Deconstructing the narrative about Latin America’s economy

A new paper by economists at the think tank Group of Thirty (G30) shows that Latin American economies underperformed as compared to developed countries and other economies with similar income per capita. This trend pre-dates the last decade-long commodities crisis, which started in 2003-2004, and is visible for at least the last three decades. 

Former Chilean finance minister and director of the G30 LatAm project Andres Velasco said Latin America bucks theoretical predictions. “Standard economic theory says that, conditional to a number of things, poor countries should grow faster and someday catch up with richer countries. But this has not happened in Latin America,” explained Mr. Velasco, dean of the School of Public Policy and Political Science at the London School of Economics (LSE). “Even faster-growing countries like Panamá and Chile have failed to catch up with wealthier nations’ growth.” 

According to the report, poor productivity is a key causal factor, and has not contributed (-0.03 percentage points a year) to the region’s overall growth in recent decades — a striking opposite phenomenon to that of developed countries or emerging economies in Asia. 

“The same worker and the same machine [in Latin America] produced no more output in 2019 than it did in 1990. In stark contrast, in emerging Asia, total factor productivity accounted for an average of 1.5 percent per capita annual growth over the period,” reads the think tank study. 

In the same period, the contribution of capital accumulation was zero. Rather, Latin America’s growth came mainly from per capita labor input (0.94 points a year), stemming from the growing working-age population and their accumulation of skills (0.82 points a year). 

But beyond low productivity, much of the usual narrative about Latin America, blaming underperformance on terrible macroeconomic fundamentals, no longer fits all of the region. 

“We have an enduring puzzle about why countries with fairly good macro [economics] and that have also implemented a number...