Latin America Development Problem and the Solution

In this paper I make two main points. First, I showed that low GDP per capita in Latin America relative to the United States (what I call the development problem of Latin America) is due to low relative total factor productivity. In other words, the development problem of Latin America is a productivity problem. I calculate that in order to explain a factor of 1 to 4 difference in GDP per worker between Latin America and the United States only a 1 to 1.6 difference in TFP would be needed. The larger difference in labor productivity arises as an amplification of productivity through physical and human capital accumulation. Second, I considered a framework where institutions and policy distortions create a misallocation of factors across heterogeneous producers that can potentially explain the low relative productivity in Latin America. Barriers to formal market entry, regulation and barriers to competition, trade barriers and employment protection, and general policies that discriminate against productive establishments may be at the core of productivity differences between Latin America and the United States. Removing these barriers can lead to an increase in long-run labor productivity in Latin America relative to the United States of a factor of 4. This increase in income amounts to 70 years worth of U.S. post-WWII development. 

That is from a new paper by Restuccia (October 2012).