On average, economic reforms in Latin America and the Caribbean have been associated with a 1.5 percent yearly increase in the growth rate of total factor productivity. But there are important differences across countries, and in some cases economic reforms have been associated with lower growth in total factor productivity.
Fajnzylber and Lederman rely on a series of growth accounting exercises to determine whether the growth rate of total factor productivity (TFP) or the unexplained portion of GDP growth (after controlling for the accumulation of capital per worker) in 18 Latin American and Caribbean economies has benefited from economic reform.
They use Sachs and Warner (1995) criteria to identify the years of economic reform. They apply growth decomposition analysis and econometric tests to determine whether TFP growth has been significantly higher during periods of economic reform.
Although the growth decomposition analysis assumes that the capital share of output is constant across Latin American countries, the econometric estimates allow for cross-country differences. In ordinary least squares (OLS) regressions and seemingly unrelated regressions (SUR), two alternative dummy variables are used to control for the effects of business-cycle fluctuations on observed rates of TFP growth. In addition, the SUR regressions consider the possibility that Latin American economies face common shocks.
Finally, panel regressions are based on five-year averages of the growth rates of GDP and capital per worker. The authors find that, on average, economic reforms have been associated with a 1.5 percent yearly increase in the rate of TFP growth. But there are important differences across countries and in some cases economic reforms have been associated with lower TFP growth.
This paper—a product of the Poverty Reduction and Economic Management Sector Unit, Latin America and the Caribbean Region—is part of a larger effort in the Bank to undertake regional studies to shed light on policy-relevant issues. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Sandra Holt, room I8-122, telephone 202-473-7859, fax 202-614-0235, Internet address sholt@worldbank.org. Daniel Lederman may be contacted at dlederman@worldbank.org. (23 pages)
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