,andForecastsAfterrepeatedinternationalcrises,casesofinterruptedreforms,andinstancesofmacroeconomicmismanagement,severalcountriesinLatinAmericaandtheCaribbeanareexperiencingsevereeconomicdownturnsatthestartofthenewcentury.JustasintheaftermathoftheTequilacrisis,thesuccessofmarket-orientedreformsiscalledintoquestion,andpeoplefrompoliticianstoacademicsproposeachangeofeconomicpolicyawayfromthe“WashingtonConsensus.”Inthiscontext,itbecomesnecessarytoreassessthegrowthperformanceofcountriesintheregion,explaintheunderlyingsourcesoftheireconomicgrowth–orlackthereof-,anddesignastrategyforfurtherreform.Thisstudyintendstocontributetothiseffort.Wecannotoverstatetheimportanceofincomegrowthforeconomic,social,andevenpoliticaldevelopment.Countriesthatgrowstronglyandforsustainedperiodsoftimeareabletoreducesignificantlytheirpovertylevels,strengthentheirdemocraticandpoliticalstability,improvethequalityoftheirnaturalenvironment,andevendiminishtheincidenceofcrimeandviolence.1Economicgrowthisnotapanacea;buteveninthecaseswhereitdoesnothaveadirectbeneficialimpact,itfacilitatestheimplementationofpublicprogramsthataddressthepeople,places,andissuesleftbehind.Nowonder,then,thatenormousamountoftalentandefforthasbeeninvestedinunderstandingtheprocessofeconomicgrowth.Therecentsurgeinacademicresearchonendogenousgrowthandthepolicypreoccupationwithpoverty-alleviatinggrowthareonlytwoofmanydemonstrationsthateconomicgrowthisatthecenterofattentioninresearchandpolicycircles.ThisstudytakesadvantageofthereceivedliteraturetoanalyzethegrowthperformanceinLatinAmericaandtheCaribbean,usinginparticularthemethodsandfindingsofmacroeconomicandcross-nationalempiricalstudies.Theobjectivesofthestudyarethefollowing.First,describethebasiccharacteristics(orstylizedfacts)ofeconomicgrowthinLatinAmericanandCaribbeancountries.Second,explainthedifferencesacrosscountriesandovertimeineconomicgrowthbasedonregressionanalysis.And,third,forecastthechangesineconomicgrowthforthenextdecadebasedonbothregressionresultsandprojectionsonthefuturebehaviorofgrowthdeterminants.3Ourgoalistocontributewithinsights,arguments,andevidencetoanswersomeofthecentralquestionssurroundingeconomicgrowthinLatinAmericaandtheCaribbean,amongthem,•HowsimilararecountriesinLatinAmericaandtheCaribbeanwitheachotherregardingtheirpatternsofeconomicgrowth?Canwespeakofcommonregionaltrends?Whatarethemajorexceptions?And,isLatinAmericaandtheCaribbeanuniqueintheworld,ortowhatextentareitsgrowthcharacteristicssharedbyotherregions?•Isphysicalcapitalinvestmentcrucialtostartupgrowth?And,isinvestmentresponsibleforthemajorshiftsineconomicgrowth,orisitfactorproductivity?•Whatliesbehindtheeconomicdownturnofthe“lostdecade”ofthe1980s?And,whatexplainstheeconomicrecoveryofthe1990s?Inparticular,whatistheroleofstructuralandstabilizationpolicyreform?Towhatextentcanbusiness-cyclemovementsandshiftingexternalconditionsexplainthepatternsoffallandrecoveryexperiencedinthelastdecades?•WhatcanberealisticallyexpectedforeconomicgrowthinLatinAmericaandtheCaribbeaninthenextdecade?IfLatinAmericaandtheCaribbeanmakesignificantprogressineconomicreforms,whatistheregion’sgrowthpotential?Whataretheareasofeconomicpolicythataremorelikelytorenderanincreaseineconomicgrowth?Asmentionedabove,thisstudywilltakeacross-countryperspective.Thatis,itwillderiveimplicationsforLatinAmericanandCaribbeancountriesfromtheinternationalevidenceonthepatternsanddeterminantsofeconomicgrowth.Thus,initsdescriptivesection,thestudywillexaminethegrowthperformanceofindividualcountriesinthecontextofregionalandworldtrends;and,initseconometricsection,thestudywillapplytheestimatesfromcross-countryregressionstoanalyzetheeconomicandsocialfactorsthatdrivepercapitaGDPgrowthineachcountryintheregion.Thisreportcanbeseenasacomplementtoindividualcountry-casestudies.Itcanprovidethemthebasicinternationalcontextintermsofbothdescriptivepatternsandempiricalexplanationsofoutputgrowthbehavior.Theplanofthereportisthefollowing.SectionIdescribesthemainstylizedfactsofgrowthinLatinAmericaandtheCaribbeanfromfourdifferentmacroperspectives.Wefirst1SeeBarro(1996and2002),Easterly(1999),DollarandKraay(2001),andFajnzylber,Loayza,andLederman(2002).4reviewthegrowthperformanceofLatinAmericanandCaribbeancountriesbydecades(1960sto90s)incomparisontothetypicalcountriesintheregionandintheworld.Then,wedecomposethesecountries’GDPgrowthintoitscyclicalandtrendcomponentsandexaminetheirmaincharacteristics.Next,weconductSolow-typegro