Productivity, Structural Change and Latin American Development

• Author: Carlos Gustavo Machicado,Felix Rioja,Antonio Saravia
• Date: 01 August 2014
• Published date: 01 August 2014
• DOI: http://doi.org/10.1111/rode.12106

Productivity, Structural Change and Latin

American Development

Antonio Saravia, Carlos Gustavo Machicado, and Felix Rioja*

Abstract

We calibrate a simple neoclassical growth model adapted to illustrate a process of structural transformation

or industrialization to a group of nine South American countries. The paper shows that low levels of agri-

cultural productivity can substantially delay the process of industrialization, which, together with low levels

of non-agricultural productivity observed in recent decades, satisfactorily explains the significant differ-

ences in gross domestic product (GDP) per capita levels among the countries in our sample. The results

suggest that Argentina underwent the process of industrialization first followed by Uruguay, Chile, Brazil,

Colombia, Ecuador, Peru, Paraguay and Bolivia. The model predicts that the ranking of these countries in

terms of GDP per capita would follow this order until convergence occurs. The empirical evidence confirms

the prediction of the model with the exceptions of Uruguay and Chile which caught up with Argentina in

terms of GDP per capita levels in the late 1980s.

1. Introduction

Trying to understand the origins of the large disparity in income per capita levels

between rich and poor countries has been an enduring research question. While

several factors explain different parts of the puzzle, there is widespread agreement

that one of the prominent reasons for this disparity is that poor countries started the

process of industrialization much later than their rich counterparts and that the indus-

trialization process is slow (Lucas, 2000).

On this line of argument, Gollin, Parente and Rogerson (2002, GPR hereafter),

developed a model of structural transformation that explains why countries industrial-

ize at different dates and why industrialization proceeds slowly. Using a basic neoclas-

sical growth model modified to include both an agricultural and a non-agricultural

sector, GPR (2002) argue that countries begin the process of industrialization only

after being able to satisfy their basic agricultural needs (food). At this point, resources

are freed up from the agricultural sector and moved to the non-agricultural sector as

the industrialization process begins. Given that low agricultural productivity can sig-

nificantly delay the point at which countries are able to satisfy their basic agricultural

needs, low agricultural productivity can also delay the process of industrialization and

result in the country falling behind the leaders in terms of income per capita.1

In order to study the effect of agricultural productivity, GPR (2002) set non-

agricultural productivity, as well as the rate of technological progress in both the

agricultural and non-agricultural sectors, constant and equal across the modeled

economies. As a result, the modeled economies converge in the long run and each

* Saravia: Eugene W. Stetson School of Business & Economics, Mercer University, 1400 Coleman Avenue,

Macon, GA 31207, USA. Tel: +1-404-625-2116; Fax: +1-678-547-6160; E-mail: saravia_av@mercer.edu.

Machicado: Institute for Advanced Development Studies, 6115 Av. Hector Ormachea, La Paz, Bolivia.

E-mail: cmachicado@inesad.edu.bo. Rioja: Georgia State University, P.O. Box 3992, Atlanta, GA 30302,

USA. E-mail: frioja@gsu.edu.

Review of Development Economics, 18(3), 610–624, 2014

DOI:10.1111/rode.12106

© 2014 John Wiley & Sons Ltd