Peripherality, income inequality, and economic development in Latin American countries

ABSTRACT

Following a neo-structuralist perspective, this study presents a development puzzle for Latin American countries (LACs): a triangular relation amongst peripherality (increased terms-of-trade volatility and technological backwardness), income inequality, and per-capita income. We employ a simultaneous equation model using three-stage least squares (3SLS) to analyse this triangular relation. We find that a decrease in income inequality and an increase in per-capita income were mutually reinforcing in 14 LACs between 1995 and 2014. Although technological progress increases per-capita income, it partly mitigates this increase by increasing income inequality. Additionally, the increasing effects of foreign sources of technology, including foreign direct investment (FDI), on income inequality are mitigated in countries with higher technological capabilities. While an improvement in commodity terms-of-trade expectedly increases per-capita income and decreases income inequality in South American countries, their volatility is mostly insignificant.

KEYWORDS:

• Commodity terms-of-trade
• volatility
• technological progress
• foreign direct investment (FDI)
• neo-structuralism

Acknowledgements

The authors would like to thank the editor and anonymous referees for their valuable comments and suggestions that greatly contributed to improving this paper. They are deeply grateful to Taeko Hoshino, Mikio Kuwayama, Takahiro Sato, Patricio Solís Gutiérrez, Hiroyuki Ukeda, and Toru Yanagihara for their insightful comments and constructive suggestions, Seiji Horii and Masahiro Ikeda for their research assistance, and Pamela Díaz-Valdés Liberona, Mauricio Escobar, Daniela Gebhard, and Francisca Guerrero Jelvez for assisting the access to the data from CEPALSTAT. They are also grateful to João Carlos Ferraz, Atsushi Fukumi, Tatsuji Hayakawa, Katsushi Imai, Jorge Mario Martínez Piva, Tomoo Marukawa, Enrique Mu, Sachiyo Murase, Enrique Peruzzotti, Tatsuya Shimizu, Terukazu Suruga, Yuriko Takahashi, and Tsuyoshi Yasuhara for their insightful comments and constructive suggestions in the early stages of this study. Any remaining errors are the authors’ own.

Supplemental data

Supplemental data for this article can be accessed here.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. More specifically, traditional structuralists defined the ‘peripheral status’ as specialization in primary commodities, while neo-structuralists associate it with the lack of genuine competitiveness stemming from technological progress, human capital skill development, and social equity (Bielschowsky, 2009). Thus, for neo-structuralists, the distinction between primary commodities and industrial products has lost economic significance (Di Filippo, 1998; Hounie et al., 1999). Furthermore, neo-structuralists consider that the lack of genuine competitiveness leads to external vulnerability through balance-of-payments predominance (Ocampo, 2011).

2. None of the 14 LACs reported an inflation rate of more than 100% during 1995–2014.

3. The reason is as follows. Since there are several channels through which government expenditure affects economic growth, both positively (e.g. by enhancing human capital) and negatively (e.g. through distortionary taxes), the overall effect can be insignificant, as indicated by Churchill, Ugur, and Yew (2017) who found that the effect was indeed insignificant in developing countries. Regarding LACs in recent times, although there have been extensive studies showing that cash transfer programs, the mainstay of social policy in this period, improved education outcomes and reduced inequality and extreme poverty (e.g. Soares, Ribas, & Osório, 2010), to the best of our knowledge, there is no convincing empirical research on the effects on economic growth. This may be due to the time-lag that exists before the impacts are realised and the fact that the demand expansion of cash transfer is localised and irrelevant at the national level, given the geographical concentration of poor households eligible for such programs. Moreover, since our dependent variable is the level rather than growth of per-capita income, it is more likely that the share of social expenditure, which indicates a degree of income transfers among different income groups, will not affect the average per-capita income level in a given country. Indeed, the share of social expenditure is insignificant with respect to per-capita income in all specifications estimated in Section 4 (see the online supplemental file).

4. Alternatively, we measure it by the 12-month standard deviation of monthly ln Commodity_TOT. However, the measure generates remarkably similar results (see the online supplemental file).

5. The interaction with the share of intermediate goods imports is not included because the variable is mostly insignificant in both equations.

6. The sum of the product of each variable’s standardised coefficient and its correlation with the dependent variable is equal to the overall R-squared. For more details, see Pratt (1987).

7. Indirect effects can be calculated by multiplying the Gini coefficient from equation (1)(1) $\begin{array}{r}lnGD{P}_{it}\end{array}={\beta }_0+{\beta }_{1}lnCapita{l}_{it}+{\beta }_{2}Gin{i}_{it}+{\beta }_{3}ln{Commodity\mathrm{\_}TOT}_{it}+{\beta }_{4}Volatility{ }_{it}+{\beta }_{5}Paten{t}_{it}+{\beta }_{6}FD{I}_{it}+{\beta }_{7}Intermediate\mathrm{\_}{X}_{it}+{\beta }_{8}Intermediate\mathrm{\_}{M}_{it}+{\beta }_{9}Paten{t}_{it}\ast FD{I}_{it}+{\beta }_{10}Paten{t}_{it}\ast Intermediate\mathrm{\_}{X}_{it}+{\mathit{X}}_{it}^{\prime }{\mathit{\beta }}_{11}+{\alpha }_{1i}+e_{1it}$(1) with the coefficient of the variable in question from equation (2).

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science (JSPS) KAKENHI Grant Numbers 16H03313, 17K17877, 20K13482, and the Kobe University Center for Social Systems Innovation.

Notes on contributors

Yoshimichi Murakami

Yoshimichi Murakami is an Associate Professor at the Research Institute for Economics and Business Administration (RIEB) of Kobe University, Japan, where he obtained his Ph.D. in Economics. Previously, he was an associate expert at the Latin American and Caribbean Institute for Economic and Social Planning (ILPES) of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).

Nobuaki Hamaguchi is a Professor at the Research Institute for Economics and Business Administration of Kobe University, Japan. He is also a program-director and faculty-fellow of the Regional Economy Program of Research Institute of Economy, Trade and Industry. He holds a Ph.D. in Regional Science from the University of Pennsylvania.