How Latin America Sinks into the Quicksand of Inertia José Gabriel Palma

Abstract

Krugman identified the enigma of Latin America’s economic under performance as one of the greatest analytical challenges of economic theory today. I shall attempt to answer this challenge by interlinking the key three facets of Latin America’s current “trilogy of contrasts”: i) when compared with all other regions and main countries since the 1980s economic reforms, Latin America’s capacity to generate employment in services and construction ranks top in the world; ii) however, its productivity-growth (increase of output per worker) ranks bottom; and iii) despite some progress in poverty reduction and in the income-share of the bottom 40%, Latin America still ranks almost top in terms of inequality. Post-1980 LA is indeed a region of contrasts! What follows (even if you have the advantage of having an Amazon, or proximity to the US) is that as the old productive strategies have run their course “extractivism” for some, assembly platforms for foreign conglomerates for others―, the only way forward is to generate new engines of productivity-growth. Trying to stretch the “shelf-life” of the old one is a recipe for falling in the middle-income trap. Exporting “more of the same” unprocessed commodities or products from “shallow” manufacturing assembly-operations is no longer a valid growth-option for LA. But domestic rigidities and markets imperfections and failures (home and abroad) are blocking the necessary “upgrade” of these exhausted productive strategies; and it is unlikely that change would be led by rentier domestic elites, FDI or weak governments. But the conventional hegemonic wisdom still expects these countries to leap from mid-table to higher incomeper capita through policies based on the same institutional setting, elite-preferences, and ideology that got them stuck in mid-table —this is not a realistic solution.

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(This paper has been published on the website of University of Cambridge as Cambridge Working Papers in Economics (CWPE))