Andrés SolimanoRegional Adviser

ECLAC, United Nations

Paris - July 11th, 2006

VANISHING GROWTH IN LATIN AMERICA

OECD SEMINAR

2

THEMES

A. Growth performance of Latin America in comparative perspective.

B. Individual country performance.

C.Volatility and growth crises.

D.Determinants of growth: Factor accumulation and TFP.

E. Conclusions

3

A. GROWTH PERFORMANCE OF LATIN AMERICA IN COMPARATIVE PERSPECTIVE

4

0

5000

10000

15000

20000

25000

30000

35000

40000

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Year

GD

P pe

r cap

ita, P

PP

USA

OECD (High Income)

World

Latin America

Figure 1: GDP per capita (PPP) for Latin America, OECD (High Income Countries), the USA and the World

1975 - 2004

2004

Source: World Bank, WDI online database.OECD High Income Countries includes 24 nations.PPP: Purchasing Power Parity.

5

Figure 2. Evolution of the GDP per capita (PPP) of Latin America, East Asia & Pacific and Sub Saharan Africa

(as percent of the per capita income of the USA)

0

5

10

15

20

25

30

35

Year

% U

SA G

DP

per c

apita

Latin America

East Asia & Pacific

Sub Saharan Africa

2004

Source: World Bank, WDI online database.OECD High Income Countries includes 24 nations.PPP: Purchasing Power Parity.

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Table 1: GDP per capita in Latin America, OECD (High Income Countries), the USA and the World

1975 - 2004

Accumulated growth (%)

Average annual rate of

growth (%)Standard deviation

Coefficient of variation

1975 1990 2004 1975-2004 1975-2004 1975-2004 1975-2004

Latin America 5 578 6 115 7 314 27.89 0.96 2.21 2.30United States 19 831 28 375 36 465 62.11 2.14 2.01 0.94High income: OECD 15 764 23 096 29 413 63.24 2.18 1.20 0.55World 4 836 6 292 8 187 53.28 1.84 1.05 0.57

Country/ RegionGDP per capita (PPP)

constant US$ 2000

Source: World Bank, WDI online database.OECD High Income Countries includes 24 nations.PPP: Purchasing Power Parity.

7

B. INDIVIDUAL COUNTRY PERFORMANCE

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B. INDIVIDUAL COUNTRY PERFORMANCE

• Chile and the Dominican Republic accelerated their historical growth rate since the mid to late 1980’s.

• Brazil and Mexico have experienced a growth slowdown in the last 25 years.

• Argentina and Venezuela, recent recovery.

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Figure 3. Evolution of GDP per capita:Selected countries of Latin America

0

50

100

150

200

250

3001

97

5

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

Ind

ex

19

75

= 1

00

Chile

Dominican Republic

Mexico

Brazil

Argentina

Venezuela

2004

Source: World Bank, WDI online database.OECD High Income Countries includes 24 nations.PPP: Purchasing Power Parity.

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Figure 4. Evolution of GDP per capita (PPP):Selected countries from Latin America and outside the

region

0

100

200

300

400

500

600

700

800

900

1 000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Ind

ex 1

975

= 10

0

China

Ireland

Chile

Dominican Republic

2004

Source: World Bank, WDI online database.OECD High Income Countries includes 24 nations.PPP: Purchasing Power Parity.

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Figure 5. GDP per capita divergence: Venezuela, Singapore and Ireland, 1975-2004

(in constant international US$ 2000)

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Co

nst

ant

inte

rnat

ion

al U

S$

Venezuela

Ireland

Singapore

2004

Source: World Bank, WDI online database.OECD High Income Countries includes 24 nations.PPP: Purchasing Power Parity.

12

Figure 6. Other cases of divergence: Spain, Argentina and Italy, 1975-2004

(in constant international US$ 2000)

0

5 000

10 000

15 000

20 000

25 000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Co

nst

ant

inte

rnat

ion

al U

S$

Italy

Spain

Argentina

Note: GDP per capita (PPP) is measured in constant International dollars of 2000. Source: World Bank, WDI online database

2004

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C. VOLATILITY AND GROWTH CRISES

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Table 2. Growth Crises in Latin America and Reference Group 1960-2003

Source: Solimano, A. (2006). Vanishing Growth in Latin America. The Late Twentieth Century Experience. Edward Elgar Publishers.

