Manufacturing Industry and
Economic Growth in Latin
America: A Kaldorian Approach
Gilberto Libanio
Federal University of Minas Gerais, Brazil
Introduction
• Economic reforms and growth in Latin
America
• Manufacturing and growth
• Kaldor’s growth laws
Kaldor’s First Growth Law
• Relationship between industrial growth
and the performance of the economy as a
whole
• “Manufacturing is the engine of growth”
• Explained by growth of overall productivity
due to labor transfer from low productivity
sectors and to increasing returns to scale
in manufacturing
Kaldor’s Second Law (Verdoorn)
• Positive causal relationship between output
growth and productivity growth in
manufacturing
• Theoretical controversies: can Verdoorn
coefficient represent a measure of returns to
scale? Verdoorn’s Law as a production
relationship and a labor supply relationship
Kaldor’s Second Law (Verdoorn)
• Kaldor: Verdoorn coefficient indicates degree
of returns to scale
• Effect of output growth on productivity is
explained by factors such as increasing
specialization among firms, positive
externalities, induced technical progress, and
greater scope for product differentiation
Kaldor’s Second Law (Verdoorn)
• Key player in models of circular and cumulative
causation in the Kaldorian tradition (Kaldor,
1970; Dixon and Thirlwall, 1975):
↑output → ↑productivity → ↓prices →
↑competitiveness → ↑exports → ↑output
• Once a country or region acquires a growth
advantage, it will tend to keep it through the
process of increasing returns and consequent
competitive gains that growth itself induces
Empirical estimation
• Panel data: seven largest economies in Latin
America – Argentina, Brazil, Chile, Colombia,
Mexico, Peru, Venezuela (1985 – 2001)
• First law:
qi  ai  bi mi
(1)
qi = ci + di . (mi – nmi)
(2)
nmi = ui + vi . mi
(3)
Empirical estimation
• Verdoorn’s Law:
ei     .qi  .k i
Returns to scale =
(10)
(1   )
tfi = i + 1qi
Returns to scale = 1/1

(11)
Results
TABLE 4
KALDOR'S LAW (CORRECTED FOR HETEROSKEDASTICITY)
SELECTED LATIN AMERICAN COUNTRIES
1985-2001
Method: FGLS (heteroskedastic panel)
n = 119
Equation (1):
q = 1.739 + 0.614 m
(8.75)*
Equation (2):
Equation (3):
(20.76)*
q = 3.450 + 0.466 (m – nm)
(10.93)*
Wald = 46.26
(6.80)*
nm = 1.846 + 0.432 m
(9.40)*
Wald = 431.03
(14.83)*
Wald = 219.95
Results
TABLE 8
VERDOORN'S LAW (IV ESTIMATION)
SELECTED LATIN AMERICAN COUNTRIES
1985-2001
Method: G2SLS Random-Effects IV Regression
n = 90
Equation (10):
e = -0.908 + 0.659q + 0.081k
(-0.85)
(6.41)* (0.65)
R2 = 0.346
Wald = 48.19
Returns to scale =
1.394
Equation (11):
tfi = 2.001 + 0.433q
(4.92)* (6.51)*
R2 = 0.325
Wald = 42.44
Returns to scale =
2.309
Conclusions
• Results confirm the “manufacturing is the engine of
growth” hypothesis, and suggest the existence of
significant increasing returns in the manufacturing
sector in the largest Latin American economies
• Industrial activities represent an important source of
potential economic growth in the region
• Further de-industrialization in the region may have
negative effects to economic growth in the long run