Despite (Daude and Fernández-Arias, 2010). Table 1 illustrates

Despite recent progress witnessed in several social indicators such as
poverty and disparity, most countries in LAC have been growing slowly in the
last 50 years and the regional share of the world output has basically remained
stagnant since the 1960s. Especially, income per capita relative to more mature
economies has significantly declined ever since, with Latin American countries becoming
increasingly poor compared to the rest of the world (Selowsky and Loser, 2015).

Growth accounting studies have identified in low productivity the crucial
catalyst of such divergence with faster-growing countries, such as East Asia
and Western Europe (Busso, Madrigal, and Pagés,
2012). Indeed, although the lack of investments is often suggested as
the main reason behind this lag, the keys to understand the systematically low
income per capita in LAC are both the productivity stasis and the slow growth
rate of factor accumulation compared to more developed economies (Daude and Fernández-Arias, 2010). Table 1 illustrates how the income gap
with APAC (Asia Pacific) and OECD countries has been widening over the last 50
years, which is mostly explained by the lagging productivity performance
(Fernández-Arias and Rodríguez-Apolinar, 2016).Income growth, in fact, can only be sustainable when backed by
underlaying growth of productivity (measured as TFP), and this has been the key
determinant of the gap with Asian countries. From 2001 to 2010, only 58% of per
capita GDP growth in Latin America derived from growth in productivity, against
90% in China and 72% in the ASEAN 5 countries1
(World Economic Forum, 2015).Numerous policy distortions spanning import-substitution
industrialization, widespread government intervention and mismanaged
competitive barriers, especially in the form of trade restrictions and targeted
subsidies, have been holding back LAC economies. This context, worsened by the
alternation of external shocks and demand ups and downs, led most of the
countries in the region (with the exception of Chile, the only country in Latin
America with positive TFP change between 1960 and 2007) to be much less
productive than other economies in the last decades (Ferreia, Pessoa, and Veloso, 2013).Productivity in LAC countries lag Asia Pacific developing countries and
OECD countries; it is far behind the MENA (Middle East and North Africa)
region’s and United States’ output. TFP in LAC only performs better that the
world average and the Central Europe and Eastern European Countries (CEECs) by
respectively 0,11% and 0,13% (Figure 1)1.
The following paragraphs present an overview of the historical change of
productivity in Latin America, the theoretical foundation behind the
relationship with the economic growth, and the determinants of TFP growth.

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Figure 2 illustrates trends of
Real GDP and TFP for the 1960-2014 period. LAC countries overperformed East
Asian economies in terms of TFP until the 1990-1991, when the reverberations of
the financial crisis hit the major economies in Latin America1,
freezing investments and favouring debt adjustment policies in response to
severe domestic and external disequilibria (Ocampo
and Martin, 2003). Conversely, capital accumulation policies undertaken
by China since the late 1970s, terrifically boosted growth in the country’s
stock of capital assets (e.g. factories, manufacturing machinery, communication
systems), hence pushing up the regional productivity and economy above the
world average (Hu and Khan, 1997).(2013), from 1980 to 2007, the TFP mean in LAC (considered as a
percentage relative to the United States) declined from 82% to 54%, witnessing
a controversial path that sow U.S. productivity grow at 0.89% per year and a
collapse in the Latin American equivalent of 0.89% per year.The Centennial Group has gathered data of TFP for the LAC region since
1980 (Figure 3). Negative growth
rates of TFP were commonly recorded by the large majority of LAC countries during
the 1980’s (the so called “lost decade”)1.
In the aftermath of the crisis, some countries experienced positive TFP growth
thanks to the application of sound macroeconomic policies, more open trade and
enhanced competition. Improved trade flows reduced the output declines and the
need for abrupt stabilization, and enhanced microeconomic efficiency and
factors productivity (Selowsky and Loser, 2015).In
Chile and Uruguay, TFP growth rates have been positive throughout the three
periods (1980-1990, 1991-2000, 2001-2014), as a result of more sustained economic
policies. Uruguay has experienced constant TFP growth over the 2003-2013
period, while Chile is now slowing down since it has moved closer to the
frontier and its microeconomic gains are shrinking. Other countries, such as
Argentina, Costa Rica, Dominican Republic, Guatemala, Panama and Peru strongly
switched from negative to positive TFP growth in the 1990s. Despite a general
slowdown during the following decade, Peru and Panama maintained the highest
growth even throughout the 2000s. Bolivia, Brazil and Venezuela benefitted from greater cumulative gains in terms of trade and surfaced
towards positive productivity during the last 15 years. Finally, Mexico
experienced low, often negative, TFP growth rates over the entire period.
Although the greater openness is terms of external trade, favoured by the NAFTA
(North American Free Trade Agreement) deal, the government has been neglecting
the low level of internal competition and contestability, especially in the
service sector (Selowsky and Loser, 2015).