Growth and Adjustment in East Asia and Latin America

Growth rates around the world have varied greatly over the last four decades. The four East Asian tigers—Hong Kong, Singapore, South Korea (henceforth Korea), and Taiwan—grew at an average of over 6.0 percent a year in per capita terms between 1960 and 2000. In contrast, many countries in Latin America and the Caribbean recorded less than 1.0 percent growth during the same period. Comparing the high growth of East Asian countries with the poor performance of Latin American and Caribbean economies leads to the question of which factors are fundamental for explaining such differences and what countries should do to spur growth.

This paper assesses the evolution of growth in these two regions in order to explain the poor performance of Latin America and the Caribbean relative to East Asia. Based on cross-country growth regressions, we find that the traditionally important growth factors—investment, population growth, and the quality of human resources—explain almost half of the difference in per capita GDP growth between East Asia and Latin America. Economic policy and institutional factors—such as the rule of law, government consumption, macroeconomic stability, and the degree of openness—explain the other half of the growth differences between the two regions. Balance-of-payments crises have also contributed to lower growth in Latin America and East Asia, although both regions have suffered from their effects.

We extend the discussion on growth determinants to the role of income distribution and the quality of education. Although those variables do not enter satisfactorily into growth regressions as a result of collinearity or lack of available data, we provide evidence that they help explain why the regions have different institutions and policies.

When we compare the East Asian and Latin American experiences of adjusting from currency crises, we find that the adjustment process is generally consistent with the stylized V-shaped pattern observed in all crisis episodes worldwide. The mean growth rates hit bottom either at the time of the crisis or one year later, and they return to the precrisis trend rate within two or three years.

Output losses have been severe in some recent crises, such as the East Asian meltdown of 1997. By examining regional adjustment patterns following past crisis episodes, we identify the factors that help countries avoid a large decline in growth during the crisis and quickly recover to the precrisis potential growth path. Adequate international liquidity, real exchange rate depreciation, and a sound banking system play a critical role in avoiding severe repercussions from a crisis. A good external environment also speeds recovery and limits the cost of the crisis. Moreover, an expansionary monetary policy may dampen the crisis costs, but fiscal policy has no significant effect.

The paper is organized in five sections. First we present an overview of East Asian and Latin American growth over the past forty years. The subsequent section uses cross-country regressions to identify the critical factors behind Latin America and the Caribbean's low growth performance relative to East Asia, and it also discusses prospects for the future. We then undertake a comparative analysis of the regional patterns of adjustment from previous crisis episodes. Next, we investigate the factors that help countries avoid severe output losses following a crisis and quickly return to the precrisis potential growth path. The final section concludes.

Overview

Compared with the East Asian experience, Latin America's growth performance over the past four decades was disappointing. Table 1presents growth rates for the sample of twenty-one Latin American and Caribbean