What happened? Why East Asia surged ahead of Latin America and some lessons for economic policy.

IN 1950, Latin America was the most developed region outside the industrial countries, with an average real GDP per capita more than two and a half times that of East Asia (excluding China and Japan), and about one-fourth that of the United States. By the beginning of the current century, however,

What accounted for this big shift in fortunes? Clearly, many factors need to be considered, including the differences in countries' initial conditions, such as the impact of culture, historical traditions, and natural endowments. One way of organizing one's thinking is to consider the so-called deep determinants of economic development, which reflect some of the impact of initial conditions and other fundamental factors in the development process: geography (natural endowments, distance from the equator or from major markets), integration (trade and other policy reform), and institutions.

Geography, it turns out, does not significantly differentiate Latin America and East Asia. Both regions contain resource-rich and resource-poor countries; both regions include a roughly similar portion of territory in the tropics; and both are similarly located in relation to major trade markets.

In relation to integration and institutions, a comparison of the recent development experiences of East Asia and Latin America highlights three factors that can account for much of Latin America's lagging economic performance during the second half of the past century: its problems of macroeconomic instability; its low level of integration with the global economy; and the poor quality of its public institutions.

Too much macroeconomic instability

Most of the growth divergence between the two regions occurred in the last quarter of the 20th century. For Latin America as a whole, economic growth was particularly weak during the 1980s--the "lost decade"--when real GDP per capita fell by nearly 1 percent in the wake of adjustments to a regional debt crisis. Average real income picked up in the 1990s but still grew by only 1.9 percent, while the region's open unemployment rate, according to data from the International Labor Organization, rose to 10 percent by the end of the decade. Real income growth was weaker in the second half of the 1990s than for the decade as a whole, and, during 1998-2003, it was zero, although there has been an encouraging recovery since then. By comparison, growth in real GDP in East Asia was about 6 percent a year, on average, during these same periods. In addition, growth has been significantly more volatile in Latin America than in East Asia since 1980.