A future of opportunities and challenges

Three transitions will significantly condition the development of Latin America and the Caribbean in the coming decades: demographic, green and digital. Along with these transitions, recent geopolitical factors such as the trade war between the United States and China, or global armed conflicts, may reconfigure global value chains with implications for the region (Estevadeordal et al., 2024). 

The demographic transition: a rapidly aging population 

Latin America and the Caribbean still has a relatively young population. By 2024, the fraction of adults over 65 years of age averages 9.76 % in Latin America and just over 11 % in the Caribbean countries. In contrast, in OECD countries it is around 21 %.

However, in the coming decades, the region will undergo a rapid and inexorable aging process. By 2050, the over-65s will account for 19 % of the population in Latin America and 18 % in the Caribbean. It is worth noting that while it took countries such as France and Sweden 115 years and 85 years, respectively, to experience an increase in their over-65 population, from 7 % to 14 % (Aranco et al., 2018), this phenomenon will occur in the region in just 30 years.

During the demographic transition process, the dependency ratio¹ usually follows a U-shaped behavior, where the decreasing phase is identified with the first demographic bonus². On average, the region has already reached its minimum dependency ratio, in other words, it has already passed its first demographic bonus. However, countries such as Bolivia and Paraguay will still experience some additional years with a declining dependency ratio.

The dynamics of the population age structure and dependency ratio respond to life expectancy and fertility rate³. Both factors have moved in the same direction as in the developed world. In 1950, life expectancy at birth for a Latin American citizen was only 50 years, and for a person born in the OECD countries it was up to 65 years. Today, the numbers are 76 and 81, respectively. In the last 70 years, life expectancy has increased by more than 25 years for Latin Americans and Caribbean citizens. It is expected that these values will continue to rise towards the end of the century, reaching 87 years for Latin Americans, very close to the 91 years of OECD citizens. On the other hand, fertility has fallen markedly during this period. Between 1950 and 2024, Latin America’s fertility rate fell from more than six to around two live births per woman of childbearing age. By the end of the century, it is expected to continue falling and converge to OECD levels of around 1.7 births per woman, which is below replacement fertility.

The green transition: climate change and the growing concern for environmental sustainability

In the last 70 years, greenhouse gas (GHG) emissions have increased more than sixfold. Their increased concentration in the atmosphere has pushed the global temperature of the planet to more than one degree Celsius above the temperature of the pre-industrial era. The effects of this global warming are evident, with an increase in the frequency and intensity of extreme weather events (see chapter 4).

We have seen how climate change has wreaked havoc around the world, but especially in small island developing states. The hurricanes we are experiencing are bigger, fiercer and causing more damage than we could ever comprehend.

Based on an interview with Karen-Mae Hill

The sustainability of the planet demands a radical change in the production model. This change must translate into a considerable reduction in GHG emissions and greater protection of natural capital. Fortunately, there seems to be a significant global consensus on this need (see chapter 4).

When facing climate change, this commitment requires, in the long term, a drastic reduction in the use of fossil fuels worldwide and their replacement by clean energy sources such as solar, wind and green hydrogen. Indeed, by 2022, coal, oil and gas accounted for 80 % of energy inputs. Under the IEA’s zero net emissions scenario, this contribution will drop to 17 % by 2050. Solar and wind sources, which accounted for about 2 % in 2022, will account for 42 % of energy supply by 2050 under the same scenario.

This energy transformation is also associated with a growing demand for certain minerals that are essential for clean energy technologies. Indeed, under the CEN scenario, it is estimated that demand for lithium will be more than 10 times higher than it is today by 2050. The demand for other minerals will also grow significantly: cobalt demand will increase by a factor of three, nickel by more than two, and copper by more than 1.5 times.

The digital transition

Undoubtedly, digital technologies⁴ are producing profound transformations in society. The digitalization of the economy has advanced formidably with the massive penetration of computers and the use of the Internet and other information and communication technologies (ICTs). By 2022, the number of internet users will reach 5,300 million, two-thirds of the global population (World Bank, 2024c).

However, this growth has been uneven. There are still gaps in access between developed and developing economies. By 2022, in Latin America and the Caribbean, 78 % of the population had access to the Internet, a value 13 percentage points lower than in the developed world. In addition, there are large differences within countries: between rural and urban areas, between age groups and between genders. In the productive sphere, there are gaps between sectors and companies of different sizes.

