Prospects for sustainable economic growth: opportunities amid persistent challenges
The fourth industrial revolution has come to offer a new opportunity to address LAC’s challenges and achieve a more inclusive and just region. In particular, the adoption of Industry 4.0 technologies (artificial intelligence, internet of things, etc.) and the development of digital talent can favorably impact productivity, foster greater regional integration, create quality jobs and reduce social and gender gaps. While it is true that automation may also reduce the advantages of access to cheap labor in the region, there is a potentially beneficial trade-off as new digital technologies open up space for new jobs and reduce coordination, monitoring and trade costs. Specifically, the digitalization of our economies promotes the decentralization of production and the formation of value chains, as well as the diversification of services traded within and outside the region.
The traditional and prevailing view of the region’s development considered that the true path to economic growth was through a structural transformation that implied a transition from agriculture to manufacturing industry. Under this view, the path to development in LAC should be seen as a sequential and gradual process of investments in skills and technology that would facilitate the transit of our economies through the stages previously followed by developed nations (Lin, 2011; Kuznets, 1966). However, the current context offers the possibility of leap-frogging as a way to achieve growth in low- and middle-income nations.
Experience in other regions of the world has taught us that this is possible. One of the best examples is the investment in mobile telephony as a substitute for fixed lines. Countries such as India, Ghana and Nigeria virtually bypassed the adoption of fixed lines, thus avoiding building an extensive network infrastructure1. Others, such as China, slowed down the expansion of fixed lines and focused on building up their mobile telecommunications network. The explosive growth of mobile technology has boosted other sectors, such as e-commerce and digital financial services. In countries such as Kenya, Ghana and Nigeria, mass access to mobile telephony led to innovation in the financial sector through the provision of mobile money services and digital payments (M-Pesa, MoMo, or eTranzact). The adoption of these services triggered another leap in stages, as this new technology facilitated the financial inclusion of previously excluded households without the need to open a traditional bank account. China provides another example of leap-frogging in its payment system, virtually bypassing the use of banked cards and moving directly from cash to digital wallets (Alipay and WeChat Pay)2. Another example of leap-frogging comes from the region. In Brazil, several rural areas have moved directly from older technologies, such as Ethernet, to satellite connections without the need to deploy expensive fiber optic infrastructure. This technological leap has been key to bridging the digital divide in a country with vast geographic areas that are difficult to access3.
In the case of low-income countries, leap-frogging offers the opportunity to take advantage of new technologies to address existing development gaps and stimulate economic growth. Technology adoption can also facilitate the inclusion of populations with limited access to infrastructure and services. For middle-income countries, leap-frogging provides a potential way out of the middle-income trap, whereby a nation’s economic development stagnates, by enabling countries to move rapidly to a knowledge-based economy built on digital services and high value-added production.
Latin America needs to do a lot of work to improve financial inclusion. What can be done? […] Digitalization policies, more sensible microfinance and more advanced risk assessment would allow banks to broaden the base of who they lend to.
Based on an interview with Carmen Reinhart
LAC should make the necessary investments to underpin the technologies of the fourth industrial revolution. This would allow us to move from traditional industry to modern industry by accelerating the level of development, wealth creation and digital transformation in the post-pandemic stage. In particular, a recent study for Africa proposes actions that are crucial to facilitate the leap-frogging (Blimpo et al., 2017). First, it is critical to have the right regulatory ecosystem in place (see box 5.1). Second, the implemented innovation must have the potential to be scaled. Third, the public sector must prioritize the acquisition of skills and, fourth, investment in R&D must be encouraged to adapt the technology to the local context.
Building a vision of the future that allows LAC to avoid intermediate stages in its development requires the urgent identification of key sectors in which the use of technology can accelerate the transition from traditional to modern industry. In addition to accelerating wealth creation, this would also raise levels of development in the region. An essential component of this strategy involves maximizing the region’s natural advantages: the production of raw materials and the relative abundance of low-skilled labor. Technology, in this context, presents itself as a catalyst that can transform these resources into sources of sustained wealth.
Two actions are essential. First, to promote a modern agricultural sector that capitalizes on the comparative advantages derived from the region’s natural capital. The use of advanced technologies in agriculture will make it possible to improve productivity and sustainability, maximizing the region’s existing potential.
