Abstract: By international standards, gross domestic product (GDP) per capita
in Latin America is low: around one fourth of that of the United States.
Moreover, in the last five decades, Latin America has failed to catch-up in
wealth to the level of the United States while other countries at similar or
even lower stages of development have been successful. The failure to attain
higher levels of relative income represents what I call the development problem
in Latin America. Using a development accounting framework, I find that the bulk of the
difference in GDP per capita between Latin America and the United States is
accounted for by low GDP per hour and, in particular, low total factor
productivity (TFP) in Latin America. I estimate that to explain the difference
in GDP per hour, TFP in Latin America must be around 60 percent of that
in the United States. I then consider a model with heterogeneous production units
where institutions and policy distortions lead to a 60 percent productivity
ratio between Latin America and the United States. Removing the barriers to
productivity can increase long-run GDP per hour in Latin America by
a factor of 4 relative to that of the United States. This increase is equivalent to 70-years worth of post-world-war-II
economic development in the United States.
Keywords: productivity, capital, schooling, establishments, distortions
JEL Classification: O1