For example, according to the Report on Digital Trends and Progress 2023 (World Bank, 2024a), upper-middle-income countries have gaps in urban and rural internet use of 22 percentage points; the gender gap is 5 percentage points, and between adults and young people it is 19 percentage points. For lower-middle-income countries, the values are 34, 15 and 13, respectively. The report also points out, based on the World Bank’s Pulse of Business survey, that by 2022, globally, the fraction of microenterprises (between 5 and 19 workers) that had adopted a digital solution was around 30 %. Among large companies (more than 100 workers) it was almost 65 %.

Despite the progress made in the last three decades, the digitalization phenomenon is still in its early stages. Significant penetration of emerging or advanced digital technologies such as the internet of things (Figure 1.20) and artificial intelligence is anticipated. For example, the volume of global data traffic is expected to grow by a factor of 2.5 by 2029, largely associated with the expansion of fifth-generation technology. Projections for adoption of this technology point to growth in coverage from 45 % in 2023 to around 85 % by the end of the decade (UNCTAD, 2024). 

The Internet of Things (IoT), a term that refers to the network of devices equipped with sensors and actuators connected to the network to collect and share data in real time, is also expected to grow significantly. This technology facilitates process automation, remote monitoring, resource optimization and the creation of intelligent systems that improve efficiency and convenience in various fields, such as smart homes and cities, healthcare, agriculture and industry, among others.

It is estimated that around 39 billion connections will be IoT-related by 2029, compared to around 16 billion existing connections in 2023. The enterprise segment will account for more than 60 % of these connections (UNCTAD, 2024).

The automation of production processes through the use of robots is another future prospect. According to the International Federation of Robotics (2018), global sales of industrial robots doubled between 2013 and 2017, and it is expected that the trend will continue in the future. 

Business models are also being transformed by improvements in internet quality through reduced latency between users and data centers, and lower data storage costs, which facilitates cloud computing. This reduces the need for in-house technology experts and offers flexibility for scalability, qualities that are especially important for SMEs and highly relevant in Latin America and the Caribbean.

Between 2016 and 2021, cloud traffic multiplied by a factor of 6, mainly explained by the dynamics in Asia-Pacific and North America. Latin America represents a very small fraction of the global share, close to 2.5 % (UNCTAD, 2019). 

Finally, one of the most transformative technologies will be artificial intelligence (AI). According to estimates, global investment in private AI companies has multiplied by a factor of more than 4 between 2015 and 2019. The United States has the largest market, accounting for more than half of such investment (UNCTAD, 2021).

The capacity of AI algorithms has evolved dramatically over time. The parameters used in models (a measure of complexity) have grown exponentially, from just 255 in 1955 to 1.6 trillion in 2022. Widespread adoption of this technology can drive accelerated growth and efficiency, and offer opportunities for developing countries, especially for its applications in the education, transportation, and sustainability sectors, among others (World Bank, 2024a).

Implications for development

These trends will undoubtedly have a significant impact on the sustainable development of the countries in the region.

Fiscal scope and State capacities

The accelerated aging of the population will generate a significant growth in the demand for health and elderly care services, while a greater number of people will attain a pension. Both forces will impact fiscal accounts. Estimates carried out in the RED 2020 (Álvarez et al., 2020) indicate that, if the pension and health systems continue along the same lines, the fiscal deficits of both systems will increase by almost four points of GDP on average for the region, solely as a result of aging. To this must be added the expenditures associated with closing the gaps in coverage and quality.

Decarbonization would also have significant fiscal impacts. By 2021, for example, fiscal revenues from the hydrocarbon industry were more than 2.5 % of GDP for Latin America and the Caribbean. However, for some countries such as Trinidad and Tobago, Guyana and Ecuador, the values exceeded 4 % of GDP. The decreasing global prevalence of fossil fuels associated with decarbonization will entail significant losses in these sources of income. On the other hand, mitigating and adapting to climate change in the coming years will require significant fiscal outlays (see chapter 4). The search for new sources of tax revenue, such as environmental taxes or emerging activities such as the production of critical minerals for the energy transition, is a key aspect of providing the treasury with revenue.

