Latin America and Income Convergence: History of Failure? – 03/03/2021 – Latinoamérica21

There is a popular belief in economics that poor countries tend to grow faster than rich countries. As a result, global economies eventually converge in their income levels. The most important benefit of laggards is to copy the best institutional, technological and productive standards and practices from those that precede them.

In addition, the theory is that the poor receive large amounts of capital from the rich, which means that despite investing more and more capital in training their labor force or in their industries, the returns they get from these investments are each lower.

How is the theory in the light of history?

After the English Industrial Revolution and the modern economic growth it spawned in the mid-18th century, a dozen Western countries achieved income levels similar to those of the English over the next hundred years. First come Holland and Belgium. Then France, Switzerland, Denmark, Germany, New Zealand, Australia, Canada and Argentina. At the beginning of the last century, the wealthy group was supplemented by Norway and Sweden.

The United States deserves a special mention, as it overtook England to become the richest country in the world, the technological leader and the hegemonic political power of the world on the brink of WWI.

Since then, there has been little convergence. During the so-called “golden years” of the post-war period, the accelerated economic growth of Austria, Finland, Italy and Spain brought them to the elite club. Ireland and Portugal joined the group recently.

And Latin America?

The region has not been fully immune to the phenomenon. However, historical experiences of convergence have been bitter.

Argentina was one of the 12 most prosperous economies in the world during the first third of the 20th century and since started a long (relative) decline in its GDP per capita until the 2000s. It was overcome by the Venezuela in the 1950s, whose economy grew rapidly for another two decades, only to experience significant shrinkage and another 30 years of stagnation.

Thus, Venezuela shows an evolution of its income close to the shape of a normal distribution bell. Obviously, in neither case was the convergence cemented.

Source: own elaboration based on Maddison Project database (2020). G10 + (average of the group of rich countries mentioned above, of which Argentina and Venezuela were temporarily part for different decades).

While the cases of Chile and Colombia are similar, as both end their trajectories at income levels very close to their starting points a century ago, Chile has lagged significantly behind the G10 + for 50 years. (1930 to 1970), and this only started to recover in the 1980s. Colombia, however, has remained largely static since the 1940s, with a recovery in the last decade.

Brazil is different. It shows an upward trend only slowed down by the debt crisis of the 1980s and the “lost decade” that followed. In 100 years, Brazilians’ incomes have grown from just over 10% of US incomes to 28%. At this rate, convergence with the leader will take about 300 years.

The success of Asian countries

Latin America’s failure to converge is clear and brutal. But not everyone has suffered this fate. The experiences of Japan, Hong Kong, Singapore, Taiwan and South Korea (the Asian “tigers”) are examples of successful convergence.

Starting with Japan in the 1960s, and successively with differences of about a decade between the 1970s and 2000s, the remaining four cases in the order above reached G10 + income levels. While they did so at different growth rates, Hong Kong and Japan at very high rates and Korea at a slower pace, they all reached the Promised Land.

Source: own elaboration based on Maddison Project database (2020). G10 + (average of the group of rich countries mentioned above, of which Argentina and Venezuela were temporarily part for different decades).

Where is the difference?

The decisive factor in understanding the reason for the different experiences in the two regions lies in the nature of the integration into the international economy.

On the one hand, Latin America has been integrated through primary exports. Throughout the century, the export matrices of the five economies have been dominated by commodities: coffee, wheat, meat, rubber, wool, soybeans, copper, nitrate, coal and petroleum.

In contrast, the “tigers” gradually transformed their headquarters, moving away from the export of primary products to focus on the development of exports of industrial products (and of commercial and financial services in Singapore and Hong Kong).

The years of rapid growth and convergence have been years of dynamism and consolidation in industries such as automotive, high-precision machinery, man-made fibers, plastics, semiconductors, computer software and products. electronic. All these competitors in international markets. In other words, these economies have strongly stimulated their industrialization, reorienting it towards exports.

The industrialization of exports has stimulated the demand for domestic activities linked to production abroad, has generated more and more skilled formal labor and has enabled the re-conversion of the accumulation of savings in the form of investments in infrastructure and other resource-intensive sectors.

But above all, this export commitment required the formation of a national technological system capable of continuous innovation, both in products and in production processes. As a result, Asian businesses and workers have become more productive and have added more and more value to the goods and services offered. As a result, they received higher income.

To be fair, Latin Americans have been successful in exporting industrial products. But they did so in smaller proportions, mostly regionally and episodically. Instead of creating technology at home, it was imported and the virtuous circle was broken.

Commodities forged another course, with long-standing structural problems: external vulnerability, currency devaluation, volatility of growth, and scarcity of stimuli and links to other activities.

The world has changed and the news is not good. The conditions for jumping forward are more difficult today than they were for “tigers” four or five decades ago. Bilateral trade agreements, the rules of the regulatory game for international trade, and the pervasiveness of intellectual property rights have dramatically reduced the possibilities for developing the kind of industrial policies that the wealthy now implemented when they sought to get out of the doldrums. poverty.

Latin America seems doomed to contribute to the theories of divergence.

Spanish translation by Maria Isabel Santos Lima, a plural medium engaged in the diffusion of critical and true information on Latin America.

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