## _wp06287 — 1. Real GDP Growth and Volatility

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---

### Objective and methodology
- Objective:
  - Compare patterns of volatility across episodes of high and low growth since 1970 in 17 Latin American countries, focusing on the role of policy volatility in the region’s growth performance.
- Episodic approach:
  - Identify non-overlapping 10-year periods (decades) of highest and lowest average annual per capita GDP growth for each country during 1970–2004.
  - High growth period in country i = decade corresponding to max(g_it) where t ranges over 10-year intervals 1970–79, 1971–80, ..., 1995–2004.
  - Low growth period in country i = decade corresponding to min(g_it) with same t definition.
  - Non-overlapping high and low decades found for 14 of the 17 countries; exceptions Costa Rica, Uruguay, and Venezuela handled by selecting nearest non-overlapping decades.
- Analytical focus:
  - Bivariate relationships across episodes; cross-country regressions used to test robustness.

### Level and volatility of macroeconomic outcomes — key findings
- Output growth and volatility:
  - Regional pattern: volatility more than twice as high during the worst decade compared to the best decade.
  - Cross-sectional correlations:
    - Real GDP Growth and Volatility (1970-2004): Correlation coefficient = −0.53, P-value = 0.00
    - Latin America (1970–2004): Correlation coefficient = −0.49, P-value = 0.05
  - Exemplars:
    - Best-decade performers: Chile (1988–97: 6.1 percent per annum), Paraguay (1972–1981: 5.9 percent per annum), Brazil (1971–80: 5.8 percent per annum).
    - Worst-decade examples: Nicaragua (1979–88: −6.7 percent per annum), El Salvador (1979–88), Peru (1982–91).
- Inflation, devaluation, fiscal balance:
  - Average inflation, devaluation, and fiscal imbalance (as percent of GDP) were two to four times higher during low growth periods versus high growth periods.
  - Fiscal imbalance higher during the low growth period in every country except Ecuador.
  - Volatilities of inflation and devaluation about three times higher in low growth periods (text also notes inflation and devaluation volatilities 5–6 times higher in one summary statement).
  - Country examples for monetary outcome volatility: Colombia, Panama, Paraguay (relatively low); Argentina, Bolivia, Brazil, Nicaragua, Peru (highest).
- Extreme events (currency crises, banking crises, sovereign debt defaults):
  - Total crisis observations (1970–2004): 312; 223 occurred during identified high and low growth episodes.
  - Average frequency interpretations:
    - nearly 9 crisis observations recorded on average each year in Latin America during 1970–2004
    - about 6 crisis observations per country per decade since 1970
  - Crisis counts by episode:
    - High growth years: 6 currency crises, 15 banking crises, 50 debt default observations
    - Low growth years: 34 currency crises, 14 banking crises, 104 debt default observations
  - Country extremes:
    - Argentina: 29 crises over the 35-year period (maximum)
    - Colombia: 6 crises over the 35-year period (minimum)
  - Concurrent crises:
    - Currency crises and debt defaults co-occurred across 13 countries (total 26 crisis-years)
    - Banking + currency crises concurrent in only two countries (Argentina and Uruguay)
    - Banking crises + debt default occurred in 10 countries
    - All three crises simultaneous in four countries
  - Output impact:
    - All three crises simultaneously: average cumulative output fall of nearly 9 percent (measured one year before, during, and after crisis year).
    - Currency and banking crises only: cumulative real GDP per capita growth −9.1
    - Currency crisis and debt default only: −6.3
    - Banking crisis and debt default only: 1.8
- Magnitude and volatility of shocks:
  - Global shocks:
    - G-7 growth: level and volatility do not differ much between high and low growth episodes; difference = 0.4 percent.
    - U.S. real interest rates: average U.S. real interest rate significantly lower by about 500 basis points and volatility twice as low during high growth years.
    - Of global shocks considered, only U.S. real interest rate stands out as significantly different between highest and lowest growth episodes.
  - Country-specific shocks:
    - Terms of trade: average positive shock during best decade < ½ percent; average negative shock during worst decade just over −1 percent.
    - Natural disasters: measured as number of disasters per million people affected; smaller countries most affected (Costa Rica, Ecuador, Honduras, Nicaragua, Panama). Example: Hurricane Mitch (1998) caused up to US$8.5 billion in damage in Honduras and Nicaragua.
    - ODA: marginally higher (less than ½ percent of GDP) during the high growth period; ODA volatility quite small.

### Macroeconomic policy volatility — fiscal and monetary findings
- Fiscal policy volatility — measurement and findings:
  - Two measurement approaches:
    - Standard deviation measures:
      - (i) standard deviation of central government fiscal expenditures as share of GDP
      - (ii) Fatás and Mihov (2005) discretionary fiscal policy measure: volatility = standard deviation of residual ε_it from regression of real government spending growth on macro conditions
    - Procyclicality measures:
      - KRV (Kaminsky, Reinhart, Vegh, 2004): correlation of cyclical components of real government spending and real GDP; positive = procyclical
      - AT (Alesina and Tabellini, 2005): coefficient on output gap in regressions of changes in government spending as share of GDP
  - Findings:
    - Average level of fiscal expenditures about 3–4 percentage points of GDP lower during the high growth decade compared with the low growth decade.
    - Average fiscal expenditure volatility significantly lower in high growth decades.
    - Chile: fiscal expenditures >10 percentage points of GDP lower in the high growth period.
    - Fatás-Mihov discretionary volatility: only marginally higher in low growth period; Nicaragua an outlier.
    - Procyclicality evidence:
      - KRV: all countries except Ecuador pursued procyclical policies over whole sample (nearly half strongly significant).
      - AT: confirms procyclicality with higher and more significant coefficients.
- Monetary/exchange rate policy volatility:
  - Exchange rate regime-change measure using Reinhart and Rogoff (2004) 15-point annual scoring (1 = currency board to 15 = free floating).
  - Two variables: number of regime changes and intensity (absolute difference in score) per subperiod.
  - Findings:
    - Total number of regime changes similar across high and low growth subperiods.
    - Number of changes per country in a 10-year period: a little over one.
    - Intensity varies widely by country; average pattern across subperiods not very different.