The digitalization of the State, on the other hand, can increase collection capacities and the efficiency of public spending with a view to addressing the fiscal deterioration of these trends. There is evidence that the digitalization and automation of sales and tax processes facilitates the identification of the tax base, improves tax payment monitoring and compliance, and reduces the transactional costs of paying taxes. The same evidence points to the incorporation of digital technologies improving public service delivery through at least three channels: enabling new ways of service delivery (e.g., e-learning), improving program targeting, and finally, improving transparency, accountability, and reducing corruption (Nayyar et al., 2024). For example, Laajaj et al. (2017) show how a reform that automated the import declaration procedure in Colombia reduced reported cases of corruption.

Technology is going to offer us some tools that we do not know about, that we have not fully adopted in our countries, but that are going to be fundamental to improve the efficiency of the State, to improve tax collection. These technologies are really going to be very useful in giving us a great qualitative leap in the way the State operates.

Based on an interview with Mauricio Cárdenas

There are demands to spend more on climate transition, both mitigation and adaptation. There are demands for social needs. There are demands for an aging population. […] None of that is going to go away any time soon. Governments have to prioritize addressing these demands with an eye toward having a high impact, because dealing with all these demands will drain fiscal resources very quickly.

Based on an interview with Carmen Reinhart

Both pensions and public health in the region are increasingly affected by the aging of the population that is taking place in the region at an accelerated pace and, therefore, we will need important redesigns of our public health systems that will have to attend to a different demography, with different health problems, and this will possibly require important fiscal resources.

Based on an interview with Augusto de la Torre

People are not living the quality and length of life that they should be living in the Caribbean. And that is a huge challenge for our health systems, for our social capital, for human policy development, and we must do something about it as an urgent priority for the Caribbean.

Based on an interview with Karen-Mae Hill

Economic growth

These trends would also have repercussions in terms of economic growth, which, in turn, has an impact on tax collection potential. On the demographic front, the loss of the first demographic bonus makes productivity gains essential as a source of prosperity. Fortunately, the expectation of living longer could encourage greater private savings to finance a longer period of retirement. Properly channeled, these savings could boost economic growth (this channel is associated with a «second demographic bonus»).

The green transition, although challenging for hydrocarbon-rich countries, offers productive development opportunities for the region by virtue of its wealth of natural capital. Certainly, the fossil fuel industry represents a driving force for many economies in the region⁵, and with decarbonization, it will lose its traction. However, the sectors associated with minerals that serve as inputs for clean technologies will gain relevance.

Latin America and the Caribbean has two of the main copper producers: Chile and Peru. The region also has a very significant share of lithium reserves. One of the world’s main reserves of this mineral is located on the border between Argentina, Bolivia and Chile, a region known as the lithium triangle. With regard to nickel, the region has a significant share of world reserves (17 %), although production is small, accounting for less than 5 % of the world total. This offers it the opportunity to join the clean energy VC.

Given the growing concern for the environment, access to clean energy could be a determining factor in the location of powershoring companies seeking to reduce their carbon footprint. This would facilitate their access to consumer markets in developed countries. Historically, the region has had a clean electricity matrix. Today, 57 % comes from renewable sources compared to the global average of 37 %. And although it is true that this advantage comes mainly from its excellent water potential—which still remains to be exploited—it is also known that the region has an excellent solar and wind potential (Allub et al., 2024). This potential is attractive for companies, especially in energy-intensive sectors, and would also allow the development of an industry for the production and export of clean fuels such as green H_2.

We must begin by saying that Latin America and the Caribbean is in a privileged position in the world with respect to electric energy and, above all, to clean electric energy from renewable sources. We have this great asset, and we should take advantage of it because we are capable. We could offer products from agriculture and industry with a low carbon footprint because our electric energy is clean, but we must decarbonize even more.

Based on an interview with Mauricio Cárdenas

Digital transformation has been and will continue to be an important driver of growth globally. In developing countries, technological leapfrogging will allow them to close their income gap with respect to developed countries (see chapter 5). Digitalization increases production and productivity by expanding markets and improving the quality of supply-demand matches; it also improves the efficiency of business processes and boosts the accumulation of intangible capital (Nayyar et al., 2024).Digitalization, and in particular AI, can have a significant impact on the economy through new discoveries and inventions, reshaping the nature of the innovation, research and development process (Cockburn et al., 2019). Finally, digital transformation can promote a reconfiguration of global value chains. On the one hand, automation may reduce the advantages of access to cheap labor; on the other hand, new digital technologies will reduce the costs of coordination, monitoring and trade, promoting the decentralization of production and the shaping of value chains (Estevadeordal et al., 2024).

