On the Evolution of Total Factor Productivity in Latin America

By Ferreira, Pedro Cavalcanti; De Abreu Pessoa, Samuel et al. | Economic Inquiry, January 2013 | Go to article overview

On the Evolution of Total Factor Productivity in Latin America


Ferreira, Pedro Cavalcanti, De Abreu Pessoa, Samuel, Veloso, Fernando A., Economic Inquiry


I. INTRODUCTION

Because of several policy distortions, including import-substitution industrialization, widespread government intervention, and both domestic and international competitive barriers, there has been a general presumption that Latin America has been much less productive than the leading economies in the last decades. Recent papers have provided evidence that is consistent with this hypothesis. In particular, Cole et al. (2005) found that average total factor productivity (TFP) in Latin America corresponded to roughly 50% of U.S. productivity between 1950 and 2000. The authors also argued that competitive barriers may explain why TFP is low in Latin America relative to the United States.

Some studies have documented a negative TFP growth rate in Latin America in the 1980s. Bosworth and Collins (2003) and Loayza, Fajnzylber, and Calderon (2005) show that average TFP in Latin America declined during this decade. Other studies have confirmed this finding for some specific countries, including Kydland and Zarazaga (2002) and Hopenhayn and Neumeyer (2006) for Argentina, Bergoing et al. (2002) for Mexico, and Bugarin et al. (2007) for Brazil.

In this paper we show, however, that until the late 1970s Latin American countries had high productivity levels relative to the United States. On average, TFP in Latin America corresponded to 82% of the United States between 1960 and 1980. It is only after the late 1970s that we observe a fast decrease of relative TFP in Latin America, which fell to 54% of U.S. TFP in 2007.

Blyde and Fernandez-Arias (2006) also presented some evidence that Latin America had high TFP relative to the United States in the 1960s and 1970s, and that it was lower in the 1990s. (1) Our main contribution is to document more systematically this stylized fact--this point was just one among many in their article--and examine to what extent this result is robust to the use of different methodologies and data sources. In particular, we consider the role of natural resources and human capital.

We first address the possibility that natural resources might account for the high relative TFP in Latin America between 1960 and 1980. We compute a measure of TFP adjusted for natural resources for the seven largest Latin American countries, for which there is detailed sectorial data available from the Groningen Growth and Development Centre 10-Sector Database (Timmer and de Vries 2009). Despite being lower than our baseline measure in every year, the adjusted relative TFP displays the same pattern. In particular, it was high between 1960 and 1980 and then it fell sharply.

We consider next the importance of including human capital as a factor of production. In this paper we include human capital in the production function, as has become standard in the growth and development accounting literature (see Klenow and Rodriguez-Clare 1997; Hall and Jones 1999). We show that the inclusion of human capital makes a crucial difference in the TFP calculations for Latin America. When we do not include human capital we obtain a value of 53% for Latin America relative TFP between 1960 and 1980. It then declines and reaches 43% in 2007.

This paper is organized as follows. In Section II we present the methodology used to construct our measure of relative TFP. Section III presents the stylized facts about relative TFP in Latin America and several robustness exercises. In particular, we examine the role of natural resources and human capital. Section IV concludes.

II. METHODOLOGY AND DATA

Let the production function in terms of output per worker be given by:

(1) [y.sub.it] = [A.sub.it][k.sup.[alpha].sub.it][h.sup.1-[alpha].sub.it],

where [y.sub.it] is the output per worker of country i at time t, k stands for physical capital per worker, h is human capital per worker, and A is TFP. Estimates in Gollin (2002) of the capital share of output for a variety of countries fluctuates around 0. …

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