NS4053 Winter Term 2015

Productivity Growth in Latin America

Latin American Productivity I

• Henry Bruton, “Productivity Growth in Latin America” American Economic Review, December 1967

• Wants to determine sources of Latin American growth• Focus is on the relative contribution of labor, capital and

technological change/efficiency (the residual)• Argument built around an aggregate production function – the

Solow approach• Wants to look at sub-periods to see if sources of growth have

changed

• 1940-1964

• 1946-64

• 1955-64

• Also wants to make comparisons with the advanced economies

2

Latin American Productivity II

Findings:

•For the period as a whole (1940-64)

•Latin America and the advanced countries had similar sources of growth

•Residual in Latin America about one half that of the advanced countries

•Finds that for the later sub-periods the residual in Latin America is increasingly negative

•Growth in these periods increasingly dependent on direct factor inputs

Explanation:

•During WWII, the Latin American economies were cut off from supplies of equipment from the advanced countries

•Receipts from exports to the advanced countries put in blocked accounts. 3

Latin American Productivity IV

• During the war years, Latin American companies had to make due with what they had

• Lack of imports of machinery provided incentives to develop capital goods industries – develop new domestic technologies

• This effort paid off in creating an environment conducive to innovation and improved efficiency

• After the war, most Latin American countries adopted import substitution as their industrialization strategy

• Incentives – overvalued exchange rates, low interest rates.

• Minimum wage laws and unions forced wages up.

• Result, foreign capital substituted for domestic capital and labor

4

Latin American Productivity V

• Import substitution

• By making foreign capital relatively inexpensive, few incentives to use it efficiently

• Also because foreign capital created in very different factor proportions setting, not designed to use abundant labor

• Result – many of those predicted by Marx, but for very different reasons

• Few jobs created in manufacturing

• High wages attracted migrants into urban areas

• Increasing unemployment

• Concentration of capital due to smallness of domestic market and inability to export

• Eventual stagnation in late 1960s and 1970s5