Convergence Clubs determined by Economic History in Latin America

The concept of club convergence has been widely used in empirical analysis to group countries in clubs with similar development paths. However, there is no unified agreement on how to identify the clubs in the first place. In this paper, I argue that economic history can guide us to identify clubs. The argument is that economic history helps us understand when, where, and how institutions are formed and since institutions determine the way scarce resources are used by their chosen policies, it allows us to understand economic growth. Even though Latin America is typically considered a club itself, due to common characteristics, such as language, geography, religion and history, it still exhibits differences across countries. I study a period of more than 100 years, from 1900 to 2007,where first, I identify two main common external shocks to the region: the Great Depression in the 1930s and the oil price shock in 1974. Second, I classify countries in clubs according, first, to their natural resources endowments, and then, after each shock, to their policy-response to the shocks. Lastly, I test convergence within each club. I find significant and positive convergence speed within each of the clubs, implying that this way of finding clubs should not be ruled out.