### Structural policy volatility and reform reversals
- Heritage-Morley composite index (1970–2004):
  - Combined Morley (1970–95) with Heritage Foundation (1995–2004); normalized to 0–100 (higher = greater market-oriented reforms).
  - Nicaragua and Panama excluded (Morley does not report them).
  - Components: trade policy reforms, government intervention, tax reforms, foreign investment policy, property rights, domestic financial reforms, privatization, labor market regulations, regulatory burdens on business.
- Regional and country patterns:
  - Significant progress in structural reforms regionally, with acceleration in late 1980s and 1990s.
  - Reform reversals observed in early 1980s and early 2000s; early-1980s reversals coincided with macro instability and debt crises; early-2000s reversals sometimes commenced before crises and were exacerbated by them.
  - Country examples:
    - Argentina: most advanced reformer in 1970 but fell behind by 2004.
    - Chile: laggard in 1970, top reformer by 2004.
    - Venezuela: regressed below 1970 reform level by 2004.
  - Heterogeneity in initial level and pace:
    - Fastest progress from low initial levels: Bolivia, Chile, Guatemala, Uruguay, Peru.
    - Least progress from low initial levels: Ecuador, Colombia.
- Reform reversals and intensity:
  - All countries experienced reform reversals during 1970–2004: 167 reversals in total (excluding Nicaragua and Panama).
  - Countries with highest numbers of reversals: Argentina, Brazil, Colombia, Venezuela.
  - Most intense reversals: Argentina, Chile (early sub-period), Paraguay, Venezuela.
  - Least intense reversals: Costa Rica, El Salvador, Guatemala, Uruguay.
  - Latin America simple averages (Table 11 summary):
    - During High Growth Decade — Average 38.1, Trend 9.2, Number of Reversals 38, Intensity Medium
    - During Low Growth Decade — Average 34.6, Trend 7.4, Number of Reversals 53, Intensity High

### Constraints faced by policymakers — financing, trade, socio-political features
- Financing constraints:
  - Measures: access to external private capital markets, financial liberalization, capital flows/GDP, M2-to-GDP, public debt.
  - Market access (Gelos, Sahay, and Sandleris (2004) binary variable 1980-2000): Argentina had access 70 percent of the time during its best growth period and 40 percent during its worst growth period (text statement).
  - On average, greater access to capital markets during high growth periods; exceptions include Chile and Uruguay.
  - Financial liberalization dummy: more liberalized countries experienced higher growth; exceptions: Brazil, Colombia, Mexico, Venezuela (less liberalized in their high growth periods; three of these four had highest growth in the 1970s).
  - Capital flows/GDP: on average, capital flowed into countries during high growth periods and flowed out during low growth periods; exceptions: Colombia, Nicaragua, Paraguay, Venezuela.
  - Financial depth (M2-to-GDP): on average, same during high and low growth periods.
  - Public debt: higher in low growth period in virtually all countries, though not significantly so (exceptions: Colombia, Nicaragua, Uruguay, Venezuela).
- Trade integration:
  - Measures: trade liberalization dummy; trade openness = (exports+imports)/GDP.
  - On average, trade more liberalized and more open during high growth than low growth, but only marginally so.
  - Five countries grew faster when trade regimes were much less liberal: Colombia, Costa Rica, Ecuador, Mexico, Paraguay (their best years were in the 1970s).
- Socio-political and economic features:
  - Polity changes: number high across Latin America, dominated by Bolivia, Ecuador, Guatemala, Peru; intensity high in Peru, Uruguay, and several Central American countries.
  - Ethnic diversity highest in Bolivia, Ecuador, Peru.
  - Income inequality highest in Guatemala, Brazil, Chile; lowest in Uruguay, Nicaragua, Bolivia.
  - Table 14 selected exact values:
    - Argentina: Real GDP Per Capita (Constant 2000 US$) 6,617 (1970) and 7,699 (2004); Human Capital Development 8.8 (2004); Ethnic Fractionalization 0.3; Number of Polity Changes 6; Intensity of Changes 8.2; Income Distribution (Top 20 Percent) 56.4.
    - Latin America simple averages: Real GDP Per Capita 2,440 (1970) and 3,274 (2004); Human Capital Development 6.3 (2004); Ethnic Fractionalization 0.4; Number of Polity Changes 89 (total); Intensity of Changes 14.6; Income Distribution (Top 20 Percent) 57.0.