Second, a new industrial policy is needed to address the challenge of digitalization and its impact on labor markets, integrating the non-tradable services sector. This sector, characterized by informality and low productivity, will be essential to absorb the low-skilled labor that could be displaced by automation and digitalization of some processes.
These growth paths are complementary to industrialization and the specialization of certain countries in the export of tradable services, such as financial or information services. It is therefore essential for the region’s manufacturing sector to consider biodiversity and ecosystems not only as natural assets, but also as sources of wealth, particularly in the context of the energy transition. On the other hand, LAC must find ways to better integrate into global value chains (GVCs), either through improvements that are reflected in the simplification of procedures and processes, or through investments in key sectors that have a greater projection of insertion. Among these, modern tradable services or inputs associated with the energy transition appear as alternatives.
A comprehensive strategy such as the one proposed can position the region as a key player in the global economy, making the most of its natural and human resources.
Box 5.1 Mobile payment systems and digital banking in LAC
Barriers to the adoption of mobile payment and digital banking systems in LAC are strongly influenced by a regulatory ecosystem that, in many cases, has not adapted quickly enough to the rapid technological evolution. Fragmented regulations at the regional and national levels can hinder the implementation of innovative payment solutions, creating uncertainty among financial service providers and consumers. In addition, strict regulations on customer identification and verification, while necessary to prevent money laundering and fraud, can act as barriers to financial inclusion, as many potential users do not have the required documentation to access these services.
The lack of harmonized regulation across countries is a key constraint on the expansion of fintech services and digital payment systems. Each country has its own regulatory framework, creating a fragmented environment that makes standardization of payment methods and interoperability of services difficult. This leads to companies having to adapt to a different standard in each country, making it hard to expand and implement innovative solutions regionally. In some cases, there are legal loopholes surrounding certain technologies. Such is the case of digital wallets in Peru. For many years, the regulatory framework in that country did not specifically contemplate the operation and regulation of digital wallets. This generated uncertainty for fintech companies and for users, who were unclear about how to operate legally in this space. In the absence of adequate regulation, many companies were reluctant to invest in the development of this type of solutions.
Other countries in the region have created more favorable regulatory environments for the adoption of digital payments. For example, Brazil has implemented PIX, an instant payment system that enables fast and secure transfers through mobile devices, promoted by the Central Bank of Brazil. This system helped increase the adoption of digital payments by eliminating high fees and facilitating access to a wide range of users. Similarly, Mexico has promoted the use of mobile banking and digital payments through initiatives such as CoDi (cobro digital), which facilitates electronic payments using QR codes and is backed by the Government.
Despite these advances, there are still significant challenges that need to be addressed. The lack of adequate digital infrastructure in rural and less developed areas, as well as the low level of digital and financial literacy among certain segments of the population, limit the potential of mobile payment systems and digital banking. In addition, tensions between traditional financial system entities and fintechs can also complicate the regulatory landscape, generating resistance to change and innovation. It is therefore critical that Governments work together with the private sector to create regulatory frameworks that foster collaboration and innovation, enabling the benefits of digital payments to be accessible to all citizens in LAC.
Two examples of good practices are Brazil and Costa Rica, where the respective central banks have adopted an active role beyond the administration and oversight of the national payment system by providing common infrastructure and standards for ecosystem agents (Herrera et al., 2024).
Promoting the development of a modern agricultural sector
Until a few decades ago, the expansion of national income based on commodity exports was perceived as limited and unable to help the region take the leap to a path of sustained growth. While subsistence agriculture persists, LAC is increasingly important as a supplier of food to the rest of the world. In recent years, the region has stood out for its high food trade surplus, significantly larger than any other in the world. This is reflected in the high share of agricultural exports in LAC’s total exports. In 2023, 21 % of LAC exports came from agricultural products. For the OECD countries as a whole, analyzing the same period, this value was only 7 %. And for the countries in the BRICS matrix (Brazil, Russia, India, China and South Africa), the percentage of agricultural products was only 6 % in 2023. It is worth noting that these data are guided by the behavior of the Latin American export matrix, since the Caribbean matrix stands out for the weight of exports of services, driven largely by the preponderance of tourism.
