This dissertation studies three different aspects related to economic development in Latin America. I analyze the causes of political instability, the relationship between financial development and economic growth, and the effect of inequality on economic growth in Latin America. The findings from this empirical research are relevant for policymaking in the region.
Chapter One studies the determinants of political instability in Latin America. In this analysis, political instability is measured with the first principal component of nine variables related to political instability: assassinations, coups, government crises, anti-government demonstrations, riots, strikes, purges, guerrilla activity, and revolutions. This measure of instability is appropriate since I show that it closely matches historical events and conditions in Latin American countries during the period of analysis. Using a sample of 18 Latin American countries from 1971 to 2000, I find three important results. First, countries with higher democracy scores tend to experience less instability, while those with factionalized political parties are more unstable. Second, I find that income inequality, ethnic fractionalization, and urbanization have a nonlinear effect on instability. I show that increases in income inequality raise instability up to a point, after which any further increases lower instability. Ethnic fractionalization and urban growth have the opposite effect, whereby initial increases in either decreases instability up to a point, after which any further increases produce higher levels of instability. Third, I find that the only macroeconomic factor that has a significant impact on instability is trade openness, where an increase of this measure promotes political stability.
Chapter Two presents an analysis of the causal relationship between financial development and economic growth in Latin America. There is a big debate on whether financial development causes growth or vice versa, and there are few empirical tests on this relationship at the regional level. The analysis of the relationship between financial development and economic growth in Latin America is important since countries in this region experienced improvements in their financial sectors, but they are still financially underdeveloped. Using a sample of 13 Latin American countries from 1961 to 2004, I find that there is a bi-directional causality between financial development and economic growth. Nonetheless, once the sample is divided by initial income levels, I find that the bi-directional causality between financial development and economic growth only holds for countries with higher initial income levels. For those countries with lower initial income levels, evidence shows that financial development follows economic growth and that financial development does not cause economic growth.
Chapter Three empirically analyzes the effect of inequality on economic growth in Latin American countries. I use the area of family farms as a percentage of total agricultural holdings as a measure of inequality. In a sample of 18 Latin American countries from 1960 to 2004, I find a nonlinear effect of inequality on growth. This finding implies that the effect of equality on growth depends on the current levels of resource distribution, where the effect of equality on growth is increasing up to a certain level, after this level, the effect on growth is decreasing. For the purpose of robustness, I use a different measure of inequality that takes into consideration the distribution of agricultural and non-agricultural resources and address for endogeneity. I find that the nonlinear effect of inequality on growth is robust to these different approaches. In addition, I find that those countries that are highly urbanized benefit the most from increases in equality in terms of the share of family farms.
From this research, there are three main implications for policymakers. First, Chapter One provides a good overview on what policymakers could do to decrease political instability in Latin America. The strengthening of democracy, a more equally distributed society, and further trade liberalization can promote stability in the region. Second, from the empirical analysis in Chapter Two, it can be concluded that financial reforms will not necessarily have the same effects in all Latin American countries. The positive effects of financial development on growth only hold for those countries with initial high income levels. Policymakers must take this into consideration, since there may be other complementary institutions that allow financial development to positively affect growth. Third, Chapter Three shows that inequality, in terms of resource distribution, has a nonlinear effect on growth. This is relevant since it is shown that the majority of Latin American countries are currently at levels of resource distribution where increases in equality produce greater economic growth. Policies that promote agricultural activity at a small scale are beneficial for the region. Another important implication is that policies which promote a more equal distribution of human capital will also result in higher economic growth in the majority of the Latin American countries included in the analysis.