Latin America's Growth: Looking through the Demand Glass

Abstract

This paper revisits the historical roots of Latin America's disappointing growth using a novel macro and trade-based growth decomposition and a simple model of industrial-ization in a commodities-exporting country with a large informal sector. The approach suggests the need to better qualify two opposite narratives: that the post-1982 ("neo-liberal") reforms have failed, and it is time to look back to the import substitution industrialization era for policy inspiration; and that the post-1982 reforms went in the right direction but must be completed to unleash significant productivity gains. Both can be misleading because they downplay the role of demand. The apparent "miracle" of import substitution industrialization does not provide a realistic point of comparison because it reflected an unsus-tainable, demand-induced boost in productivity. And the gains expected from Washington Consensus-style reforms alone can be overstated because they are derived from overly restrictive assumptions on demand. By allowing demand to play a more central role, the paper finds a close and revealing relationship between the growth patterns followed by Latin American countries, the quality of their macroeconomic policies, the nature of their trade, and the segmentation of their labor markets. Going forward, the policy agenda calls for an outwardly oriented growth strategy, supported by a more proactive role for the state that promotes not only efficiency in supply, but also the appeal to demand.