During the 1990s, most Latin America’s countries followed a set of policies summarized in the so-called Washington Consensus. These reforms helped achieve macroeconomic stability – notably low and stable inflation and in most countries, fiscal consolidation —but did not stimulate high and sustainable growth. Indeed, a surge in structural reforms between 1985 and 1995 failed to narrow the gap between incomes in Latin America and high income countries (Figure 2 of Zettelmeyer).
Jeromin Zettlemeyer identifies six stylized facts about Latin America.
1. Latin America (LA) per capita output growth has been systematically lower not just than growth in East Asia and Pacific (EAP) but also South Asia (SA) and Middle East/North Africa (MENA). Only in the 1970-80 period did Latin America outperform South Asia and the Middle East. Even during the 2002-2005, a period of very strong growth among all emerging economies, Latin growth has been the slowest of among all developing region (Figure 3 of Zettelmeyer).
2. Latin growth since 1970 has been disappointing because of declines in total factor productivity (TFP). Between 1970 and 1980s, the growth in capital, labor and human capital reached almost 3% per year but the negative TFP suggested that such growth rate of output (around 5%) could not be sustainable in the next decade without any reforms. It is only during the 1990s, as displayed in figure 4, that total factor productivity (TFP) growth turned positive – but remained at a far lower level than proponents of structural reform expected.
3. The dispersion of individual Latin countries’ growth rates increased after 1990. Latin countries experienced similar growth patterns through the early 1980s, but in the 1990s growth performance was much more diverse. Chile (and Argentina until 1997) experienced strong growth, Brazil experienced modest growth and countries like Ecuador, Venezuela and Argentina – in the period 1998-2001 - stagnated.
4. Business cycles in Latin America are both more volatile (large swings) and more protracted (long cycles) than advanced countries and other non-Latin American emerging markets economies. This fact was first pointed out by Aiolfo, Catao and Timmerman. The authors used data for Brazil, Argentina, Mexico and Chile over a 135-year period. Their main result is that all countries displayed a combination of both business cycle volatility and persistence relative to both advanced economies and to some other developing countries.
5. Latin America has suffered more output collapses than other developing regions. Latin countries experienced large output drops (defined as falls in output lasting at least two years and resulting a total output loss of at least 5%) as frequently as Sub-Saharan Africa (SSAfr; Figure 6 of Zettelmeyer).
6. Periods of high growth have been shorter lived in Latin America than in other regions. The average duration of periods of high growth rates in Latin America has been shorter than in Sub-Saharan Africa – let alone East Asia. The average length of a growth spell in Latin America is only half of that in Asia (table 1 of Zettelmeyer).
The “liberalize, stabilize and privatize” reforms of the 1990s did not transform Latin America into East Asia. Certain measures showed clear improvement – inflation rates in key Latin countries are now below US inflation rates – but the structural reform agenda of the late 1980s and early 1990s failed to bring about a convergence in Latin living standards with those of the advanced economies. It also failed to end Latin America’s history of large swings in growth, in part because the reforms did not address deeper economic and social constraints to more rapid growth. In the second part of this brief, we will link these stylized facts to Zettelmeyer’s assessment of different policy prescriptions.