Institutions, Geography, and Terms of Trade in Latin America

Nathan Perry and Carlos Schönerwald

International Journal of Political Economy, 2012, vol. 41, issue 1, 66-94

Abstract: The paper discusses and tests the importance of institutions, geography, and terms of trade in Latin America during the Washington Consensus (WC) reform years. The paper argues that the WC overlooked these three important factors of growth, known as the "deep determinants of growth." The paper discusses the history and failures of the WC and creates an empirical test to determine the importance of the omitted growth factors. The empirical section uses a large panel data set and employs the Hausman-Taylor (1981) estimator to account for time-variant and time-invariant variables. The data includes several measures of institutions, geography, and terms of trade to provide broad evidence. Our results are consistent with the previous literature, showing that institutions are important to growth. Once institutions are controlled for, measures of geography have statistically weak direct effects on income per capita. The paper shows that both openness to trade and an overvalued real exchange rate are detrimental to growth in Latin America. These results provide evidence that institutions and terms of trade are vitally important to Latin American growth, and should not have been ignored by WC policy advisers.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:mes:ijpoec:v:41:y:2012:i:1:p:66-94

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DOI: 10.2753/IJP0891-1916410103

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