### Synthesis of main empirical findings (stylized facts)
- Volatility patterns:
  - Volatility of macroeconomic outcomes and policies is higher in episodes of low growth compared to episodes of high growth.
  - Levels and volatilities of most shocks similar across episodes, except U.S. real interest rates (significantly lower and less volatile during high growth).
- Crises:
  - Extreme events more frequent in low growth episodes but common in high-growth episodes as well.
  - Concurrent crises deepen output declines, especially when all three crisis types occur simultaneously.
- Policies and growth:
  - Volatility of discretionary fiscal policy associated with lower growth.
  - Strong evidence of fiscal policy procyclicality across the region; no significant difference in procyclicality between high-growth and low-growth episodes.
  - Low levels of market-oriented reforms and structural reform reversals associated with lower growth.
  - Reform reversals occurred in nearly all countries despite overall progress since 1970.
- Constraints and external environment:
  - Financing and trade constraints can amplify volatility and reduce growth, independently of policies and shocks.
  - Of global shocks considered, U.S. real interest rates are the clearest external factor linked with differences in growth episodes.

### Regression analysis — explaining growth and volatility (exact reported equations and coefficients)
- Growth regression (best-performing specification; accounts for 68 percent of variation in per capita GDP growth):
  - Per capita GDP growth = − 0.23 Volatility of growth − 0.50 Average US real interest rate − 0.09 Volatility of discretionary fiscal policy + 0.17 Index of institutional development − 0.0004 Initial per capita income + 0.08 Income inequality − 6.40
  - All right hand side variables are significant at least at the 10 percent level.
  - Interpretations:
    - Volatility of growth coefficient = −0.23 (higher volatility reduces growth).
    - Average US real interest rate coefficient = −0.50 (higher US real rates reduce growth).
    - Volatility of discretionary fiscal policy coefficient = −0.09 (greater fiscal volatility reduces growth).
    - Institutional development coefficient = +0.17 (greater market-orientation increases growth).
    - Initial per capita income coefficient = −0.0004.
    - Income inequality coefficient = +0.08.
- Volatility regression (Table 18; variables account for nearly 40 percent of variation):
  - Volatility of real GDP per capita growth = 1.53 Volatility of US real interest rates + 0.32 Intensity of structural reform reversals + 2.16 Financial liberalization dummy − 0.06
  - All variables (except the constant) significant at least at the 5 percent level.
  - Interpretations:
    - Volatility of US real interest rates coefficient = 1.53 (raises output volatility).
    - Intensity of structural reform reversals coefficient = 0.32 (raises output volatility).
    - Financial liberalization dummy coefficient = 2.16 (associated with greater volatility).
- Selected adjusted R-squared values (Table 17 growth specifications): 0.22, 0.47, 0.47, 0.46, 0.51, 0.60, 0.65, 0.66, 0.68.
- Selected adjusted R-squared progression (Table 18 volatility specifications): 0.08, 0.07, 0.06, 0.09, 0.27, 0.25, 0.26, 0.25, 0.39.

### Policy-relevant conclusions and recommendations
- Principal conclusions:
  - Real GDP per capita growth in Latin America 1970–2004 was low and growth volatility was high.
  - High-growth episodes associated with lower volatility, lower inflation and devaluation, lower fiscal volatility, and fewer currency crises and debt defaults.
  - U.S. real interest rates important for both growth and volatility; most other external shocks not generally significant for growth.
  - Volatility of discretionary fiscal policy and higher fiscal expenditure volatility associated with lower growth in multivariate regressions.
  - Greater market-oriented structural reforms and fewer reform reversals associated with higher growth; intensity of reform reversals associated with higher growth volatility.
  - Financial liberalization associated with higher growth but also with greater volatility (trade-off).
- Policy implications:
  - Reduce growth volatility and manage exposure to U.S. real interest rate fluctuations to support higher growth and lower volatility.
  - Strengthen institutional development and pursue market-oriented structural reforms while minimizing reform reversals to foster growth and reduce volatility.
  - Reduce volatility of discretionary fiscal policy; fiscal expenditure levels and volatility matter empirically.
  - Manage financial liberalization to reap growth benefits while containing associated volatility risks.
- Suggested future work:
  - Expand analysis to other regions, especially on the role of structural reform reversals.
  - Test alternative specifications for growth and volatility, including interacting explanatory variables to reveal channels.
  - Examine the relationship between reform reversals and crises in detail; investigate conditions under which reform reversals predict crises.

*Source: Excerpt from IMF working paper content unit _wp06287 (1970–2004 episodic analysis of volatility and growth in Latin America).*

### 1. Real GDP Growth and Volatility ......................................................................................

### 1. Real GDP Growth and Volatility

### Major themes covered
- Real GDP growth and volatility across countries and regions.
- Regional GDP growth and volatility.
- Detailed focus on Latin America: levels of real GDP growth and volatility.
- Channels through which policy volatility affects growth, presented as a schematic representation.
- Latin America: progress in structural reforms and instances of reform reversals.
- Classification of Latin American countries into "Fast Reformers" and "Slow Reformers" with separate treatment.

