Long-Run Determinants of Economic Growth in South America

Abstract:     
In this paper, we exploit a new annual historical data set for ten South American countries from 1960 to 2008, providing a basis for understanding the long-run economic growth within a two-equation framework. For this purpose, a system of two panel data models estimated by generalized least squares, which is a method used to control for unobserved country-specific effects, accounting for within panel serial auto-correlation, as well as heteroskedasticity and cross-sectional correlation across panels. Our analysis documented that the impact on growth is driven through capital formation, foreign investment and human capital, as well as by sectoral exports (manufacturing and other services). On the other hand, the correlation between trade openness and foreign investment is positive, indicating that relatively closed countries stand to benefit most from opening up their economies. Whereas, the evidence shows that macroeconomic disturbances still have a significant detrimental effect on long-run growth on developing countries. Finally, in view of the importance of our analysis, we divided the sample in two sub-periods 1960-1982 and 1983-2008, the results highlight our previous findings and, show a convergence process within the region. Our approach here is decidedly empirical, taking advantage of a broad new historical data set especially for the developing countries in the region.

Keywords: economic growth, Latin America, investment, dynamic panel data analysis

JEL Classification: F41, O54, N26

working papers series