Economic growth in Latin America and the Caribbean: growth transitions rather than steady states

Recent evidence on economic growth indicates that growth fluctuations at frequencies of a decade or so are at the centre of the Latin American countries'growth story. In this context, investment has played an important role as a source of growth, while national saving has been the main source of investment financing. Foreign saving has played a secondary role and has generally been substituted for national saving, rather than augmenting the total amount of savings available in Latin America. The high volatility and vulnerability to external swings exhibited by foreign capital have made foreign saving an unstable source of investment financing. This study on Latin America helps to provide a statistical framework for analysing the growth story of Latin America. Transitions affecting per capita GDP growth, investment and national and foreign savings rates are identified, as are common and country-specific transitions, based on comparisons of a sample group of eight Latin American countries with the Latin American and Caribbean region as a whole for the period 1960-2005. This research also helps to demonstrate that some growth episodes are not well captured by standard growth theories and econometric work developed and based on different economic contexts and time periods. The study confirms some general conclusions reached in the literature but provides evidence that raises doubts about others. Although growth needs to be sustained by higher investment rates, an initial impulse from investment is not required in order for growth to accelerate. It is not always the case that growth accelerations are accompanied by rising national savings rates; the latter may also decline. Foreign saving does not, in most cases, add to total saving (equal to investment), and the crowding out of national saving by foreign saving seems to be positively biased (being stronger when foreign saving is rising).