Can Latin America fly?: revising the engines of growth

Hubert Escaith is Director of Statistics and Economic Projections Division. ECLAC The views expressed in this document, which has been reproduced without formal editing, are those of the authors and do not necessarily reflect the views of the Organization. Summary This document analyses the past dynamics and the potential of economic growth in Latin America, using alternative methodological perspectives. Applying them to the regional situation at the end of the 1990-2002 economic cycle, the respective methods are used to review the medium term determinants of growth in the region. This is achieved from the dual standpoints of production function approaches and export-led models, contrasting the particular situation of the principal sub-regions in Latin America. In this process, a series of issues are raised, ranging from the impact of structural reforms on total factor productivity, to the Balance of Payments constraints and the sustainability of the export-led model. Productive capacity in the early years of the 2000 has been debilitated by years of reduced investments, and total factor productivity has not responded positively to the reforms. The observed structural changes in the labour markets point also to an inefficient allocation of the labour force. This negative trend puts an additional constraint on the supply-side forces which, from this perspective, lowers the growth potential of the region. At first glance, it appears that structural reforms did not have the expected beneficial effect on the supply side of the economy, and the diagnostic that concludes the first part of the study is low spirited. When turning to the demand side, the potential for export-led growth appears higher than may have been expected, thanks to a regression-to-trend of the high import elasticity observed during the 1990s. This increases the efficiency of the demand-driven model, and strengthens its macroeconomic sustainability. Comparing the empirical outcome of various theoretical schools and methodologies, the study determines a set of plausible economic scenarios for the region, and concludes by highlighting some economic policy conditions for strengthening its growth potential and ensure being in a better position to seize the opportunities offered by external markets. The results obtained from the empirical investigation point, inter alia, at the role of exchange rate in determining short-term competitiveness. On the supply side, structural policies should look at strengthening this external competitiveness by increasing the rate of incorporation of technical progress, particularly in the tradable sectors.