### Section and chapter headings (as presented)
- 1. Real GDP Growth and Volatility
- 2. Regional GDP Growth and Volatility
- 3. Latin America: Real GDP Growth and Volatility
- 4. Channels through which Policy Volatility Affects Growth: A Schematic Representation
- 5. Latin America: Progress in Structural Reforms
- 6. Latin America: Structural Reforms and Reversals
- 7. Latin America: Structural Reforms and Reversals (Fast Reformers)
- 8. Latin America: Structural Reforms and Reversals (Slow Reformers)

### Empirical tables and topics (table list)
- Table 1: Growth and Volatility, High and Low Years
- Table 2: Inflation, Devaluation, and Fiscal Balance During High and Low Growth Decades
- Table 3: Crises During High and Low Growth Decades
- Table 4: Concurrent Crises and Growth
- Table 5: Global Shocks—G7 Growth and World Real Interest Rates
- Table 6: Country-Specific Shocks—Terms of Trade, Natural Disasters, And Official Aid
- Table 7: Fiscal Policy Volatility During High and Low Growth Decades
- Table 8: Fiscal Policy Procyclicality
- Table 9: Monetary Policy Volatility
- Table 10: Fast and Slow Reformers
- Table 11: Structural Reform Levels, Trends, and Reversals During High and Low Growth Decades
- Table 12: Financial Integration and Constraints During High and Low Growth Decades
- Table 13: Trade Liberalization and Integration During High and Low Growth Decades
- Table 14: Socio-Political and Economic Features
- Table 15: Summary Outcomes and Shocks—Relative Value in High and Low Growth Years
- Table 16: Summary Policies and Constraints in High Relative to Low Growth Years
- Table 17: Explaining Growth by Shocks, Policies, and Institutions
- Table 18: Explaining Volatility by Shocks, Policies and Constraints

### Appendix
- I. Description of the Data (listed as Appendix I)

*Source: _wp06287 - 1. Real GDP Growth and Volatility (IMF PDF table of contents and tables list).*

### References..............................................................................................................

### _wp06287 - References..............................................................................................................

### Introduction and purpose
- Objective: compare patterns of volatility across episodes of high and low growth since 1970 in 17 Latin American countries, with a focus on the role of policy volatility in accounting for the region’s growth performance.
- Episodic approach: identify non-overlapping 10-year periods (decades) of highest and lowest average annual per capita GDP growth for each country during 1970–2004; compare variables of interest between these two episodes for each country and draw common lessons.
- Rationale:
  - Avoid arbitrary decade cutoffs by letting moving 10-year averages of GDP per capita growth define best and worst decades.
  - Emphasize within-country variation to address concerns that “my country is different.”
  - Distinguish clearly among macroeconomic outcomes, policies (macroeconomic and structural), and shocks.

### Methodology: episodic approach
- Definition:
  - High growth period in country i = decade corresponding to max(g_it), where t ranges over 10-year intervals 1970–79, 1971–80, ..., 1995–2004, and g is the average annual per capita GDP growth rate.
  - Low growth period in country i = decade corresponding to min(g_it) with same t definition.
- Outcome: Non-overlapping high and low decades found for 14 of the 17 countries; exceptions Costa Rica, Uruguay, and Venezuela handled by selecting nearest non-overlapping decades.
- Analytical focus: bivariate relationships across episodes, with cross-country regressions used to test robustness.

### Level and volatility of macroeconomic outcomes
- Output growth:
  - Best decades vary across countries; 1970s remain best years for about half the countries; six countries best in the 1990s; three standout best-decade performers:
    - Chile (1988–97: 6.1 percent per annum)
    - Paraguay (1972–1981: 5.9 percent per annum)
    - Brazil (1971–80: 5.8 percent per annum)
  - Worst-decade examples:
    - Nicaragua (1979–88: −6.7 percent per annum)
    - El Salvador (1979–88)
    - Peru (1982–91)
  - Regional pattern: volatility more than twice as high during the worst decade compared to the best decade.
  - Cross-sectional correlations shown:
    - Real GDP Growth and Volatility (1970-2004): Correlation coefficient = −0.53, P-value = 0.00
    - Latin America (1970–2004): Correlation coefficient = −0.49, P-value = 0.05

- Inflation, devaluation, fiscal balance:
  - Average inflation, devaluation, and fiscal imbalance (as percent of GDP) were two to four times higher during low growth periods versus high growth periods.
  - Fiscal imbalance: in every country except Ecuador, fiscal imbalances were higher during the low growth period.
  - Volatility: volatilities of inflation, devaluation, and fiscal balance higher during low growth periods (inflation and devaluation volatilities about three times higher).
  - Country examples for monetary outcome volatility: Colombia, Panama, Paraguay (relatively low); Argentina, Bolivia, Brazil, Nicaragua, Peru (highest).

- Extreme events (currency crises, banking crises, sovereign debt defaults):
  - Total crisis observations (1970–2004): 312 (combining all three crisis types), of which 223 occurred during the identified high and low growth episodes.
  - Average frequency interpretations:
    - nearly 9 crisis observations recorded on average each year in Latin America during 1970–2004
    - about 6 crisis observations per country per decade since 1970
  - Crisis counts by episode:
    - High growth years: 6 currency crises, 15 banking crises, 50 debt default observations
    - Low growth years: 34 currency crises, 14 banking crises, 104 debt default observations
  - Country extremes:
    - Argentina: 29 crises over the 35-year period (maximum)
    - Colombia: 6 crises over the 35-year period (minimum)
  - Concurrent crises:
    - Currency crises and debt defaults co-occurred across 13 countries (total 26 crisis-years)
    - Banking + currency crises concurrent in only two countries (Argentina and Uruguay)
    - Banking crises + debt default occurred in 10 countries
    - All three crises simultaneous in four countries
  - Output impact:
    - Largest declines when all three crises occurred simultaneously: average of nearly 9 percent fall in output (measured cumulatively one year before, during, and after crisis year).
    - Banking crisis or debt default combined with a currency crisis also caused significant output falls; debt default combined with banking crisis alone may lead to growth deceleration but not necessarily an output fall.

