Fundamental Variables in the Analysis of Economic Growth in Latin America

This thesis analyses the fundamental causes of economic growth in Latin America. Growth determinants can be distinguished between proximate and fundamental. Variables such as technology, investments in human and physical capital are considered to be proximate growth determinants. Better technology and greater accumulation of capital are related to greater growth, but in order to fully understand what causes growth, we need to explain why some countries invest more in technology and capital than others. This requires the analysis of more fundamental sources of growth. The focus of this thesis lies on institutions as fundamental cause of Latin American growth. The reasons for this are provided in Chapter 2. In particular, three different analyses show the relevance of institutions for the region's growth. First, a qualitative analysis that replicates Glaeser et al.'s work [2004] shows that institutions are more fundamental than human capital. Second, in a Barro-regression applied to a Latin American panel data, institutional variables are statistically significant. Finally, institutions are also crucial in explaining episodes of rapid growth in the region. However, even if fundamental, institutions are endogenous to the growth process (i.e. these improve with higher levels of income), and we need to explain what determines the character of these institutions. The rest of the thesis unveils how Latin American institutions originate and evolve. Chapter 3 analyses the colonial origins of institutions. The results show that, although some colonial factors have affected the evolution of institutions in Latin America, they are not the ones typically highlighted in the literature (e.g. European settler mortality). The origins of Latin American institutions are better explained by British colonial rule and colonial resource endowments. There is also no evidence that current institutions reflect early ones (there is weak correlation between early and current institutions). Chapter 4 takes up this challenge by examining how institutions have evolved since independence. The evolution of Latin American institutions is explained by using a two equation model for the interrelationship between inequality and institutions. The results show that inequality is an outcome of the colonial resource endowment, and that the discovery of oil and gas negatively affects the evolution of political institutions in the region. Finally, there is a bilateral causality between inequality and institutions in Latin America: poor institutional quality results in higher degree of inequality and institutions are negatively affected by inequality so that these two variables reinforce each other