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Development in the Americas (DIA)

IDB Flagship Publication

Buy the book at

  • English and Spanish versions
  • Spanish version

Abstract

Productivity, the main driver of economic prosperity, is languishing in Latin America and the Caribbean and is preventing the region from catching up with the developed world. Asking why the region is falling farther and farther behind, this book looks beyond the traditional macro explanations and digs all the way down to the industry and firm level to uncover the causes of this low productivity. It provides tools to ponder productivity growth beyond conventional aggregate analysis, focusing on the extreme heterogeneity of sectors and firms while emphasizing the importance of policies that allow high productivity firms to thrive and expand. While it certainly considers the plight of manufacturing, the book zeros in on the critical services sectors, particularly those, such as transportation and retail, with important repercussions on the rest of the economy. It challenges the argument that the region is condemned to stagnation and examines a number of policy levers that can transform the economies of the region.

Working Papers

  • Financial Dependence, Formal Credit and Informal Jobs
  • Abstract: This paper examines a much overlooked link between credit markets and formalization: since access to bank credit typically requires compliance with tax and employment legislation, firms are more likely to incur such formalization costs once bank credit is more widely available at lower cost. The relevance of this credit channel is gauged using the Rajan-Zingales measure of financial dependence and a difference-in-differences approach applied to household survey data from Brazil. It is found that formalization rates increase with financial deepening, especially in sectors where firms are typically more dependent on external finance. Also found is that, decomposing shifts in formalization rates into those within each firm size category and those between firm sizes, financial deepening significantly explains the former but not so much the latter. Some key policy implications are derived. Click here for more information.

  • Financial Development and TFP Growth: Cross-Country and Industry-Level Evidence
  • Abstract: This paper estimates the impact of financial development on industry-level total factor productivity (TFP) growth using a largely unexploited panel of 77 countries with data for 26 manufacturing industries for the years 1963 to 2003. A significant relationship is found between financial development and industry-level TFP growth when controlling for country-time and industry-time fixed effects. The results are both statistically and economically significant. TFP growth can accelerate up to 0.6 percent per year, depending on the external finance requirement of industries, following a one standard deviation increase in financial development. The results are robust to different samples and specifications. Click here for more information.

  • Integration, Resources Reallocation and Productivity: The Cases of Brazil and Chile
  • Abstract: Most microeconometric studies available for LAC have focused on measuring the direct impact of trade on plant productivity leaving aside other effects that arise through the market selection process. Additionally, most studies have focused on tariff barriers as the only obstacle to international trade and integration. In this paper we use data from Brazil and Chile to analyze how trade affects aggregate productivity through the process of resource reallocation and to explore not only the role of tariffs but also the role of transport costs. We find that trade costs affect the reallocative process by protecting inefficient producers, lowering their likelihood to exit, and also by limiting the expansion of efficient plants, lowering their likelihood to export. We also find that the reallocative impacts of trade come not only from tariff barriers but also from transport costs. Click here for more information.

  • Misallocation and Productivity in Colombia’s Manufacturing Industries
  • Abstract: Following Hsieh and Klenow (2009), this paper studies productivity dispersions in Colombian industrial establishments using the Colombian Annual Manufacturing Survey (AMS) from 1982 to 1998. The United States is used as a benchmark to estimate the reallocation of capital and labor to equalize marginal products across plants in Colombia. Gains are found in manufacturing Total Factor Productivity (TFP) of approximately 3-8 percent and TPF is positively correlated with exporting status, age, size, and location in the central region of the country. There is also suggestive evidence that opening the economy in 1991 is associated with an increase in plant productivity levels for firms that export goods. The 1990 reform that reduced dismissal costs is associated with an increase in productivity, while the reform that increased labor costs in 1993 is associated with a decrease in plants’ productivity. Further work is needed to establish a causal relation between productivity and policy changes. Click here for more information.

  • On the Role of Productivity and Factor Accumulation in Economic Development in Latin America and the Caribbean
  • Abstract: This paper combines development and growth accounting exercises with economic theory to estimate the relative importance of total factor productivity and the accumulation of factors of production in the economic development performance of Latin America. The region’s development performance is assessed by contrast with various alternative benchmarks, both advanced countries and peer countries in other regions. The paper finds that total factor productivity is the predominant factor: low productivity and slow productivity growth, as opposed to impediments to factor accumulation, are the key to understanding Latin America’s low income relative to developed economies and its stagnation relative to other developing countries. While policies easing factor accumulation would help somewhat in improving productivity, for the most part, closing the productivity gap requires productivity-specific policies. Click here for more information.