### Magnitude and volatility of shocks
- Global shocks considered: growth rate of G-7 industrial countries and U.S. real interest rates.
  - G-7 growth: level and volatility do not differ much between high and low growth episodes; difference between episodes is 0.4 percent.
  - U.S. real interest rates: average U.S. real interest rate was significantly lower by about 500 basis points and volatility was twice as low during the high growth years.
  - Result: of global shocks considered, only U.S. real interest rate stands out as significantly different between highest and lowest growth episodes.

- Country-specific shocks: terms of trade shocks, natural disasters, changes in official development assistance (ODA).
  - Terms of trade:
    - Average positive terms of trade shock during best decade: less than ½ percent.
    - Average negative shock during worst decade: just over −1 percent.
    - Significant country-level differences: Chile, Ecuador, and Mexico show notable differences consistent with expectations.
    - Volatility of terms of trade shock: high and similar across both episodes; highest volatility in Ecuador and Paraguay (best decade) and Chile (worst decade).
  - Natural disasters:
    - Measured as number of disasters per million people affected; smaller countries most affected: Costa Rica, Ecuador, Honduras, Nicaragua, Panama.
    - Number of disasters were much higher during high growth periods in many cases.
    - Example: Hurricane Mitch (1998) caused as much as US$8.5 billion in damage in Honduras and Nicaragua.
  - Official development assistance (ODA):
    - ODA marginally higher (less than ½ percent of GDP) during the high growth period.
    - Volatility of ODA found to be quite small.

### Macroeconomic policy volatility
- Conceptual framing:
  - Distinguish macroeconomic policy volatility (fiscal and monetary policies) from structural policy volatility (product market regulations, trade taxes, regulatory barriers, credit and labor market regulations).
  - Policy volatility measures target both “discretionary” components and “rules.”
- Fiscal policy volatility:
  - Two measurement approaches:
    - Standard deviation measures:
      - (i) standard deviation of central government fiscal expenditures as share of GDP (captures “rules” and “discretionary” components)
      - (ii) Fatás and Mihov (2005) based measure of discretionary fiscal policy: residual from regression of real government spending growth on macro conditions; volatility = standard deviation of residual ε_it
    - Procyclicality measures:
      - KRV (Kaminsky, Reinhart, Vegh, 2004): correlation of cyclical components of real government spending and real GDP; positive correlation = procyclical
      - AT (Alesina and Tabellini, 2005): country regressions of changes in government spending as share of GDP on cyclical GDP component (output gap) and terms of trade; positive coefficient on output gap indicates procyclicality
  - Findings:
    - Average level of fiscal expenditures was about 3–4 percentage points of GDP lower during the high growth decade compared with the low growth decade; average volatility significantly lower in high growth decades.
    - Chile: fiscal expenditures were more than 10 percentage points of GDP lower in the high growth period.
    - Fatás-Mihov discretionary volatility: volatility only marginally higher in the low growth period; wide country variation with Nicaragua as outlier; excluding Nicaragua reduces average discretionary volatility in low-growth period.
    - Procyclicality: evidence of procyclical fiscal policies in Latin America:
      - KRV measure: all countries except Ecuador pursued procyclical policies over whole sample (nearly half strongly significant).
      - AT measure: confirms procyclicality with higher and more significant coefficients.

- Monetary/exchange rate policy volatility:
  - Monetary policy measurement challenges noted; paper constructs an exchange rate regime-change measure using Reinhart and Rogoff (2004) 15-point annual scoring (1 = currency board to 15 = free floating).
  - Two variables: number of exchange rate regime changes and intensity (absolute difference in score) per subperiod.
  - Findings:
    - Total number of regime changes similar across high and low growth subperiods.
    - Number of changes per country in a 10-year period: a little over one.
    - Intensity of changes varies widely by country, but average pattern across subperiods not very different.

### Structural policy volatility and reform reversals
- Composite index construction:
  - Created a new composite Heritage-Morley index for 1970–2004 by combining Morley (1970–95) with Heritage Foundation (1995–2004); indices normalized to 0–100 with higher numbers indicating greater market-oriented reforms.
  - Nicaragua and Panama dropped because Morley does not report them.
  - Components include trade policy reforms, government intervention, tax reforms, foreign investment policy, property rights, domestic financial reforms, privatization, labor market regulations, regulatory burdens on business.
- Regional and country patterns (1970–2004):
  - Region overall: significant progress in structural reforms, with pronounced acceleration in the latter half of the 1980s and the 1990s.
  - Periods of reform reversals observed in early 1980s and early 2000s; reversals in early 1980s coincided with macro instability and debt crises; early 2000s reversals sometimes commenced before crises and were exacerbated by them.
  - Country examples:
    - Argentina: most advanced reformer in 1970 but fell behind by 2004.
    - Chile: laggard in 1970, top reformer by 2004.
    - Costa Rica: maintained relatively high reform orientation.
    - Ecuador: started low and progressed slowly.
    - Venezuela: regressed below 1970 reform level by 2004.
  - Variation in initial level and pace:
    - Grouping by initial reforms (above/below median) and pace (fast/slow) shows heterogeneity; Brazil at median for both.
    - Fastest progress from low initial levels: Bolivia, Chile, Guatemala, Uruguay, Peru.
    - Least progress from low initial levels: Ecuador, Colombia.
  - Reform volatility and reversals:
    - Marked reversals in Argentina, Bolivia, Ecuador, Paraguay, Venezuela in recent years.
    - Figures illustrate period and intensity of reversals; area under reversal curve interpreted as the “cost” of reform reversals (intensity × time to revert).