Figure 5.1 LAC exports, 2023
Today, agriculture is a modern sector that represents a great opportunity for the region. Even with varying degrees of heterogeneity within and between countries, we find a sector that has been innovating and that relies on advanced production methods, thanks to the use of drones, satellite images, precision agriculture and cutting-edge genetics. Modern agriculture has the capacity to respond quickly, both to the changing standards imposed by large buyers—food processing centers and supermarkets—and to the demanding requirements of consumers. With the introduction of technological advances, significant productivity gains are unlocked, which become even more relevant under the pressures that mitigation actions demand in terms of land use in LAC. This innovation in the sector will also be critical in adapting to climate change. Technologies such as drip irrigation and genetically modified crops resistant to water stress, temperature change and pests, contribute to maximizing the use of arable land and water resources (Brassiolo et al., 2023).
To strengthen the role of agriculture as an engine of economic growth, the vertical transformation of the sector is necessary for it to employ more workers in more productive enterprises and become better inserted into global supply chains. These objectives imply promoting public-private partnerships and greater investment in innovation, as well as more sophisticated and productive processes (Ghezzi et al., 2022). Furthermore, this process of transforming agriculture must incorporate the notion of sustainability, especially in a context in which the bulk of the region’s emissions come from agriculture (Brassiolo et al., 2023).
Promoting productivity improvements in the non-tradable services sector
Industrialization has been the main engine of modern economic growth. In developing countries, manufacturing offered the advantage of employing low-skilled workers. However, today’s manufacturing industry tends to innovate through high-skilled workers, which reduces the demand for those with low levels of education. Automation has accelerated this trend. The advantage that developing economies used to have in terms of the relative abundance of unskilled labor is now in jeopardy. This new reality forces the service industry to become the sector that absorbs most of this displaced labor, particularly unskilled workers (Rodrik and Sandhu, 2024; Nayyar et al., 2021).
With services emerging as the main source of new jobs for low-skilled labor, industrial policy actions need to be reoriented to generate broad productivity improvements in this sector of the economy. This is the only way to bring about substantial increases in aggregate income. Productivity gains are also central to the equity agenda, as the only sustainable means of lifting people out of poverty is through well-paying jobs (Rodrik and Stiglitz, 2024). This reality is particularly important considering that approximately 80 % of total household income in LAC comes from labor income (Rodríguez Castelán et al., 2016).
In some countries, such as India and the Philippines, tradable service industries have been created that tend to be skill-intensive, as is the case of information technology services, financial services and business process outsourcing. In those sectors, productivity improvements can be very dynamic, but they are not the ones that will absorb the largest amount of available labor (Nayyar y Vargas da Cruz, 2018). From a development point of view, tradable services face the same disadvantage as manufacturing firms oriented to global value chains: they have limited potential to generate large amounts of employment for the abundant low-skilled labor force.
The informal sector is the largest employer in Latin America and the Caribbean. Available jobs come from micro and small enterprises or self-employed workers. To contribute to a generalized increase in productivity, the challenge is to generate productivity improvements in sectors that offer typically non-tradable services and absorb a lot of low-skilled labor, such as those linked to retail trade and care services (Rodrik and Stiglitz, 2024). These sectors, which in our region incorporate abundant informal labor, have low productivity levels and have never been a specific target of productive development policies in the region. While it is true that many workers in these sectors resort to these jobs as a survival mechanism, a portion of these micro and small enterprises have room to introduce strategies and policies that promote labor productivity gains.
Rodrik and Sandhu (2024) outline a new industrial policy focused on non-tradable services based on four pillars. First, work with large, established and relatively productive companies to incentivize them to increase employment, either directly or through their local supply chains. For example, the Government could implement partnerships with deliveryservice platforms, which became popular during and after the pandemic, and which employ a largely young population. The Government can help recruit delivery drivers through fairs, regulation adjustment and publication of databases of potential candidates.
