Abstract: By international standards, gross domestic product (GDP) per capita
in Latin America is low -- around one fifth 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
of Latin America. Using a variety of data, I find that the bulk of the
difference in GDP per capita between Latin America and the United States is
explained by low GDP per worker and, in particular, low total factor
productivity (TFP) in Latin America. I calculate that to explain the difference
in GDP per worker, TFP in Latin America must be around 60 percent of the level
in the United States. I 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 relative GDP per worker in Latin America by
a factor of 4. This increase is equivalent to 70-years worth of U.S. post WW-II
development.
Keywords: labor productivity, capital, schooling, plant heterogeneity, policy distortions
JEL Classification: O1