Capital, Economic Growth and Relative Income Differences in Latin America

This paper examines the growth effects of imported and domestic capital in thirty two Latin America economies from 1960 to 2010. Disaggregated data on imported and domestic physical capital is compiled for each economy during the time horizon along with measures of human capital and other economic aggregates. Alternative growth econometric methods and instrumental variables procedures are then applied to control for economic policy, trade distortions and endowments effects. We find significant evidence that the acquisition of capital imports enhances economic growth and lessens relative income differences, particularly at lower income levels. We also find that relative income grows faster in countries that invest more on domestic capital. Our evidence show that countries which experienced a slowdown in economic growth were relatively richer in 1970, and acquired relatively less capital imports and domestic capital. Our findings indicate the existence of a positive correlation between higher productivity growth and the acquisition of capital imports in these countries. Capital accumulation is found to be a key driver of growth and development in Latin America.