  • Politics, Policies and the Dynamics of Aggregate Productivity in Colombia
  • Abstract: This paper describes private actors’ involvement in Colombia’s policymaking process. While more transparent and formal channels are used to discuss horizontal policies, they are also less effective. The adoption of targeted policies, however, follows a faster track and depends more on political power than on those policies’ potential as engines for productivity growth. Data on policies and political characteristics across sector-region units are used to further characterize the different groups’ weight in policymaking, and the effect of the implied unbalance on aggregate productivity. Electoral weight and being represented by business groups and associations are found to be important determinants of the policy benefits received by a sector in a region, especially when activities are located in regions affected by armed conflict. It is also found that the resulting imbalance of policies damages aggregate productivity. Click here for more information.

  • Productive Development Policies in Trinidad and Tobago: A Critical Review
  • Abstract: Even as Trinidad and Tobago seeks productive diversification away from the energy sector, the process underlying the country’s productive development policies (PDP) is in a state of transition from state-directed industrial policy to a newer approach with extensive private-public participation. This study explores the main characteristics of four PDPs in Trinidad and Tobago and reviews them following the related literature (e.g., Rodríguez-Clare, 2005a and 2005b, and Melo and Rodríguez-Clare, 2006). The four PDPs are: a) The process towards the Promotion of Clusters; b) the PDPs for the Tourism industry; c) the classical PDPs for Micro, Small and Medium Enterprises and; d) the Free Trade Zone as a policy designed to compensate for the failure of the State. Click here for more information.

  • Reforms and Counter-Reforms in Bolivia
  • Abstract: This paper analyzes reforms and counter-reforms in Bolivia in recent decades and their effects on the policymaking process (PMP) and productivity. Bolivia’s PMP has shifted from a formal representative democracy to a “participative and direct type of democracy” where street protest and other non-conventional forms of political participation have become dominant. While reforms have increased productivity, they have failed to secure the political support necessary to assure long-term sustainability. In contrast, counter-reforms have so far enjoyed extensive political support, but productivity has stagnated since this process started, with declining economic growth and job creation—developments likely to undermine support for the counter-reform process. The document stresses the need to rebuild a consensus around a PMP capable of increasing productivity and employment creation while restoring social cohesion. Click here for more information.

  • The Political Economy of Productivity in Argentina: Interpretation and Illustration
  • Abstract: This paper examines how the main characteristics of Argentina’s policymaking process (PMP) affect the productivity of its economy using the conceptual framework presented in Murillo, Scartascini and Tommasi (2008), Stein et al. (2008), Spiller and Tommasi (2007), and IDB (2005). First, the paper complements existing descriptions of the PMP by considering private agents and elaborating on structural characteristics possibly conducive to policymaking instability. Second, the paper illustrates the (negative) impact of Argentina’s lowquality and myopic PMP equilibrium on productivity by examining two key areas: provision of infrastructure services and agricultural policy. Finally, the paper explores the PMP at the local level of government (municipalities and local communities), finding that it mimics the flaws observed at the federal level. Click here for more information.

  • The Political Economy of Productivity in Brazil
  • Abstract: This paper explores the link between Brazil’s political institutions and its disappointing productivity and growth in recent decades. Although political institutions provide the president with incentives and the instruments to pursue monetary stability and fiscal discipline they simultaneously raise the costs of achieving those very objectives. The insulation of certain expenditures from presidential discretion necessitates the use of other policy options, such as high taxation levels and cuts in unprotected expenditures, which put a drag on productivity and growth. In a context of robust checks and balances and interest group fragmentation, a state overburdened by constitutional entitlements has resorted to massive increases in taxation. The resulting environment possesses both essential elements for sustainable economic growth and distortions that conspire against its realization. While some improvements in productivity and growth have occurred in the past decade, the pace has been slow and incremental. Click here for more information.

