Industrialization as an engine of growth in Latin America throughout a century 1913–2013

Abstract

For a long period of the 20th Century, industrialization was seen as the quickest and more effective path for progress and productive diversification, influencing the choice of public policies adopted by Latin American governments since the inter-war period up until the debt crisis and the lost decade of the 1980s. Using a long-term macroeconomic database for the period 1913–2013 and 11 Latin American countries, complemented with a dataset of exports by product for the same countries and years, a positive relationship between industrialization and economic growth was found, both for the long run and for episodes of acceleration and deceleration. This correlation seems to be stronger for large than for small economies, reflecting the importance of the size of the domestic market in order to take advantages of economies of scale in the process of industrialization. Three economic channels that may explain this positive correlation are empirically tested. The first one is the contribution of manufacturing to the different components of productivity growth (within- and shift-effects), for which a shift-share decomposition was estimated, both for the long-run, for subperiods and for acceleration and deceleration episodes. The second channel is the contribution of industrialization to gross capital accumulation, where a positive relationship was found between the change in the share of employment in manufacture with the rate of growth of physical capital. Finally, the learning-by-doing hypothesis is tested using the skill-level composition of manufacturing exports, finding a positive relationship between cumulative manufacturing production and the share of mid- and high-skill products in the exports’ matrix. The main contributions of the paper are twofold: the empirical identification of the mechanisms through which industrialization can promote economic development, and the extension of the analysis of Latin American economies to the first half of the 20th Century, which is scarce in the literature because of lack of reliable data.