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Webpondo: First of all I would like to thank you for accepting this interview for Webpondo. We are really happy to have you here sharing your thoughts with us. The first question is related to the figures that you showed on your work with Lee and Alvaro: in the 1950's the real GDP per adult in Europe, Asia and Latin America (LATAM) was 49%, 20% and 29% of the US respectively. Forty years later Europe improved this figure to 65% and Asia to 57%. LATAM failed to improve the labor productivity. You mentioned that probably the roots are in barriers to competition. Could you elaborate a little bit more on why is it that this is a common feature for every Latin American country.

Harold Cole: Thank you for interviewing me. I appreciate the chance to be here and have this opportunity to speak. I want to split my answer into two parts. The first part, has to do with our striking finding that stagnation in Latin America is pervasive. Every single country has had this experience. Now given that fact and the long-term nature of the stagnation, this leads you to automatically look for some sort of long-run systemic factor that's causing problems for all Latin American countries. This factor, while important for Latin America, should not be important for our Asian countries and Europe countries. The facts from this first part have laid out the question; Why did Latin America stagnate? Now this question is open to everyone. This leads to the second stage, which is where, as the researcher, you've got to start to place your bets in terms of what factors you try to examine for this role. The examples that we talked about in terms of the micro evidence on the impact of competition on productivity at the plant or the industry level suggest that some sort of failure of competitiveness is a possible explanation. Of course, this isn't the only potential explanation. For example, Michele Boldrin did a beautiful job debating the pros and cons of human capital as a possible source of the problem. As both he and we pointed out, the measures of human capital suggest different things, and the importance of this factor seems kind of murky. Overall though, human capital is a variable that you think of as responding to equilibrium conditions just as capital does. The supply of capital in the long run is normally determined by a condition like the marginal product plus one minus depreciation being equal to the inverse of the discount factor. That tends to tie down endogenously what capital looks like. If you thought that Latin America was, say, suffering from some sort of capital distortion, you would expect to see the rate of return on capital looking very high in those countries. That would be consistent with capital scarcity. We didn't see any evidence of that. Similarly with respect to human capital you start to ask yourself: well, human capital is something that is going to be responding endogenously. And therefore I would want to be looking for a distortion that prevented the normal endogenous response of human capital. I'm not aware of that distortion and that, among other things, makes me leery of human capital as the key factor in Latin America's stagnation. Once you think it is probably not human capital, or that while human capital may play a role, it is not the predominant role, then you start to look for things that can affect productivity directly. Unfortunately this is the most nebulous and unsatisfactory area of macro theory right now. We do not have a clear set of factors that affect total factor productivity (TFP) and we have very little in the way of sharp theoretical models and statements to make about TFP. It's measured as a residual. So in my mind, the center stage puzzle is to figure out a way to explain productivity using economic theory. There has been some progress on this question. For example, Ed Prescott has been pushing this question a lot in his most recent work, and has argued that low productivity is due to barriers to adopting new technologies. We ourselves have some ideas but we are in a preliminary stage in terms of pursuing that second leg of the research program. We are trying to come up with theories and stories and evidence that address this productivity puzzle. This is how we're planning on attacking the question of Latin America's long-run stagnation. Of course, other people will probably be going after it from different angles. But at the end of the day, I think that the central focus is going to be coming up with factors and theories that explains labor productivity..

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