The debate on the strategies to foster economic growth is still a heated one. Possibly because the ‘capital fundamentalism’ (low growth explained by insufficient increase in the supply of physical capital) has been discarded and has recently been replaced more recently with a focus on human capital. The pieces in this cluster contrast the latest development on economic growth and how they can be implemented apply to Latin American countries.
Hausmann, Rodrick and Velasco argue that increasing the amount of human capital should not be taken as a solution for all developing countries as a receipt to foster growth. In their view countries should find the two most binding constraints on their economy and then focus on lifting those. Due to different constraints, what works for one country may not work for another. As an example, they explain that the poor growth performance in Brazil and in El-Salvador cannot be explained by low savings and little emphasis on education. While it is true that both countries have low savings and investment rates, the return on capital and education is different between countries. In El Salvador, savings is not a constraint According to the authors: “there are no symptoms that El Salvador’s growth is constrained by lack of savings.” (p. 21) and yet has low returns on capital. has the lowest lending rates in Latin America the country is not constrained by a lack of savings and yet cannot find productive investments. Brazil has high returns on capital as well as on education. on both – physical capital and education – whereas El Salvador is not constrained by a lack of savings but due its inability to find productive investments.
The authors also suggest that Washington Consensus’ reforms were designed to reduce the most economic distortions simultaneously. While such a strategy – coined by the authors ‘wholesale reform’ – should improve welfare, it tends to produce different result across countries due to their distinct labor, land and credit markets features. In turn, what is good for a country may detrimental to growth for another. A better strategy is to focus on reforms that seem practical and politically feasible to implement deep changes. They recommend countries to find the two most binding constraints on their economy and then focus on lifting those. Due to different constraints, what works for one country may not work for another.
The piece by Arminio Fraga goes back to the 1980’s to explain the origins of the stabilization policies implemented throughout South America during the 1990’s. These policies, by and large, followed traditional macroeconomic policies and were coined “Washington Consensus”. The huge capital flow to South America is mainly due to the successful implementation of these policies. While we have seen progress in the macroeconomic fundamentals, very little has been done to improve the political system. Mainly because these structural changes have not been implemented, a new government has the power to change the whole economic policy and hence reversing the virtuous cycle we have observed so far.
The actions of Central Banks have led these economies to preserve low and stable inflation. However, these countries have done very little to deal with key issues like poverty, hunger and inequality. Indeed if these structural problems are not properly addressed soon, the current democratic arrangement might be at stake.It is of vital importance to strengthen political institutions in order to ensure economic stability.