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César Calderón: Diego Restuccia’s paper addresses one of the key stylized facts of Latin America’s development: over the last hundred years, relative income per capita in the region (with respect to the United States) has remained roughly flat. Some practitioners have dubbed this pattern the one hundred years of solitude, as the region has failed to converge to the living standards of higher-income countries.1 In fact, the relative income per capita of the eight largest Latin American economies relative to the United States has fluctuated around 0.25 and 0.30 since 1900. This behavior is appalling when compared to the notable catch-up engineered by East Asia (which quadrupled over the last 60 years). The paper attributes the region’s failure to catch up to institutions and policy distortions—and, more specifically, to policies and regulations that impede market contestability and an efficient reallocation of resources.

Growth Accounting: Measurement Issues

I agree with the author that Latin America’s failure to catch up with the United States is likely to be attributed to systemic differences in total factor productivity (TFP). However, there are some measurement issues that the author should have discussed further. Although accounting for all these issues would not have changed his results qualitatively, they are worth mentioning as caveats as they may alter the productivity ranking among countries within the region.

Measuring TFP is not a trivial issue. The TFP component of growth is, by definition, a residual. It is typically computed as the difference between output growth and a weighted average of the growth in the quantity and quality of factors of production. As such, any measurement errors present in the variables used to measure labor and capital are mechanically imputed to TFP. For instance, failure to account for improvements in the quality composition of capital stocks or the labor force will tend to overestimate the TFP component. Analogously, if the labor and capital actually used in production are considerably lower than their available stocks (or installed capacity), the resulting TFP estimates will be underestimated.2 The following points should also be taken into account in the discussion.

  • The capital share. In several papers that conduct growth accounting exercises, the share of capital (α) has been calculated using the labor income share in total income. This share tends to be overestimated, however, because it does not take into account the labor income of the self-employed and other proprietors.3 This is key in Latin America given the importance of informality.

  • Human capital. There is a wide discussion on the contribution of human capital (and, more specifically, education) to growth. Pritchett argues that the returns to education may be overstated as a result of low educational quality and perverse incentives created by the institutional and governance environment.4

  • Independence between factor accumulation and TFP growth. This is a crucial underlying assumption in the growth accounting literature, yet it can be invalidated on theoretical grounds. For instance, Klenow and Rodríguez-Clare point out that TFP growth can revive investment projects that were previously not profitable.5 In addition, technological innovations embodied in capital goods will render a significant relationship between TFP growth and the speed rate of capital accumulation.6

Explaining Latin America’s Underdevelopment: What the Paper Omits

The paper fails to mention two major factors that may explain the lack of convergence of the Latin America region vis-à-vis advanced countries: namely, the instability of political institutions and macroeconomic instability. These two dimensions are important because they create the set of economic incentives that will determine agents’ behavior and also condition agents’ risk management practices and their ability to take risks in the economy.

With regard to political instability, economic institutions shape economic incentives and set constraints.7 These institutions are, in turn, determined by the political process—and, hence, by political institutions. In the case of Latin America, the history of the region has been plagued by heightened political instability.8 Some countries have had repressive, nondemocratic governments, while others have experienced episodes of civil conflict and war, terrorism and drug trafficking, and rampant crime and violence and inequality. All these events have generated a lot of...

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