The Latin American Growth Shortfall: Productivity and Inequality

Mar 31, 2021

We analyze the per capita output growth performance since 1960 of countries in Latin America and the Caribbean (LAC) and assess the respective contributions of production factors and productivity measured by total factor productivity (TFP), the overall efficiency with which accumulated factors are utilized.

Using a worldwide panel of countries, we find, first, strong evidence that, relative to countries with the same output per capita, LAC countries have a large average per capita growth shortfall (of 0.7% per annum) that is almost entirely driven by subpar productivity growth. This finding holds across LAC countries.

Second, while the growth performance of LAC countries has generally improved substantially since 1990, regional productivity growth remains subpar, and the productivity gap with respect to the United States has widened in virtually all LAC countries.

We then ask to what extent income inequality is statistically associated with productivity growth and, in this way, shed light on the nature of the region’s growing productivity shortfall. We find that, in fact, the high Gini index of disposable income in LAC countries goes a long way to account for the subpar productivity growth. However, high inequality is also associated with a high rate of factor accumulation and does not account for the region’s poor per capita output growth.

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