### Synthesis of main empirical findings (as presented)
- Volatility patterns:
  - Volatility of macroeconomic outcomes and policies is higher in episodes of low growth compared to episodes of high growth.
  - Both the level and volatility of most shocks are similar across episodes, except U.S. real interest rates which were significantly lower and less volatile during high growth episodes.
- Crises:
  - Extreme events (currency crises, banking crises, debt defaults) are more frequent in low growth episodes but are common in high-growth episodes as well.
  - Concurrent crises deepen output declines, especially when all three crisis types occur simultaneously.
- Policies and growth:
  - Volatility of discretionary fiscal policy is associated with lower growth.
  - Strong evidence of fiscal policy procyclicality across the region, but no significant difference in procyclicality between high-growth and low-growth episodes.
  - Low levels of market-oriented reforms and structural reform reversals are associated with lower growth.
  - Reform reversals have occurred in nearly all countries despite overall progress since 1970.
- Constraints and external environment:
  - Financing and trade constraints (lack of access to international capital markets, trade restrictions) can amplify macroeconomic outcome volatility and reduce growth, independently of policies and shocks.
  - Of global shocks considered, U.S. real interest rates are the clearest external factor linked with differences in growth episodes.

_Italic: Source: Excerpt from IMF working paper content unit _wp06287 (1970–2004 episodic analysis of volatility and growth in Latin America)._

### 3.3 years

### Figure 8. Latin America: Structural Reforms and Reversals (Slow Reformers), 1970–2004

### Overview
- Time span shown: 1970    1974    1978    1982    1986    1990    1994    1998    2002
- Source: Authors, Heritage-Morley Composite Index.

### Country-specific durations and markers
- El Salvador
  - 3.3 years
  - 9.7 years
  - 1.1 years
  - 1.3 years
  - 2 years

- Uruguay
  - 5.3 years
  - 1.7 years
  - 2 years
  - 3 years
  - 1year
  - 4 years

- Bolivia
  - 2 years
  - 1 year
  - 1.7 years
  - 1.4 years
  - 1.1 years
  - 3 years

- Costa Rica
  - 1.2 years
  - 5.2 years
  - 1.2 years
  - 1 year
  - 3.2 years
  - 3 years

- Peru
  - 7.6 years
  - 6.2 years
  - 2 years

- Guatemala
  - 10.5 years8.3 years
  - 3 years3.4 years
  - 1 year
  - 1 year
  - 2 years3 years
  - 1.7 year

- Brazil
  - 16.1 years
  - 1.4 years
  - 1.5 years
  - 2 years
  - 1 year

- Mexico
  - 9.8 years
  - 6 years
  - 1 year

- Colombia
  - 2 years
  - 7.5 years
  - 1.7 years
  - 1.3 years
  - 1.6 years
  - 3.3 years
  - 2.2 years
  - 2 years

- Paraguay
  - 5.3 years
  - 1.1 years
  - 8 years

- Argentina
  - 6.9 years
  - 7.5 years
  - 1.5 years
  - 4 years

- Honduras
  - 9.1 years
  - 1 year
  - 2 years

- Ecuador
  - 2 years
  - 6.2 years
  - 1.5 years
  - 1.3 years
  - 5 years

- Venezuela
  - 5.1 years
  - 5 years
  - 1.8 years
  - 2.4 years

### Key patterns visible in the figure
- Multiple countries exhibit long episodes labeled in the range of single-digit to double-digit years (examples: 16.1 years for Brazil; 10.5 years8.3 years for Guatemala; 9.8 years for Mexico; 9.7 years for El Salvador).
- Several countries show short-duration episodes clustered around 1 to 3 years.
- The timeline axis markers are: 1970, 1974, 1978, 1982, 1986, 1990, 1994, 1998, 2002.

*Source: Figure 8. Latin America: Structural Reforms and Reversals (Slow Reformers), 1970–2004. Authors, Heritage-Morley Composite Index.*

### 1.4 years

### _wp06287 - 1.4 years

### Reform reversals and structural reforms
- All countries experienced reform reversals during 1970–2004. There were 167 reversals in total, excluding Nicaragua and Panama.
- Countries with the highest numbers of reversals: Argentina, Brazil, Colombia, and Venezuela.
- Most intense reversals: Argentina, Chile (during the early part of the sub-period), Paraguay, and Venezuela.
- Least intense reversals: Costa Rica, El Salvador, Guatemala, and Uruguay.
- Structural reform performance:
  - Better during the high-growth episode compared with the low-growth episode.
  - During the high-growth episode: higher degree of market orientation of structural policies, more progress in structural reforms, fewer reform reversals, and lower intensity of reform reversals.
- Table 11 (summarized examples):
  - Argentina: During High Growth Decade — Average 58.2, Trend 17.0, Number of Reversals 2, Intensity of Reversals High; During Low Growth Decade — Average 39.8, Trend 6.8, Number of Reversals 5, Intensity of Reversals High.
  - Chile: During High Growth Decade — Average 58.1, Trend 15.8, Number of Reversals 1, Intensity Low; During Low Growth Decade — Average 45.6, Trend 32.2, Number of Reversals 1, Intensity Medium.
  - Latin America simple averages: During High Growth Decade — Average 38.1, Trend 9.2, Number of Reversals 38, Intensity Medium; During Low Growth Decade — Average 34.6, Trend 7.4, Number of Reversals 53, Intensity High.

