Project Studies History behind Latin America's Sluggish Growth

When Latin America’s largest national economies consistently exhibited poor economic growth in the late 20th century, economists were puzzled. A brief glance at each country’s annual GDP relative to that of the United States seems to tell the story of a continent falling behind: Only Argentina, Chile, and Uraguay ever exceeded 40 percent of U.S. per capita GDP, and since 1971, GDP declined sharply or, at best, remained nearly flat.

The trends in these data suggest that the economies of Latin America missed out on the three decades of steady growth enjoyed by the rest of the world over the latter half of the last century. Yet, despite the scale and severity of the anomaly and more than a decade of hindsight, economists remain uncertain of its causes.

A project supported by the Becker Friedman Institute will shed some light on the mystery. In July 2013, the institute pledged funding to conduct a comprehensive comparative study of the fiscal history of Latin America's nine largest countries. Leading the project are Juan Pablo Nicolini (PhD ’91) of the Federal Reserve Bank of Minneapolis, Timothy Kehoe of the University of Minnesota, and Thomas Sargent of New York University. The institute’s Fiscal Studies initiative researchers will evaluate the aggregate effect of past fiscal and monetary policy decisions on the region's poor growth performance.

One small team of economists in each of the nine countries will produce a monetary and fiscal history of each country from 1960 to 2005. Viewing country specific data as “case studies,” the researchers will test two central hypotheses: first, that bad fiscal and monetary policies led to macroeconomic instability and second, that macroeconomic instability was responsible for poor growth performance in this region.

The institute plans to host a conference in Chicago in the spring of next year in order to take stock of the project’s intermediate progress, as well as its current contexts. At this meeting, economists from several Latin American countries will present their current findings and gain insight from institute scholars.

In the project’s final stages, the research team will host a series of workshops in every studied country. A large joint conference, where all will convene to share findings and make comparative evaluations, is slated to follow. The group’s ultimate goal is to publish a book—both in English and local languages—sharing the project’s results alongside country-specific policy lessons.

The lessons gleaned from analyzing the fiscal history of the region will offer valuable guidance for policy makers, international financial institutions of the region, and the international academic community.

–Ajay Batra