A central issue in the economics of growth and development is why some countries are rich and others poor, and why some countries are able to start and maintain a period of substantial income growth while other countries do not. Understanding these central issues and the role of policy and institutions in the determination of these outcomes has tremendous welfare implications, in particular in regions of the world where per capita income gaps are large and not converging such as most countries in Latin America. For instance, GDP per capita in Latin America was 30 percent of that of the United States in 1960 and is only 23 percent in 2010. Understanding low and declining relative GDP per capita in Latin America is of critical importance. A growing consensus in the literature is that the majority of the differences in per capita income in the world can be attributed to differences in labor productivity and, in particular, total factor productivity (TFP).

Productivity differences across countries have been studied from many useful perspectives. One perspective that has received substantial attention recently in the literature is that the allocation of resources across heterogeneous productive uses is critical in understanding the cross-country differences in productivity and hence, the observed per capita income differences. There are two large themes within this topic that differ with respect to the definition of micro units. First, the reallocation of resources across broad sectors of the economy associated with the well-known process of structural change and its impact on aggregate productivity. Second, the reallocation of resources across heterogeneous micro units, such as establishments, within a sector. Differences in allocations are studied in the context of policy distortions such as size-dependent policies, progressive taxes and subsidies, explicit or implicit price distortions, trade and industrial policy, among many others; and institutions such as financial frictions or credit market imperfections, labor and land market frictions, among others.

This perspective is likely to be very useful in thinking about the large and growing income gap in Latin America since productivity is the main factor driving the income gap and Latin American economies are subject to many of the policies and institutions that are emphasized in the literature that could create misallocation of resources and hence low productivity at the aggregate level. For instance, a large and growing share of economic activity in Latin American economies such as Peru and Mexico is done in the informal sector. This sector is often characterized as small-scale and unproductive. Hence, large informal activities represent a symptom of misallocation and a key question is what the determinants of informality are in poor countries. An important objective of the research in this area is to identify the key policy and institutional elements driving productivity, measure them in the data and provide a quantitative assessment of their importance for productivity across counties and for individual countries in Latin America in particular.

Another large theme is the role of factor accumulation, both physical and human capital, as amplification mechanisms driving low productivity in developing countries. For instance, while developing countries have increased their schooling level relative to that of developed economies, there are still important differences and especially when quality differences in education are taken into account. Low human capital may be an important limitation for productivity in the business sector. The issues surrounding this research area are what factors are critical in determining low education quantity and quality in developing countries and what policies and institutions are appropriate to support human capital investment and its impact on productivity.

A workshop on “Productivity Growth, Resource Misallocation and Development” to be held in Montevideo, December 11-12 2014.

Organizers: German Cubas (Houston), Hugo Hopenhayn (UCLA), Omar Licandro (Barcelona GSE) and Diego Restuccia (Toronto).
Local Host Institution and Organizer
CINVE, Diego Aboal.
The research group would like to organize a course on Growth and Development by Diego Restuccia, Omar Licandro and German Cubas, to be held in December 2015.