Latin Americas Bicentenary and the Maddison Legacy Maddison Memorial Conference André Hofman - Director CEPAL Review Economic Commission for Latin America and the Caribbean Amsterdam, November 2010

Outline Introduction. Bicentenary Latin America: Economic growth in the very long run, Growth and Productivity in Latin America, : Growth accounting. Growth and Productivity in Latin America, : LA-KLEMS. Final remarks.

Introduction This presentation is about growth and productivity in Latin America and the influence of the work of Angus Maddison in research on growth and productivity in Latin America and some future research indications. It is partially based on a article Angus and I were preparing ¨Latin Americas Bicentenary: Long run performance in an international comparative perspective, ¨, but it contains also some new elements related with growth and productivity in Latin America.

Introduction ( cont. ) 3 periods of analysis in Latin America. All periods end with 2010 but in each subsequent period new analytical and empirical tools are introduced. The periods are: Bicentenary Latin America - Economic growth and productivity in the very long run Growth and productivity in Latin America: Growth accounting Disaggregated growth and productivity in Latin America: The LA-KLEMS approach. Important characteristic is the systematic use of quantitative evidence in a macroeconomic - national accounts - framework.

Bicentenary Latin America - Economic growth and productivity in the very long run,

Benchmarks 1500, 1820, 1870, 1913, 1950, Extensive growth in Latin America, discovery, conquest and destruction.

Bicentenary Latin America - Economic growth and productivity in the very long run, Independence period in Latin America. Very low growth in comparison with rest of the world Rapid growth in the world and also in Latin America. Foreign direct investment and international trade Faster growth in Latin America compared to the world economy. Growth was faster in part because of internal production capacity expanded as WW and crisis made import substitution necessary.

Table 1 LEVELS OF PER CAPITA GDP AND INTERREGIONAL SPREAD, (1990 international dollars) Source: Maddison (2001).

Table 2 LEVELS OF PER CAPITA GDP AND INTERREGIONAL SPREAD, (1990 international dollars) Source: Maddison and Hofman (forthcoming) Latin America Western Europe Western Offshoots Japan West Asia (excluding Japan) Eastern Europe & f. USSR Africa Rest World Interregional Spread1.9:12.9:14.8:18.2:114.6:113.2:1 16.9:1 West/Rest Spread1.3:11.9:13.1:14.3:15.2:16.3:1 5.2:1

Table 3 LATIN AMERICA: TOTAL GDP, (average annual growth rate) Sources: Maddison and Hofman (forthcoming). 1500– – – – – – Latin America Western Europe Western Offshoots Japan West Asia (excluding Japan) 0– – Eastern Europe & f. USSR – Africa Rest World

Table 4 Population, (million) Source: Maddison and Hofman (forthcoming) Latin America Western Europe Western Offshoots Japan West Asia (excluding Japan) E. Europe & f. USSR Africa Rest World % West/World

Bicentenary Latin America - Economic growth and productivity in the very long run, Research agenda. Level of Latin American population at conquest is still a very controversal theme. Angus took a relatively conservative stance with the estimate of 18 million. Estimates alone for Central Mexico ranged from 4.5 million to 100 million. Future research is needed to narrow this range. More research needed on colonial heritage, new institutional set-up after independence, economic growth in specific countries. Reference to Bértola and ECLAC project on the bicentenary.

Growth and productivity in Latin America, : Growth accounting.

Table 5 ULTIMATE AND PROXIMATE ELEMENTS EXPLAINING PER CAPITA GDP PERFORMANCE National institutions, ideologies, pressures of socio-economic interest groups, historical accidents, and domestic economic policy Nature of the international economic order, exogenous ideologies, pressures or shocks from friendly or unfriendly neighbours Y (N L K) E + A D P Y = gross domestic product. D = population. N = natural resources augmented by technical progress. L = human capital, i.e. labour input augmented by investment in education and training. K = stocks of physical capital augmented by technical progress. E = efficiency of resource allocation. A = net flow of goods, services, production factors, and technology from abroad. = f

Growth accounting The basic framework of growth accounting makes it possible to measure how much increases in inputs and technological progress contribute to economic growth. The starting point for such an analysis is a Cobb- Douglas production function with constant returns to scale in which GDP (Y) is defined as a function of multifactor productivity (A) and factor inputs (capital, K, and labour, L): Where Z and H are the quality indices for capital and labour, respectively. H is an index for the quality of the labour force based on educational level.