### Constraints faced by policymakers
A. Financing constraints
- Measures considered: access to external private capital markets, financial liberalization, capital flows/GDP, M2-to-GDP ratio (financial depth), public debt.
- Access to capital markets (Gelos, Sahay, and Sandleris (2004) binary variable 1980-2000):
  - Example: Argentina had access 70 percent of the time during its best growth period and 40 percent during its worst growth period (text statement).
  - On average, Latin American countries had greater access during high growth periods. Exceptions noted: Chile and Uruguay had lower access during their high growth period.
- Financial liberalization (one-zero annual dummy):
  - More financially liberalized countries experienced higher growth.
  - Only Brazil, Colombia, Mexico and Venezuela were financially less liberalized in their high growth period (three of these four experienced their highest growth period during the 1970s).
- Capital flows/GDP:
  - On average, capital flowed into countries during their high growth periods and flowed out during low growth periods.
  - Exceptions: Colombia, Nicaragua, Paraguay, and Venezuela.
- Financial depth (M2-to-GDP):
  - On average, financial depth was the same during high and low growth periods.
- Public debt:
  - Debt was higher in the low growth period in virtually all countries, though not significantly so (exceptions: Colombia, Nicaragua, Uruguay, and Venezuela).

B. Trade integration
- Two measures: trade liberalization dummy and trade openness (exports+imports)/GDP.
- On average, trade more liberalized and more open during high growth than low growth, but only marginally so.
- Five countries that grew faster when trade regimes were much less liberal: Colombia, Costa Rica, Ecuador, Mexico, and Paraguay (their best years were in the 1970s).
- Note: Measures of trade openness have limitations and need caution.

C. Socio-political and economic features
- Features considered: per capita income, size of economy, human capital, ethnic fractionalization, polity changes, external risk perceptions.
- Polity changes:
  - Number of polity changes high across Latin America, dominated by Bolivia, Ecuador, Guatemala and Peru.
  - Intensity of polity changes high in Peru, Uruguay, and several Central American countries.
- Ethnic diversity highest in Bolivia, Ecuador, and Peru.
- Income inequality highest in Guatemala, Brazil and Chile; lowest in Uruguay, Nicaragua and Bolivia.
- Table 14 examples (selected exact values):
  - Argentina: Real GDP Per Capita (Constant 2000 US$) 6,617 (1970) and 7,699 (2004); Human Capital Development 8.8 (2004); Ethnic Fractionalization 0.3; Number of Polity Changes 6; Intensity of Changes 8.2; Income Distribution (Top 20 Percent) 56.4.
  - Latin America simple averages: Real GDP Per Capita 2,440 (1970) and 3,274 (2004); Human Capital Development 6.3 (2004); Ethnic Fractionalization 0.4; Number of Polity Changes 89 (total); Intensity of Changes 14.6; Income Distribution (Top 20 Percent) 57.0.

### What have we learnt so far (stylized facts and bivariate results)
- Real GDP per capita growth in Latin America during 1970–2004 was low: best performer Chile grew at 2.6 percent per annum; worst performer Nicaragua experienced a decline in real GDP per capita (text statement).
- Volatility of growth was high across the region.
- Episodic approach: best and worst 10-year growth periods identified for each country; bivariate relationships established between growth and macroeconomic outcomes, shocks, policies, constraints.
- Episodes of relatively high growth were robustly and negatively related with volatility.
- Timing across countries:
  - For nearly half the countries, the 1970s was the best decade; the 1990s were the best for only 6 countries; the 1980s were the worst for most countries.
- Macroeconomic outcomes (Table 15 — bivariate significance):
  - Output volatility, inflation, inflation volatility, devaluation, and devaluation volatility are lower in the high growth period (statistically significant).
  - Fiscal balances are higher and volatility is lower in the high growth period (statistically significant).
  - Currency crises and episodes of debt default are significantly lower in high growth periods; banking crises are not significantly lower (more banking crises in high growth period, association not significant).
- Shocks:
  - Only the level and volatility of US real interest rates appear to matter for growth.
  - Terms of trade shocks not significantly different between high and low growth periods.
- Macroeconomic policies (Table 16 — bivariate significance):
  - Of seven policy variables considered, only three matter statistically: lower fiscal expenditure, lower fiscal expenditure volatility, and fewer exchange rate regime changes are associated with higher growth.
  - Of structural reform measures—level, change, reversals—only reform reversals are significantly associated with growth.
  - Of constraints, only capital flows and public debt are significantly related to growth in bivariate analysis.