1960-1980 1981-2003 1960-2003Argentina 6 11 17 38.6Bolivia 4 9 13 29.5Brazil 2 11 13 29.5Chile 4 3 7 15.9Colombia 2 5 7 15.9Costa Rica 3 8 11 25.0Ecuador 3 8 11 25.0Mexico 0 8 8 18.2Peru 4 10 14 31.8Dominican Rep. 4 6 10 22.7Uruguay 5 9 14 31.8Venezuela 10 13 23 52.3Average 3.9 8.4 12.3 28.0

Korea 2 1 3 6.8Spain 2 2 4 9.1Philippines 0 7 7 15.9Ireland 2 2 4 9.1Thailand 0 2 2 4.5Turkey 5 6 11 25.0Average 1.8 3.3 5.2 11.7

Number of years with negativeGDP per capita growth rates

Percentage of crisisin total period:

1960-2003

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Figure 7. Latin America and the Caribbean*: Anual GDP growth histogram and cumulative density of GDP

growth 1960 - 2003

(*) includes 12 countries. Source: Andrés Solimano (editor), Vanishing Growth in Latin America. The Experience of the Late 20th Century, Edward Elgar Publishing.

Histogram of GDP growth rates

0.00

0.05

0.10

0.15

0.20

-15% -9% -3% 3% 9% 15%

1960-1980 1981-2003

Cumulative density of GDP growth rates

0.0

0.2

0.4

0.6

0.8

1.0

-15% -9% -3% 3% 9% 15%

1960-1980 1981-2003

Histogram of GDP growth rate

0.00

0.05

0.10

0.15

0.20

-15% -9% -3% 3% 9% 15%

1960-1980 1981-2003

Cumulative density of GDP growth rate

0.0

0.2

0.4

0.6

0.8

1.0

-15% -9% -3% 3% 9% 15%

1960-1980 1981-2003

0% 0%

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D. DETERMINATS OF GROWTH: FACTOR ACCUMULATION AND TFP

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Table 3. Growth accounting for Latin America

GDP Labor Capital TFP GDP Labor Capital TFP

Argentina 1960-2003 2.6% 0.7% 1.1% 0.7% Dominican 1970-2003 5.4% 2.2% 1.1% 2.1%1960-1980 4.2% 0.8% 1.6% 1.8% Republic 1970-1980 7.3% 2.3% 1.7% 3.4%1981-2003 1.1% 0.7% 0.7% -0.3% 1981-2003 4.6% 2.2% 1.6% 0.8%

Brazil 1960-2003 4.2% 1.7% 2.1% 0.4% Ecuador 1965-2003 4.7% 1.9% 1.4% 1.3%1960-1980 7.2% 2.1% 3.1% 2.0% 1965-1980 8.4% 1.8% 1.7% 4.8%1981-2003 1.7% 1.5% 1.3% -1.1% 1981-2003 2.1% 2.0% 1.3% -1.2%

Bolivia 1960-2003 3.3% 1.5% 1.1% 0.7% Mexico 1960-2003 4.5% 1.9% 2.1% 0.6%1960-1980 4.7% 1.3% 1.2% 2.2% 1960-1980 6.8% 2.0% 2.7% 2.1%1981-2003 2.0% 1.8% 0.9% -0.7% 1981-2003 2.4% 1.7% 1.5% -0.8%

Chile 1960-2003 4.1% 1.4% 1.3% 1.4% Peru 1960-2003 3.1% 1.7% 1.4% 0.0%1960-1980 3.5% 1.1% 1.1% 1.3% 1960-1980 4.6% 1.6% 1.8% 1.1%1981-2003 4.6% 1.6% 1.4% 1.5% 1981-2003 1.8% 1.9% 1.1% -1.1%

Colombia 1960-2003 4.1% 1.6% 1.4% 1.1% Uruguay 1960-2003 1.5% 0.3% 0.3% 0.9%1960-1980 5.3% 2.1% 1.4% 1.8% 1960-1980 2.2% 0.8% 0.3% 1.1%1981-2003 3.0% 1.2% 1.4% 0.4% 1981-2003 0.9% -0.1% 0.3% 0.8%

Costa Rica 1960-2003 4.9% 2.2% 1.9% 0.8% Venezuela 1960-2003 2.7% 2.2% 1.3% -0.8%1960-1980 6.2% 2.4% 2.4% 1.4% 1960-1980 5.1% 2.7% 2.1% 0.3%1981-2003 3.8% 2.1% 1.5% 0.3% 1981-2003 0.6% 1.8% 0.6% -1.8%

Average annual contribution to GDP growth Average annual contribution to GDP growth

Source: Solimano, A. (2006). Vanishing Growth in Latin America. The Late Twentieth Century Experience. Edward Elgar Publishers.