The second pillar is to focus on smaller enterprises and seek to improve their productive capacities through the provision of specific public inputs. Such inputs could be management training, loans or subsidies, skills training for workers, specific infrastructure or technological assistance. Given the heterogeneity of firms in this segment, policies in this area require a differentiated approach depending on their size. In this pillar, a mechanism for selecting firms with greater growth potential is made explicit, since the reality is that not all of them become productive and successful. A key area in this line of action is access to financing for the creation and expansion of innovative firms.
The third pillar is to encourage the use of technology to complement the skills of low-skilled workers. This fundamental strategy seeks to enable less educated workers to rely on technology to increase the range of tasks they can perform, so that they can do some of the jobs usually reserved for more skilled professionals. This line of action conceives artificial intelligence and technology as mechanisms to empower less skilled workers. In this way, technology will cease to be merely a threat to their jobs. In medicine, and in particular in the provision of care services for older adults, digital tools have great potential to make it easier for less experienced caregivers to offer more advanced services to their patients.
The fourth pillar advocates training for less educated workers, but with a clear emphasis on offering assistance programs to job seekers to improve their employability. This implies, in turn, increasing the probability of job retention and promoting eventual promotion (Carranza and McKenzie, 2024). A good example along these lines is the «Youth Building the Future» program, implemented in Brazil, Colombia and El Salvador, and more recently, in Mexico (Kleijn et al., 2017). The program has three components: partnerships with the private sector; training, support for employment and accompaniment; and generation of evidence of the impacts in order to take the program to a larger scale and replicate it in other countries
The role of subnational Governments is crucial in the design and implementation of industrial policies focused on the service sector. Given that many opportunities for development and economic growth are deeply connected to local realities, it is essential that targeting decisions-identification, selection of sectors and groups to which policies are directed-be made from a territorial approach. In particular, a new industrial policy focused on services such as tourism, technology or professional services requires the promotion of local innovation clusters, support for SMEs and the implementation of strategies to attract investments that respond to the demands and particularities of their economies, primarily by subnational Governments. Moreover, they are the ones who can best coordinate alliances between the private sector, academia and civil society, fostering the development of human capital and adequate infrastructure.
Conceiving biodiversity and ecosystems as a source of wealth
LAC is an exceptionally rich region in terms of ecosystems and biodiversity. The region contains 6 of the 17 most biodiverse countries in the world (Mexico, Venezuela, Colombia, Ecuador, Peru and Brazil). The region is also home to approximately 60-70 % of all known species, despite representing only about 16 % of the global land area. This includes more than half of the plant species, 40 % of mammal, bird and amphibian species, and 30 % of reptile species (Brassiolo et al., 2023). This immense wealth provides ecosystem services that contribute as a source of protection and adaptation to climate change, through the moderation of extreme weather events and the regulation of local climate.
Ecosystem services also determine the economic activity of our nations. Rich biodiversity influences agricultural productivity and species diversity is linked to the development of the fishing industry or the tourism sector, and the availability of minerals (particularly critical minerals and rare earths). Beyond the immediate economic benefits, biodiversity in LAC also represents a long-term strategic wealth. Instead of relying exclusively on the extraction of natural resources, such as minerals or oil, the region has the opportunity to transform its ecosystems and species into valuable assets for industries such as pharmaceuticals, agribusiness and biotechnology, sectors that could grow exponentially with the support of appropriate policies and the integration of advanced technologies. Tourism also emerges as a key sector with a sustainable approach to wealth generation based on diversity (see Box 5.2).
Much of Latin America’s growth effort will be connected to the agricultural sector, which also has a very important link to the tourism sector. Our agriculture is part of the great topographic beauty of the region. Latin America’s natural assets have to be combined to take advantage of its agricultural and agro-industrial capabilities, in addition to its capacity to attract tourism.
Based on an interview with Augusto de la Torre
The pharmaceutical industry can benefit enormously from the vast catalog of plant and animal species that inhabit LAC. The medicinal properties of many of these species have yet to be explored or are in the early stages of commercial development. By focusing on research and sustainable development of products derived from biodiversity, pharmaceutical companies can discover new drugs, treatments and therapies. The sustainable approach is crucial, as it ensures that these resources remain available in the long term, avoiding overexploitation and ecosystem degradation.