Growth accounting Taking logs and differentiating with respect to time, and assuming perfect competition, Solow (1957) shows how estimates of the share of factor inputs in GDP can be used to weight the contribution of the rate of increase in inputs to arrive at simple estimates of MFP growth as a residual. Nonetheless, Solows estimated residuals are quite sensitive to modifications in factor inputs, in respect of both their level of utilization and their quality. Assuming zero adjustment costs for capital accumulation and perfect competition in factor markets, so that the payment received by each of them is equal to their social marginal product. By applying logarithms and derivatives we obtain the standard estimate for MFP growth:

Stylized facts on economic growth in Latin America ( ) The growth of economic activity (measured by per capita GDP) in Latin America during the period shows, among other things, two notable characteristics: a)the presence of breaks in the long-term trend, as can be seen when comparing country growth with a constant growth trend, and b)the heterogeneity of per capita GDP, which translates into disparities in their respective levels, as well as on the growth rates from the second half of the twentieth century on.

Stylized facts on economic growth in Latin America ( ) In the past half-century, Latin America has seen very strong fluctuations in its growth pattern and in the contribution of the various factors to growth. Possible causes include low capital formation and fluctuations of productivity. In particular, MFP growth has shown sharp variations since the 1980s; when it appears to have fallen, and then stagnated.

Stylized facts on economic growth in Latin America ( ) PER CAPITA GDP IN LATIN AMERICA, (1950 = 100)

A comparison of per capita GDP levels in 1950 with those for 2005 shows no drastic differences in ranking, with a few exceptions. per capita GDP, 1950 (1980 international dollars) per capita GDP, 2005 (1980 international dollars) Argentina2.727Chile6.957 Venezuela (Bol. Rep. of) 2.483Mexico5.750 Chile2.179Argentina5.407 Mexico1.826Costa Rica4.256 Peru1.436Venezuela (Bol. Rep. of) Costa Rica1.252Brazil3.433 Colombia1.227Colombia3.208 Ecuador1.025Ecuador3.046 Brazil1.012Peru2.678 Bolivia 926Bolivia1.182

Stylized facts on economic growth in Latin America PER CAPITA GDP IN LATIN AMERICA, (1950 = 100) Per capita GDP trend Per capita GDP region

Stylized facts on economic growth in Latin America PER CAPITA GDP IN LATIN AMERICA, (1950 = 100) Per capita GDP trend Per capita GDP region

Stylized facts on economic growth in Latin America PER CAPITA GDP IN LATIN AMERICA, (1950 = 100) Per capita GDP trend Per capita GDP region

Growth accounting

Growth and productivity in Latin America, : Growth accounting. Lessons: Inward orientation was maintained to long. Latin America did not catch-up and did not take advantage of available technological progress. Very low TFP. Crisis of the 1980s was profound and caused lost decade. Latin America lost competitiveness in world markets and became a natural resources exporter.

Growth and productivity in Latin America, : Growth accounting. Research agenda Include capital services Measures of capacity utilization Potential output

Growth and productivity in Latin America, : LA-KLEMS.

Disaggregated growth and productivity in Latin America : LA-KLEMS - Productivity analysis and the role of ICT in Latin America: Argentina, Brazil, Chile and Mexico.

Growth and productivity in Latin America, : LA-KLEMS. New element: analysis of economic growth and productivity on the sectoral level (31 sectors). Four Latin American countries: Argentina, Brazil, Chile and Mexico. 18 variables in human capital. 7 types of fixed capital formation. Contribution of ICT.

Growth accounting - Brasil

Growth accounting - Chile

Growth accounting - México

Including hours worked in productivity analysis Argentina Brasil ChileMéxico

Table 11 Labour productivity per hour compared to USA (USA=100) Fuentes: LA-KLEMS basado en estimación de horas trabajadas y datos de ocupados/puestos de trabajo

World-KLEMS LA-KLEMS is part of the WORLD-KLEMS project to promote international comparisons of economic growth and productivity at the sectoral level. Participating countries: 25 countries of EU, Australia, Canada, Japan, South Korea and USA. Extend to developing countries: Argentina, Brasil, Chile, China, India, Indonesia, Mexico, Rusia, Taiwan and Turkey.

Growth and productivity in Latin America, : LA-KLEMS. Research agenda Include not registrated sector (informal) Structural change (between sectors) Structural heterogeneity (within sectors) Relation between sector, age groups, education and income

Growth and productivity in Latin America, : LA-KLEMS. Latin America crises in Institutional set up relatively good (e.g. financial sector). Terms of trade will remain positive as well as demand for Latin American natural resources. Macro fundamentals ok but now micro reforms are needed and sectoral productivity analysis is an important input in economic policy analysis.

Summary and conclusions Maddison contributions and future research: -Long term growth analisis: contribution Angus enormous. Latin America in world perspective. Definition of benchmarks in Latin America, analysis in time an starting point in Future work: Long term growth, improve country detail, refine pre- conquest population estimates. -Medium term analisis: contributed through incorporation of more explanatory variables and growth accounting framework. Future research: Growth accounting, methodological innovations: capital services, MFP analysis. -Actuality: work iniated by Angus and Groningen Growth and Development Centre: LA- KLEMS disaggregated growth accounts and more detailed explanatory analisis.

Latin Americas Bicentenary and the Maddison Legacy. Maddison Memorial Conference Muchas gracias.