Key comparative numerical statements from episodic results:
- The volatility of inflation and devaluation was 5–6 times higher during the low growth period (text statement).
- Fiscal balances were worse and its volatility nearly three times higher during the low growth period (text statement).
- Crises: over 300 crisis-year observations during 1970–2004 covering currency, debt default, and banking crises; Argentina had the maximum number of crises—an average of one per year—while Colombia had only 6 in the entire 35-year period (text statements).
- Concurrent crises involving a currency crisis generally resulted in a sharp fall in output in the short term (Table 4 provides country-year examples; Latin America simple averages: cumulative real GDP per capita growth across crisis types — Currency and Banking Crises Only -9.1; Currency Crisis and Debt Default Only -6.3; Banking Crisis and Debt Default Only 1.8; All Three Crises Simultaneously -8.9).

### Regression analysis — explaining growth and volatility
- Sample and method:
  - Panel regression dividing 1970–2004 into three sub-periods: 1970–79, 1980–89, 1990–2004 (maximum of 51 data points).
  - Dependent variable: per capita GDP growth.
  - Volatility of per capita growth included as explanatory variable.
  - Controls: US real interest rate, discretionary fiscal policy volatility, institutional development, initial per capita income, income inequality, plus other tested variables.
- Best-performing regression (accounting for 68 percent of variation in per capita GDP growth) — exact equation and coefficients:
  - Per capita GDP growth  =  – 0.23 Volatility of growth  – 0.50 Average US real interest rate  – 0.09 Volatility of discretionary fiscal policy  + 0.17 Index of institutional development  – 0.0004 Initial per capita income  + 0.08 Income inequality  – 6.40
  - All right hand side variables are significant at least at the 10 percent level.
  - Interpretations from regression:
    - Higher volatility of growth reduces per capita growth (coefficient on volatility: – 0.23).
    - Higher Average US real interest rate reduces growth (coefficient: – 0.50).
    - Greater volatility of discretionary fiscal policy reduces growth (coefficient: – 0.09).
    - Greater institutional development (market-orientation of structural reforms) increases growth (coefficient: + 0.17).
    - Initial per capita income has a small negative coefficient (– 0.0004) and is significant in some specifications.
    - Income inequality positively related with growth (coefficient + 0.08), though instrumenting volatility can remove significance of initial income and inequality.
- Volatility regression (Table 18 exact equation and coefficients explaining volatility of real GDP per capita growth; variables account for nearly 40 percent of variation):
  - Volatility of real GDP per capita growth  =  1.53 Volatility of US real interest rates  + 0.32 Intensity of structural reform reversals  +  2.16 Financial liberalization dummy  –  0.06
  - All variables (except the constant) significant at least at the 5 percent level in the specification reported.
  - Interpretations:
    - Higher volatility of US real interest rates increases output volatility (coefficient 1.53).
    - Greater intensity of structural reform reversals increases output volatility (coefficient 0.32).
    - Financial liberalization dummy associated with greater volatility (coefficient 2.16).
  - Other tested variables not significantly related with volatility: volatility of G-7 growth, volatility of terms of trade, number and intensity of exchange rate regime changes, public debt burden, capital flows/GDP, trade openness, trade liberalization, number and intensity of polity changes.

Selected regression table highlights (exact adjusted R-squared values shown in Table 17):
- Adjusted R-squared values across specifications reported: 0.22, 0.47, 0.47, 0.46, 0.51, 0.60, 0.65, 0.66, 0.68.

Selected volatility regression adjusted R-squared progression (Table 18):
- Adjusted R-squared values across specifications reported: 0.08, 0.07, 0.06, 0.09, 0.27, 0.25, 0.26, 0.25, 0.39.

### Conclusions, policy-relevant findings, and suggested future work
- Principal conclusions:
  - Real GDP per capita growth in Latin America 1970–2004 was low and growth volatility was high.
  - Episodes of high growth were negatively related with volatility and associated with lower inflation, devaluation, and fiscal volatility, and fewer currency crises and debt defaults.
  - US real interest rates were an important external factor for both growth and volatility; most other external shocks (terms of trade, natural disasters, ODA) were not generally significant for growth.
  - Macroeconomic policy volatility: volatility of discretionary fiscal policy and higher fiscal expenditure volatility associated with lower growth in multivariate regressions.
  - Structural reforms: greater market-oriented reforms and fewer reform reversals associated with higher growth; intensity of reform reversals associated with higher growth volatility.
  - Financial liberalization is associated with higher growth but also with greater volatility (trade-off highlighted).
  - Public debt and capital inflows were higher/ lower respectively in low growth periods in bivariate analysis; however, they were insignificant in some multivariate regressions.
- Policy-relevant implications (based on empirical findings in the text):
  - Reducing growth volatility and stabilizing US real interest rate exposure can support higher growth and lower volatility.
  - Strengthening institutional development and pursuing market-oriented structural reforms while minimizing reform reversals can foster growth and reduce volatility.
  - Reducing volatility of discretionary fiscal policy can boost growth; fiscal expenditure and its volatility matter empirically.
  - Managing financial liberalization to reap benefits while containing associated volatility risks is important.
- Suggested avenues for future work (text statements):
  - Expand analysis to other regions, especially on the role of structural reform reversals.
  - Test alternative specifications for growth and volatility, including interacting explanatory variables to reveal channels.
  - Examine the relationship between reform reversals and crises in detail; investigate conditions under which reform reversals predict crises.

*Source: _wp06287 - 1.4 years (IMF staff PDF content, 1970–2004 excerpts as provided).*

### REFERENCES

### _wp06287 - REFERENCES

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*Source: _wp06287 - REFERENCES (PDF).*

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