Economic disparities in South America: new historical evidence on immiserizing growth

PhD. Thesis abstract. The Thesis covers a range of economic topics -growth, institutions, and globalization. They advance under a unified framework for a number of common predilections and preoccupations of South America? s economies. Consequently, this dissertation shows a macroeconomic focus to pinpoint certain aspects of the political economy of the region, considering exogenous factors, the connection between trade openness and economic growth, and the role of economic stability in capital accumulation. This study makes use of quantitative methods; the focus of this analysis identifies certain aspects of the institutional and political economy that affect the economic structure and economic growth. Our econometric work benefits from a new long-term database -a rich panel data set including a large number of growth determinants. The main objective of the thesis is to develop an empirical extension about the immiserizing growth theory looking for the long-run determinants of economic growth and studying the impacts of macroeconomic distortions of misguided economic policies. We propose to achieve the following objectives: 1. To seek for the long-run determinants of economic growth, providing an assessment of South America? s economic performance during the past 48 years. The empirical part concentrates on determining the main sources of growth, studying two factors: (a) proximate and measurable influences, captured in the growth accounts and (b) potential influences (i.e. institutional economics and macroeconomic distortions). 2. To analyze individually the growth accounting of GDP per capita and growth determinants, we clarify quantitatively the formation of clusters. 3. To account for the cost of the Import-substitution industrialization (ISI) policies on South American economic growth. We built an Index of macroeconomic distortions (IMD) to measure the relationship between economic disturbances and GDP per capita growth. We found that growth rates and terms of trade can fluctuate considerably in the short-run; it should not be surprising that a country may suffer a decline in welfare, in particular years. Chapter 4 shows, that terms of trade volatility had adverse effects on growth, and on most South American economies: nine countries met this criterion. In 8 countries, their GDP declined in the first sub-period (1960-1982). In Chapter 5, the likelihood that a country will suffer immiserizing growth reduces significantly. However, it partially confirms that increments in tariffs slowdowns economic output. Additionally, the evidence supports that extractive economies experience economic growth. Natural resource's exploitation has positive effects on growth. One of the strongest messages (Chapter 3 and 4) is that primary exports ? agriculture and oil- are favorable for developing economies, although it seems that extended periods of positive growth are required. The region? s reliance upon natural resource exports leaves it highly vulnerable to terms of trade shocks; a vulnerability that is apparent now. This economic exposure demands a policy response to reduce the impact of shocks on the domestic economy. The results of the dissertation provide new evidence suggesting that most of South American countries are suffering from a common symptom (insufficient growth), and likely several different growth-diseases: weak institutions, macroeconomic disturbances, and high exposure to external shocks; furthermore, physical capital and human capital accumulation, as well as technologies are deficient and varies widely across countries, probably increasing divergence. The majority of the evidence suggests valuable lessons. First, capital accumulation (human and physical) is a necessary tool to boost long-run economic growth, and a more open economy can be an instrument to stimulate investment. Second, despite the significant advances in life expectancy, basic education and growth institutions, renewed efforts are necessary to strengthen the government's role in fostering human capital. Finally, there is a need to secure macroeconomic stability to set the basis for high and sustained economic growth, including fiscal and monetary discipline, a predictable exchange rate and a diversified export sector in order to minimize the exposure to terms of trade volatility.