To take advantage of the growth opportunities presented by digital transformation, the region must be prepared. Estevadeordal et al. (2024) propose eight indicators to assess readiness⁶. The data show that Latin America and the Caribbean lags considerably behind the OECD in multiple dimensions. These gaps are particularly wide in the importance of trade in digitally deliverable services and human capital readiness, as well as in indicators associated with policy frameworks: cybersecurity and government promotion of investment in emerging technologies. Likewise, the results of the logistics performance and mobile connectivity variables reflect persistent infrastructure and logistics challenges, which limit opportunities to take advantage of the trade facilitation potential of digital technology.

Labor market, inequality and inclusion

Demographic changes impact labor supply. Increased life expectancy, for example, can extend people’s working lives. In turn, a reduction in fertility favors an increase in women’s labor participation and greater investment in human capital per offspring. 

A major concern is the impact these trends may have on employment. The green transformation implies that some sectors will shrink and others will expand. This reallocation is expected to be intense, as estimates suggest that at least 70 % of the labor supply is in non-green jobs and thus at risk of shrinking as economies decarbonize (Allub et al., 2024). This reallocation is complicated by the fact that green jobs demand different skills than non-green jobs.

A similar phenomenon occurs with digital transformation and, in particular, with the automation of production processes. A first question is whether automation reduces or increases the demand for jobs. First, the automation of certain tasks and processes usually carried out by people would reduce the demand for labor. On the other hand, automation may increase labor productivity and, by that way, labor demand for non-automatable tasks. Likewise, digital technologies can create new tasks, increasing the demand for labor (Acemoglu and Restrepo, 2019). 

Digital transformation can also affect the labor demand due to a general increase in the demand for goods and services. New technologies reduce prices, improve product quality, enable greater customization and increase the speed of delivery. If demand increases sufficiently due to these processes, employment will grow, even if the labor required per unit of output decreases (Bessen, 2017).

I don’t think anyone can accurately predict how the labor market will be affected locally, regionally and internationally as a result of this process of rapid technological change, digitalization and now with the very important expansion of tools connected to artificial intelligence. We economists know that certain technological changes displace some jobs and sometimes destroy them. […] What I believe is going to be vital for Latin America is its capacity to adapt to the impacts of this great technological change, for example, of artificial intelligence and digitalization in the labor market.

Based on an interview with Augusto de la Torre

The evidence suggests that ICT adoption associated with the first wave of digitalization has not reduced aggregate employment in advanced economies. The few empirical studies on developing economies conclude, in general terms, that the net effect on jobs has been positive, albeit with differences by type. The evidence on the effects of robots has not been consolidated. Some studies find that robotization reduces the employment rate (Acemoglu and Restrepo, 2020) but others (Jäger et al., 2016) find that the penetration of industrial robots has so far had no direct effects (Nayyar et al., 2024). 

A related question concerns the polarization hypothesis. That is, if most of the automated tasks are in jobs in the middle part of the skill distribution, automation would lead to a reduction in the fraction of jobs in this segment, but there would be, consequently, an increase in the fraction of high- and low-skill jobs. There is evidence of this hypothesis in the developed world, but it is not verified, at least not yet, in the countries of the region (Berniell et al., 2016, Álvarez et al., 2020) nor in other developing economies (Molina and Maloney, 2019). 

One consequence of employment polarization is increased inequality. While high-skilled workers benefit from technology, as it complements their skills, low-skilled workers may suffer a reduction in their income, partly due to the displacement of middle-skilled workers to lower-skilled jobs (Álvarez et al., 2020). 

Climate change also has substantive implications for inequality and poverty. The increase in the frequency and intensity of extreme weather events, such as droughts and floods, have a greater impact on the poorest, becoming a factor that amplifies inequality (chapter 4). The revision of subsidies and tariffs for energy goods required by decarbonization affects energy prices, with potential distributional implications. At the same time, technological progress has made solar and wind energy sources cheaper, which, given their scale characteristics, may favor the closure of access to electricity in remote areas. Along the same lines, digitalization has proven to be a powerful instrument for financial inclusion, especially for households in remote areas (Nayyar et al., 2024).