Videos

Economists Debate Obstacles that Delay Growth of Brazil (in Portuguese)

May 28, 2010 - Duration: 2:17 minutes


The Age of Productivity - CNN Interview (in Spanish)

Apr 7, 2010 - Duration: 10:20 minutes

View with: ( FLV , WMV )


More Productive Economies (in Spanish)

Nov 21, 2010 - Duration: 2:05 minutes

View with: ( FLV , WMV )


Latin American economies stymied by high transportation costs

Nov 27, 2009 - Duration: 3:21 minutes

View with: ( FLV , WMV )

Press and Events

Development in the Americas is the flagship publication of the Inter-American Development Bank. Every year, the Bank researches and provides an in-depth analysis of the most pressing development issues in Latin America and the Caribbean.

Editions of Development in the Americas (DIA):

  • 2013
    More than Revenue: Taxation as a Development Tool

    More than Revenue aims to provide an up-to-date overview of the current state of taxation in the Latin American and Caribbean (LAC) region, its main reform needs, and possible reform strategies that take into account the likely economic, institutional, and political constraints on the reform process.
  • 2012
    Room for Development: Housing Markets in Latin America and the Caribbean

    This edition of the IDB's flagship publication, Development in the Americas, takes an in-depth look at the opportunities countries have to improve urban housing markets and pave the way for solutions that involve the private sector.
  • 2011
    Development Connections:
    Unveiling the Impact of New Information Technologies


    Policymakers and academics agree that computers, the Internet, mobile telephones and other information and communication technologies can be beneficial for economic and social development. But how strong is the impact?
  • 2010
    The Age of Productivity: Transforming Economies
    from the Bottom Up


    The book provides tools to ponder productivity growth beyond conventional aggregate analysis, focusing on the extreme heterogeneity of sectors and firms while emphasizing the importance of policies that allow high productivity firms to thrive and expand.
  • 2009
    Beyond Facts: Understanding Quality of Life

    Using an enhanced version of the recently created Gallup World Poll, the Inter-American Development Bank surveyed people from throughout the region and found that perceptions of quality of life are often very different from the reality.

Previous editions of the Economic and Social Progress Report (IPES):

  • 2008
    Outsiders? The Changing Patterns of Exclusion in Latin America and the Caribbean

    This report raises a number of fundamental questions about the multidimensional and interrelated nature of social exclusion and moves beyond the traditional emphasis on outcomes and groups to view exclusion as a process that results from societal traits that limit the functionings of the excluded.
  • 2007
    Living with Debt: How to Limit the Risks of Sovereign Finance

    This report analyzes the nature and evolution of sovereign debt in Latin America and discusses the policies that can be followed by countries and international financial institutions (IFIs) to reduce the vulnerabilities associated with it.
  • 2006
    The Politics of Policies

    Certain simple ideas can help to mobilize society, but they are rarely sufficient for understanding the processes of fundamental change. Sadly, there are no shortcuts to the Promised Land of sustainable development and prosperity for all.
  • 2005
    Unlocking Credit:
    The Quest for Deep and Stable Bank Lending


    Unfortunately, credit is scarce, expensive, and volatile. Without deep and stable credit markets, it will be very difficult for the region to achieve high and sustainable growth rates and combat poverty.
  • 2004
    Good Jobs Wanted: Labor Markets in Latin America

    Topics of the Report include the employer-worker dynamic, the new profile of the supply of labor, the impact of structural reforms, and the role of technology and institutions.
  • 2002
    Beyond Borders:
    The New Regionalism in Latin America


    It focuses on current subregional integration schemes, the new agenda launched in Doha for multilateral trade talks, regional initiatives, and interregional agreements between countries in the region and the European Union.
  • 2001
    Competitiveness: The Business of Growth

    This report provides guidelines to increase productivity and improve access by businesses to productive resources.
  • 2000
    Development Beyond Economics

    This report examines three entrenched structural factors -demography, geography and institutions- that are closely connected to economic and social development.
  • 1998-1999
    Facing Up to Inequality in Latin America

    Latin America in the 1990s remains the most unequal region in the world in terms of income distribution. Yet because of its changing demographics the region now has a unique window of opportunity to reduce the income gap by accelerating the development process, putting people to work, improving education, and saving for the future.
  • 1997
    Latin America After a Decade of Reforms

    This report examines the complex forces that have shaped the reform process and assesses the challenges ahead to sustain economic growth, prevent instability, improve income distribution, and foster participation in public decisionmaking.
  • 1996
    Making Social Services Work

    The 1996 Report on Economic and Social Report in Latin America interprets these macroeconomic developments in light of structural reforms implemented across the region over the past decade.

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