Productivity growth and labor reallocation: Latin America versus East Asia

The development experiences of East Asia (Hong Kong, Korea, Singapore, and Taiwan) and Latin America (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, and Venezuela) sharply contrast over the last several decades. Among the fundamental facts is that economic development involves structural transformation. Over the period 1974 to 2003, Latin American countries exhibit much slower de-agriculturalization than East Asian countries, while the manufacturing employment share has been almost stagnant in Latin America but exhibits a hump shaped pattern among East Asian countries.

The question addressed in this paper is: Can differences in sectoral productivity growth rates account for the different structural transformation experiences of Latin America and East Asia?  In the comparative analysis of economic performance in terms of structural change and the sectoral productivity differences, the contrast between East Asia and Latin America is striking. The contribution of this paper is developing a simple, but relatively detailed, six-sector general equilibrium model and applying it to a nine Latin American and four East Asian countries using a data set from the Groningen Growth and Development Centre (GGDC) 10-sector database.

Comparisons of productivity across countries at the sector level are not easy to make. First, I calibrate the model economy to replicate the structural transformation experience of the U.S. between 1974 and 2003, since the U.S. has been the world productivity leader and set the world productivity standards. I choose this sample period since it covers information for all the countries being studied in this paper. Next, I use the calibrated model economy to measure sectoral labor productivity differences across countries in 1974. Sectoral productivity levels in 1974, together with data on growth in sectoral labor productivity, imply time paths of sectoral labor productivity for each country. Then, I run the model economy for each of the Latin American and East Asian countries using country-specific sectoral productivity series between 1974 and 2003.

I compare the model predictions with the actual data regarding the allocation of employment to the individual sectors in each country. I conduct counterfactual experiments to explore why Latin American sectoral employment shares did not follow East Asian structural transformation. These experiments suggest that productivity growth in agriculture in Latin America has not been high enough to release labor from agriculture as we observe in East Asian countries. Similarly, sectoral productivity growth rates in Latin America have not been high enough to avoid the stagnation of aggregate productivity in Latin America.

An exploration of policy and institutional factors which account for sectoral productivity differentials across Latin America and East Asia is presented. The main policy message is that we need to look deeper into policies that have affected sectoral productivity growth rates over time.