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Productivity Differences and Convergence Clubs in Latin America

Carlos Mendez
https://carlos-mendez.rbind.io

Associate Professor
Graduate School of International Development
Nagoya University
JAPAN

Prepared for the 2020 Bolivian Conference of Development Economics

[ Slides, paper, and a video presentation are available at: http://bit.ly/bcde2020 ]

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This paper is a supplementary resource of the forthcoming book:

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A summary of the paper in 2 slides...

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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
  • Development potential of Latin America constrained by low productivity (Daude and Fernndez-Arias, 2010; Pages 2010; Restuccia, 2013)
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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
  • Development potential of Latin America constrained by low productivity (Daude and Fernndez-Arias, 2010; Pages 2010; Restuccia, 2013)

Research Objective:

  • (Re)evaluate the convergence hypothesis across economies in Latin America with particular emphasis on productivity differences and the formation of multiple convergence clubs.
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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
  • Development potential of Latin America constrained by low productivity (Daude and Fernndez-Arias, 2010; Pages 2010; Restuccia, 2013)

Research Objective:

  • (Re)evaluate the convergence hypothesis across economies in Latin America with particular emphasis on productivity differences and the formation of multiple convergence clubs.

Methods:

  • Nonlinear dynamic factor model (Phillips and Sul, 2007, 2009)
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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
  • Development potential of Latin America constrained by low productivity (Daude and Fernndez-Arias, 2010; Pages 2010; Restuccia, 2013)

Research Objective:

  • (Re)evaluate the convergence hypothesis across economies in Latin America with particular emphasis on productivity differences and the formation of multiple convergence clubs.

Methods:

  • Nonlinear dynamic factor model (Phillips and Sul, 2007, 2009)
  • Clustering algorithm for panel data (Phillips and Sul, 2007, 2009)
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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
  • Development potential of Latin America constrained by low productivity (Daude and Fernndez-Arias, 2010; Pages 2010; Restuccia, 2013)

Research Objective:

  • (Re)evaluate the convergence hypothesis across economies in Latin America with particular emphasis on productivity differences and the formation of multiple convergence clubs.

Methods:

  • Nonlinear dynamic factor model (Phillips and Sul, 2007, 2009)
  • Clustering algorithm for panel data (Phillips and Sul, 2007, 2009)

Data:

  • Labor productivity and total factor productivity (Fernandez-Arias, 2017)
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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
  • Development potential of Latin America constrained by low productivity (Daude and Fernndez-Arias, 2010; Pages 2010; Restuccia, 2013)

Research Objective:

  • (Re)evaluate the convergence hypothesis across economies in Latin America with particular emphasis on productivity differences and the formation of multiple convergence clubs.

Methods:

  • Nonlinear dynamic factor model (Phillips and Sul, 2007, 2009)
  • Clustering algorithm for panel data (Phillips and Sul, 2007, 2009)

Data:

  • Labor productivity and total factor productivity (Fernandez-Arias, 2017)
  • 20 Latin American countries over the 1980-2014 period
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Motivation:

  • Inconclusive literature about Latin America: Convergence vs Divergence vs Convergence Clubs (Galvao and Reis-Gomes, 2007; Barrios et. al, 2018; Martin and Vazquez, 2015)
  • Development potential of Latin America constrained by low productivity (Daude and Fernndez-Arias, 2010; Pages 2010; Restuccia, 2013)

Research Objective:

  • (Re)evaluate the convergence hypothesis across economies in Latin America with particular emphasis on productivity differences and the formation of multiple convergence clubs.

Methods:

  • Nonlinear dynamic factor model (Phillips and Sul, 2007, 2009)
  • Clustering algorithm for panel data (Phillips and Sul, 2007, 2009)

Data:

  • Labor productivity and total factor productivity (Fernandez-Arias, 2017)
  • 20 Latin American countries over the 1980-2014 period
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Main Results:

  1. Lack of overall(global) convergence in both labor productivity and total factor productivity
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Main Results:

  1. Lack of overall(global) convergence in both labor productivity and total factor productivity
  2. Multiple local convergence clubs: above and below the average
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Main Results:

  1. Lack of overall(global) convergence in both labor productivity and total factor productivity
  2. Multiple local convergence clubs: above and below the average
  3. Convergence clubs characteristics:

    • Labor productivity: Four clubs of countries
    • Total factor productivity: Three clubs of countries
    • Clubs show non-parallel trends: crossings, limited stability, and separating trends
    • The lowest-productivity club (Honduras and Nicaragua) is diverging from the rest at the highest speed.
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Outline of this presentation

