Latin America’s Bicentenary and the Maddison Legacy

Maddison Memorial ConferenceAndré 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,

1500-2010.

• Growth and Productivity in Latin America, 1950-2010: Growth

accounting .

• Growth and Productivity in Latin America, 1990-2010: 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 America’s Bicentenary: Long run performance in an international comparative perspective, 1500-2010¨, 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:1500-2010 Bicentenary Latin America - Economic growth and productivity in the very long run. 1950-2010 Growth and productivity in Latin America: Growth accounting.1990-2010 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, 1500-2010.

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

1500-2010.

• Benchmarks 1500, 1820, 1870, 1913, 1950, 1973.

• 1500-1820 Extensive growth in Latin America,

discovery, conquest and destruction.

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

run, 1500-2010.

• 1820-1870 Independence period in Latin America. Very low growth in

comparison with rest of the world.

• 1870-1913 Rapid growth in the world and also in Latin America.

Foreign direct investment and international trade.

• 1913-1950 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, 1500 - 2008(1990 international dollars)

0 1000 1500 1820 1870 1913 1950 1973 2003

Western Europe Western Offshoots Japan Asia (excluding Japan) Latin America Eastern Europe & former USSR Africa World Interregional Spreads

450 400 400 450 400 400 425 444

1.1:1

400 400 425 450 400 400 416 435

1.1:1

774 400 500 572 416 483 400 565 2:1

1 232 1 201

669 575 665 667 418 667 3:1

1 974 2 431

737 543 698 917 444 867 5:1

3 473 5 257 1 387

640 1 511 1 501

585 1 510

9:1

4 594 9 288 1 926

635 2 554 2 601

852 2 114 15:1

11 534 16 172 11 439

1 231 4 531 5 729 1 365 4 104 13:1

17 921 26 146 20 413

2 936 5 795 4 354 1 368 5 709 19:1

Source: Maddison (2001).

Table 2 LEVELS OF PER CAPITA GDP AND INTERREGIONAL

SPREAD, 1500 - 2008(1990 international dollars)

Source: Maddison and Hofman (forthcoming).

1500 1820 1870 1913 1950 1973 2008

Latin America 416 692 681 1481 2506 4504 6973

Western Europe 771 1204 1960 3458 4579 11416 22246

Western Offshoots 400 1202 2419 5233 9268 16179 30152

Japan 500 669 737 1387 1921 11434 22816

West 702 1109 1882 3672 5649 13082 25544

Asia (excluding Japan) 572 577 550 658 634 1226 5030

Eastern Europe & f. USSR 498 686 941 1558 2602 5 731 8102

Africa 414 420 500 637 894 1410 1780

Rest 538 578 606 860 1091 2072 4892

World 566 667 875 1525 2111 4091 7614

Interregional Spread 1.9:1 2.9:1 4.8:1 8.2:1 14.6:1 13.2:1 16.9:1

West/Rest Spread 1.3:1 1.9:1 3.1:1 4.3:1 5.2:1 6.3:1 5.2:1

Table 3LATIN AMERICA: TOTAL GDP, 15002008

(average annual growth rate)

Sources: Maddison and Hofman (forthcoming).

1500–1820

1820–70

1870–1913

1913–50

1950–73

1973–2001

1973-2008

2001-2008

Latin America 0.16 -0.03 1.82 1.43 2.58 0.91 1.39 2.16

Western Europe 0.14 0.98 1.33 0.76 4.05 1.88 1.95 1.54

Western Offshoots

0.34 1.41 1.81 1.56 2.45 1.841.89 1.21

Japan 0.09 0.19 1.48 0.88 8.06 2.14 2.14 1.21

West 0.14 1.06 1.57 1.17 3.72 1.95 1.84 1.44

Asia (excluding Japan)

0 –0.10 0.42 –0.10 2.91 3.554.75 6.37

Eastern Europe & f. USSR

0.1 0.63 1.18 1.4 3.49 –0.051.37 5.89

Africa 0 0.35 0.57 0.92 2 0.19 0.74 2.63

Rest 0.02 0.06 0.82 0.65 2.83 1.75 2.79 5.28

World 0.05 0.54 1.3 0.88 2.92 1.41 1.88 2.95

Table 4 Population, 1500 - 2008

(million)

Source: Maddison and Hofman (forthcoming).

1500 1820 1870 1913 1950 1973 2001 2008

Latin America18

22 40 81 166 308 531 580

Western Europe 57 133 188 261 305 358 392 401

Western Offshoots 3 11 46 111 176 251 340 363

Japan 15 31 34 52 84 109 127 127

West 75 175 268 424 565 718 859 891

Asia (excluding Japan) 268 679 731 926 1299 2140 3527 3844

E. Europe & f. USSR 30 91 142 236 267 360 411 404

Africa 47 74 90 125 227 390 821 975

Rest 363 866 1003 1368 1959 3198 5290 5803

World438

1042 1272 1791 2524 3916 6149 6695

% West/World 17.1 16.8 21.1 23.7 22.4 18.3 14.0 13.3

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

run, 1500-2010.