In the agro-industrial sector, biodiversity also offers enormous potential for the development of high-value commercial products that can position LAC in specialized markets. A clear example is cacao, whose genetic diversity in the region makes it possible to grow unique, high-quality varieties that are ideal for the production of gourmet chocolates. These special varieties, which stand out for their distinctive flavor profiles and aromatic complexities, can be exploited in niche markets that value exclusive, artisanal products, significantly increasing their commercial value. By developing a premiumagricultural product offering, the region can generate higher revenues and establish its reputation as a leader in quality and sustainability.
Likewise, the region’s plant and animal biodiversity can be used to innovate food and agro-industrial products. The growing global demand for organic, healthy and sustainable food is not fully satisfied. Producers can take advantage of local varieties of fruits, herbs and grains, not only to improve food security, but also to develop functional foods, known as superfoods, with specific nutritional benefits, which are in high demand in international markets. The key, again, is to encourage a sustainable farming approach that conserves biological resources while generating significant income for producers and local economies
Biotechnology, meanwhile, can harness biodiversity to develop innovative solutions in a wide range of sectors, from agriculture to energy. Technologies such as gene editing, biomanufacturing and biological synthesis can transform natural resources into sustainable, high-value products such as biofuels, biodegradable plastics and more environmentally friendly chemicals. In addition, the development of biotechnologies that promote the conservation of ecosystems and the rehabilitation of degraded lands would generate a synergy between biodiversity preservation and sustainable economic growth.
A very important element of productivity growth, of the productive capacities of companies already organized as such, is innovation. And innovation, on the one hand, in the sense of adopting better production techniques, but also, and above all, in the sense of inventing better products and services that are more desirable for people, but that also generate more added value for the company, for the economy and for the people who are linked to that company.
Based on an interview with Marcela Eslava
Box 5.2 Tourism: a source of sustainable and inclusive growth
LAC responds to the growing demand for nature and cultural value tourism. In terms of contribution to GDP, the Caribbean stands out with 26.8 %, significantly above the world average of 8.9 % and 7.9 % for Latin America. In terms of employment from this sector, the Caribbean also stands out with 17.7 %, compared to 10.5 % worldwide and 7.7 % in Latin America. Tourism has also become a sector with a high participation of women, especially in the Caribbean, where female labor participation is 62.2 %. Latin America has 54.7 % of women in the sector, a figure similar to the world average of 54 %. In addition, the tourism sector also represents a gateway to the labor market for young people in the region. In fact, youth employment in this sector is so important that it is higher in the Caribbean (30 %) and Latin America (25 %) than in the rest of the world (20 %) and, on the other hand, one out of every three young people starts their working life in the tourism sector.
There are three strategic advantages in the sector that are aligned with the objectives of inclusive and sustainable growth. First, the jobs generated by tourism are difficult to replace with technology (i.e., hotels, restaurants, tour guides, etc.) and tend to incorporate low-skilled labor (see subsection 5.1.2 in this chapter). Second, it is a resource that does not run out as long as it is managed sustainably. Finally, new global trends and consumer demand call for the promotion of a new tourism model that places greater value on culture and exchange with the local population, as well as on environmental responsibility.
CAF’s strategy seeks to promote a model of tourism that is greener, more inclusive, innovative, creative and equipped with new digital technologies. This model requires, first and foremost, investments in an environmentally responsible and low-carbon sector that is resilient and adapted to climate change. Also, the incorporation of a mitigation agenda that achieves the regeneration of ecosystems and promotes the conservation of protected areas.
Secondly, the new model should promote tourism with a gender focus, both on the supply and demand side. It should also take more account of the needs of people with disabilities and include a new business model that builds on the advantages of community-based tourism.
Third, the destinations and types of tourism offered must incorporate new products. Innovation in the sector relies on the region’s ability to incorporate the use of technology and digitalization, especially to facilitate access for more consumers.
Fourthly, promoting creative tourism products is key to leading the bid for cultural tourism. In recent years, some consumer groups have revealed their preferences for gastronomy and enology and, in the case of cities, the demand for museums, theaters and cultural centers has reinforced the need to make the necessary investments in these attractions. In addition, a greater appreciation of indigenous and Afro-Latino culture may open up even larger markets based on the region’s historical heritage.
