Stages of diversification in Latin America

Abstract

This article investigates the relationship between sectoral concentration and per capita income over the period 1963 to 2009 for 17 Latin American countries. Results confirm the existence of a U-shaped relationship between sectoral concentration of manufacturing value added and the level of per capita income. Import substitution industrialization policies encouraged excessive sectoral diversification early in the development process. Re-specialization in comparative advantage activities by higher per capita income countries coincided with a shift towards more market-oriented policies. The ‘Lost Decade’ of macroeconomic turmoil did not disrupt the evolving pattern of sectoral concentration.

Keywords:

• Latin America
• industrial diversification: economic development process

JEL Classification:

• O14
• O25
• O54

Notes

¹ Sosa et al. (2013), Reyes and Sawyer (2011), and Edwards (1995) discuss policies followed by Latin American countries.

² Country coverage is identified in Fig. 2.

³ Value added is the most appropriate size measure. Concentration ratios based on employment, total assets, or net capital assets may be biased if capital intensity varies across industries.

⁴ The Gini index is the preferred measure of inequality because it is derived directly from the distribution of economic activity across sectors. Herfindahl’s index expresses the sum of squared value added shares and has no clear intuitive meaning.