• 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, 1950-2010: 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 + AD 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 accountingGrowth 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.

LKAY tttt 1

H tLtZ tK tAY tt

1

ij ijji EH

Growth accountingGrowth 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, Solow’s 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:

lkya tttt 1

Stylized facts on economic growth in Stylized facts on economic growth in Latin America (1950-2005)Latin America (1950-2005)

• The growth of economic activity (measured by per capita GDP) in Latin America during the period 1950-2005 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 Stylized facts on economic growth in Latin America (1950-2005)Latin America (1950-2005)

• 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 Stylized facts on economic growth in Latin America (1950-2005)in Latin America (1950-2005)

PER CAPITA GDP IN LATIN AMERICA, 1950-2005(1950 = 100)

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Per capita GDP trend Per capita GDP region

A comparison of per capita GDP levels in 1950 with A comparison of per capita GDP levels in 1950 with those for 2005 shows no drastic differences in those for 2005 shows no drastic differences in

ranking, with a few exceptions.ranking, with a few exceptions.

per capita GDP, 1950 (1980

international dollars)

per capita GDP, 2005 (1980

international dollars)

Argentina 2.727 Chile 6.957

Venezuela (Bol. Rep. of) 2.483 Mexico 5.750

Chile 2.179 Argentina 5.407

Mexico 1.826 Costa Rica 4.256

Peru 1.436 Venezuela (Bol. Rep. of) 3.885

Costa Rica 1.252 Brazil 3.433

Colombia 1.227 Colombia 3.208

Ecuador 1.025 Ecuador 3.046

Brazil 1.012 Peru 2.678

Bolivia 926 Bolivia 1.182

Stylized facts on economic growth in Stylized facts on economic growth in Latin AmericaLatin America

PER CAPITA GDP IN LATIN AMERICA, 1950-2005(1950 = 100)

Per capita GDP trend Per capita GDP region

Brazil

0

50

100

150

200

250

300

350

400

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Costa Rica

0

50

100

150

200

250

300

350

400

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Mexico

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Stylized facts on economic growth in Stylized facts on economic growth in Latin AmericaLatin America

PER CAPITA GDP IN LATIN AMERICA, 1950-2005(1950 = 100)

Per capita GDP trend Per capita GDP region

Colombia

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Chile

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Ecuador

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Stylized facts on economic growth in Stylized facts on economic growth in Latin AmericaLatin America

PER CAPITA GDP IN LATIN AMERICA, 1950-2005(1950 = 100)

Per capita GDP trend Per capita GDP region

Argentina

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Bolivia

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Peru

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Venezuela

0

50

100

150

200

250

300

350

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Growth accountingGrowth accountingLatin America: Factor contributions to growth

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1951-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2005

Gro

wth

Labor Capital TFP

Growth accountingGrowth accountingLatin America: Factor contributions to growth, 1950-2005

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador Mexico Peru Venezuela LatinAmerica

Gro

wth

Labor Capital TFP

Growth accountingGrowth accountingLatin America: Factor contributions to growth

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Arg

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Am

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Arg

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Col

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Ric

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Am

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Arg

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Col

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Ric

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Ven

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Am

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Arg

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Col

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Am

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a

1951-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2005

Gro

wth

Labor Capital TFP

Growth and productivity in Latin America, 1950-2010: 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, 1950-2010: Growth accounting.

• Research agenda

Include capital services

Measures of capacity utilization

Potential output

Growth and productivity in Latin America, 1990-2010: LA-KLEMS.

Disaggregated growth and productivity in Latin America 1990-2010: LA-KLEMS - Productivity analysis and the role of ICT in Latin America: Argentina, Brazil, Chile and Mexico.

Growth and productivity in Latin America, 1990-2010: 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 - BrasilBras il

-0.50

0.00

0.50

1.00

1.50

1995-2001 2002-2007 1990-2007

ICT capital Non-ICT capital

Labour hours M ulti-factor productivity

Growth accounting - ChileChile

0.00

1.00

2.00

3.00

4.00

1995-2001 2002-2007 1990-2007

ICT capital Non-ICT capital

Labour hours M ulti-factor productiv ity

Growth accounting - México

México

-1.00

0.00

1.00

2.00

1995-2001 2002-2007 1990-2007

ICT capital Non-ICT capital

Labour hours M ulti-factor productivity

Including hours worked in productivity analysis

Argentina Brasil

Chile México

90

100

110

120

130

140

150

160

170

180

190

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Prod. laboral horas Prod. laboral ocupados

90

100

110

120

130

140

150

160

170

180

190

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

90

100

110

120

130

140

150

160

170

180

190

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

90

100

110

120

130

140

150

160

170

180

190

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

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

20

23

26

29

32

35

38

41

44

47

50

53

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Argentina Brasil Chile México

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, 1990-2010: 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, 1990-2010: LA-KLEMS.

• Latin America crises in 2009.

• 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 conclusionsSummary and conclusionsMaddison 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 1500. 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 America’s Bicentenary and the Maddison Legacy.

Maddison Memorial Conference

Muchas gracias.