  1. Some stylized facts

    • Large and heterogeneous productivity differences across Latin America
  2. Convergence framework

    • Global convergence test (intuition)
    • Local convergence clubs (intuition)
  3. Main results of the paper

    • Lack of overall convergence
    • Multiple convergence clubs above and bellow the average
    • Convergence clubs characteristics



[ Slides, paper, and video presentation are available at: http://bit.ly/bcde2020 ]

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(1) Some stylized facts

Large and heterogeneous productivity differences across Latin America

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Large and heterogeneous productivity differences across Latin America

Note: Labor productivity is computed as the long-run trend of (log) GDP per worker. The Hodrick-Prescott filter with a smoothing parameter of 6.25 is applied to obtain the long-run trends.

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Large and heterogeneous productivity differences across Latin America

Note: Total factor productivity is computed by dividing GDP per worker by an aggregate index of physical capital and human capital. The Hodrick-Prescott filter with a smoothing parameter of 6.25 is applied to obtain the long-run trends.

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(2) Convergence framework

Global convergence test (intuition)

Local convergence clubs (intuition)

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Convergence framework (brief overview)

  • First, define a relative transition parameter as

hit=yit1NNi=1yit

  • Second, convergence is defined as

Ht=1NNi=1(hit1)20

In other words, when the relative transition parameter converges to unity, hit1, the cross-sectional variance converges to zero, Ht0.

  • Third, evaluate convergence using the model of Phillips and Sul (2007)

log(H1Ht)2log{log(t)}=a+blog(t)+ϵt

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Convergence test (intuition)

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Convergence clubs (intuition)

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(3) Main results

Lack of overall convergence

Multiple convergence clubs above and below the average

Convergence clubs characteristics

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Lack of overall convergence

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Multiple convergence clubs

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Multiple convergence clubs: Above and below the average

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Convergence clubs characteristics: Labor productivity

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Convergence clubs characteristics: Total factor productivity

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Concluding Remarks

  • Reject (overall) convergence for both labor productivity and total factor productivity
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Concluding Remarks

  • Reject (overall) convergence for both labor productivity and total factor productivity
  • Multiple convergence clubs below and above the mean
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Concluding Remarks

  • Reject (overall) convergence for both labor productivity and total factor productivity
  • Multiple convergence clubs below and above the mean
  • The clubs show different convergence speeds and separating tendencies
    • The poor economic performance of Honduras and Nicaragua is driving the separation of clubs over time.
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Concluding Remarks

  • Reject (overall) convergence for both labor productivity and total factor productivity
  • Multiple convergence clubs below and above the mean
  • The clubs show different convergence speeds and separating tendencies
    • The poor economic performance of Honduras and Nicaragua is driving the separation of clubs over time.

Implications and further research

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Concluding Remarks

  • Reject (overall) convergence for both labor productivity and total factor productivity
  • Multiple convergence clubs below and above the mean
  • The clubs show different convergence speeds and separating tendencies
    • The poor economic performance of Honduras and Nicaragua is driving the separation of clubs over time.

Implications and further research

  • Convergence clubs may help us identify economies facing similar challenges
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Concluding Remarks

  • Reject (overall) convergence for both labor productivity and total factor productivity
  • Multiple convergence clubs below and above the mean
  • The clubs show different convergence speeds and separating tendencies
    • The poor economic performance of Honduras and Nicaragua is driving the separation of clubs over time.

Implications and further research

  • Convergence clubs may help us identify economies facing similar challenges
  • Call for better coordination and cooperation policies both within and between clubs
    • International technology transfer initiatives.
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Concluding Remarks

  • Reject (overall) convergence for both labor productivity and total factor productivity
  • Multiple convergence clubs below and above the mean
  • The clubs show different convergence speeds and separating tendencies
    • The poor economic performance of Honduras and Nicaragua is driving the separation of clubs over time.

Implications and further research

  • Convergence clubs may help us identify economies facing similar challenges
  • Call for better coordination and cooperation policies both within and between clubs
    • International technology transfer initiatives.
  • Masked behind the low productivity of Latin America, there is still a high degree of heterogeneity that is worth exploring
    • Next extension: Re-evaluate the composition of convergence clubs using subnational information from satellite nightlight data.
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Thank you very much for your attention

https://carlos-mendez.rbind.io

Slides and working paper available at: http://bit.ly/bcde2020

Quantitative Regional and Computational Science lab

https://quarcs-lab.rbind.io


This research project was supported by JSPS KAKENHI Grant Number 19K13669

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This paper is a supplementary resource of the forthcoming book:

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