Why has economic shrinking receded in Latin America? A social capability approach

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April 2022
Paper author(s): 
Martin Andersson
Andrés F. Palacio Ch.
Alvaro Von Borries
Macroeconomics - Economic growth - Monetary Policy

This paper investigates why economic shrinking episodes in Latin America and the Caribbean have declined since the 1970s. Following recent literature on long-term growth, we propose that the reduced frequency and rate of shrinking might reveal the dynamic transition from a natural state to an open-access society. Empirical support is derived from the notion of social capabilities: societies that invest in their social capabilities are more likely to reduce the shrinking frequency and flourish in the long term. Using survival models, we tested three capabilities (transformation, inclusion and autonomy) that, we argue, reflect an increase in resilience to economic shrinking. We found that transformation has not lowered the risk of shrinking in the region. However, both the inclusion and autonomy capabilities reduce the risk. We conclude that institutional transformations in Latin America and the Caribbean partly explain why economic shrinking has receded. Compared to previous decades, this is an essential step towards open-access societies. However, the persistent dependence on a narrow range of natural resources hinders progressive transformation and threatens the possibility of turning their economies to open societies.


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