Thursday, March 7, 2013

Latin America: Social Development or Dutch Disease?

Augusto de la Torre and Julián Messina solve a Latin-American puzzle (the combination of lowering income inequality and low labor productivity growth):
Dutch disease? This hypothesis may be stated as follows. The extended boom in commodity prices induced, through the appreciation of the real exchange rate, a substantial reallocation of resources (including labour) from non-commodity tradeable sectors to non-tradeable sectors. Provided that the latter are relatively less intensive in skilled labor, this reallocation would reduce the skill premium and the returns to education, bringing down wage inequality. ... Undoubtedly, this is a luminous and welcome fact for a region historically scarred by excessive inequality. This positive news, however, seems to hide a dark side: the specialisation of the region’s economies in activities that are relatively low in skill intensity and that therefore tend to be of lower productivity.

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