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Table 4. Private and public investment in Latin America (as percentage of GDP)

Private Investment

Public Investment

Total Investment

Private Investment

Public Investment

Total Investment

Argentina 1970-2000 14.8 5.2 20.0 Dominican 1970-2000 15.4 6.6 21.9 1970-1980 14.1 8.8 23.0 Republic 1970-1980 15.2 6.5 21.8 1981-2000 15.2 3.2 18.4 1981-2000 15.4 6.6 22.0

Bolivia 1970-2000 7.1 7.5 14.6 Ecuador 1970-2000 12.3 7.5 19.8 1970-1980 7.9 8.9 16.7 1970-1980 13.0 8.3 21.3 1981-2000 6.7 6.7 13.4 1981-2000 11.8 7.1 18.9

Brazil 1970-2000 15.5 5.7 21.2 Mexico 1970-2000 13.8 6.0 19.9 1970-1980 14.8 7.0 21.8 1970-1980 12.8 7.9 20.7 1981-2000 15.9 5.1 21.0 1981-2000 14.4 5.0 19.4

Chile 1970-2000 12.5 6.1 18.6 Peru 1970-2000 15.6 5.3 20.9 1970-1980 7.4 7.7 15.1 1970-1980 15.3 5.5 20.8 1981-2000 15.3 5.2 20.6 1981-2000 15.8 5.2 21.0

Colombia 1970-2000 10.2 7.0 17.2 Uruguay 1970-2000 8.9 4.4 13.3 1970-1980 10.3 5.8 16.1 1970-1980 8.6 4.6 13.2 1981-2000 10.2 7.6 17.8 1981-2000 9.1 4.3 13.4

Costa Rica 1970-2000 15.0 6.0 19.6 Venezuela 1970-2000 NA NA NA 1970-1980 15.3 7.0 22.3 1970-1980 NA NA NA 1981-2000 14.8 5.5 18.2 1981-2000 9.1 8.9 18.0

Source: Solimano, A. (2006). Vanishing Growth in Latin America. The Late Twentieth Century Experience. Edward Elgar Publishers.

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Table 5. Correlation of TFP growth and other variables in Latin American countries

Business cycles (Growth in consumption of electricity per capita)

0.152** (0.032)

0.198** (0.043)

0.116** (0.044)

Quality of labor force (growth in secundary education achievement)

0.157** (0.079)

0.314** (0.087)

-0.188 (0.150)

International trade shocks (changes in terms of trade)

0.032 (0.014)

0.031 (0.017)

0.033 (0.022)

International financial flows (changes in external debt as share of labor

0.006 (0.017)

0.35 (0.021)

-0.045 (0.029)

Economic instability I (monthly inflation rate)

-0.0925** (0.026)

0.148* (0.075)

-0.122** (0.029)

Economic Instability II (standard deviation of monthly inflation rate)

0.006 (0.027)

0.210** (0.097)

-0.008 (0.030)

Economic Instability III (standard deviation of real exchange rate)

-0.029 (0.017)

0.014 (0.030)

-0.047** (0.022)

1960-2002 1960-1980 1981-2002

* Statistically significant at 90%** Statistically significant at 95% Source: Solimano, A. (2006). Vanishing Growth in Latin America. The Late Twentieth Century Experience. Edward Elgar Publishers.

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Table 6. TFP growth and determinants in Latin America

TFP is affected by Mechanism

Inflation Volatility in relative prices

Fiscal deficitPublic debt burden and interest rates

Exchange rate instability Instability of a key relative price

Low human capital formationQuality of education is a main issue in Latin America

Low infrastructure formationPublic investment declined private investment still insufficient

Low Expenditure in research and development

Limited resources for innovation

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• Latin America has lost ground in economic growth compared to the United States and Asia in the last decades.

• In the last 20 to 30 years there has been differences in economic growth inside the region. - Growth acceleration (Chile, Dominican Republic) - Growth deceleration (Brazil, Mexico) - Growth volatility (Argentina, Venezuela)

5. CONCLUSIONS

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• Income per capita convergence and divergence on different “starting” levels.

• Divergence in per capita income levels is a serious problem.

• Factors explaining success in economic growth: - Economic reforms and political stability in democracy

(Chile) - Opening to foreign investments and technologies

(Ireland, China) - Maquila, tourism, immigrants remittances

(Dominican Republic) - Other Factors

5. CONCLUSIONS (CONTINUATION)

Andrés SolimanoRegional Adviser

ECLAC, United Nations

Paris - July 11th, 2006

VANISHING GROWTH IN LATIN AMERICA

OECD SEMINAR