Finally, a better equipped tourism sector is key to implementing several of the lines of action outlined above. This equipment is not limited to investments in infrastructure, especially resilient and sustainable infrastructure, but also includes greater connectivity and security at destinations.
[…] Going back to tourism, we need to improve transportation in the Caribbean. We do not have a good interregional transportation system […] The problem with interregional travel is that there are not enough flights available and they are very expensive […] We also do not have a regional ferry service […] We need to develop the Caribbean’s capacity in transportation, both air and sea […] We can greatly improve our tourism product.
Based on an interview with Colm Imbert
The Caribbean is struggling, like other parts of the world, with problems related to the proliferation of crime […] There is a direct relationship between crime and economic performance […] People are not going to feel safe to come and visit and spend their money. And so, the economy grinds to a halt.
Based on an interview with Karen-Mae Hill
In the context of the energy transition, LAC has important geographical advantages for the development of clean energy (see figure 5.2). In particular, the geography of the region offers important comparative advantages for electricity generation from solar and wind sources (Allub et al., 2024). Thus, for example, the Puna area (which includes territories of Argentina, Bolivia, Chile and Peru) is the area with the greatest practical potential for photovoltaic energy in the world. Using non-conventional energy sources on a small scale can be a cost-effective way to reach isolated regions in the vast geography of our region. Thus, it is expected that the share of renewable energies in the region’s electricity matrix will increase in the coming years. As discussed in chapter 4, solar and wind energy will play even more important roles in the midst of an accelerated process of electrification of the total energy matrix (see figure 5.3).
For the world to decarbonize, it’s going to need to electrify everything it can, and make that electricity in a clean way, such as transportation with electric vehicles. There are many areas of production that are involved in creating the things that would allow the world to decarbonize. Many of them require critical minerals. Latin America is potentially rich in those critical minerals. Bolivia is the country that has the largest lithium reserves in the world; Chile and Argentina also have gigantic lithium reserves, and Latin America’s copper reserves are enormous. There is a whole role that the region can play in facilitating the decarbonization of the world.
Based on an interview with Ricardo Hausmann
Figure 5.2 Clean electricity generation by region
Figure 5.3 Share of solar and wind energy in the total electricity matrix, current scenario and announced commitments for Latin America and the Caribbean
The incorporation of tariffs and trade restrictions based on the carbon content of goods and services will make access to clean energy an important competitive advantage. These potential trade barriers could promote the location of companies in countries with clean, stable and cheap energy (powershoring). Since decarbonization will also promote the formation of value chains to meet the demand for clean energy, the region should take advantage of its comparative advantages in producing renewable energy and access to minerals such as lithium and copper to expand its participation in GVCs. For example, according to Our World in Data (2023), by 2022, 58 % of electricity in the region was generated from clean sources compared to 36 % globally.
The availability of renewable and cheap energy is a necessary but not sufficient condition to convince companies to operate in the region. Reliable and attractive business environments are also required, which contribute to the consolidation of productive investments (Allub et al., 2024) .The good news is that some progress has been made. One example is Mexico, which also has the advantage of its proximity to the United States (nearshoring) in the case of the automotive and electronics sectors. Chile has also become a destination for companies in sectors such as copper mining and green technologies, and Brazil for technology and agricultural companies.
Expanding positioning potential in global value chains (GVCs)
Trade policy is currently influenced by geopolitical factors (e.g., the imposition of tariffs on Chinese products by the United States, the closing of borders due to armed conflicts or the use of sanctions schemes) that end up conditioning global trade and the formation of GVCs. The rivalry between China and the United States shows no signs of abating in the short term. In addition, the emergence and prevalence of other wars in Europe and the Middle East have led to the location of companies in countries perceived as allies and/or less likely to be part of the confrontations. As a low war-risk region, LAC can position itself as a reliable supplier of inputs.
In recent years, the United States, China and Europe have implemented various bans, restrictions and licensing requirements for exports and imports, in a historical stage in which many of these measures arise from geopolitical positioning motivations. Although some LAC countries with complex internal contexts have been affected4, in general, the region has been one of the least exposed to the imposition of these measures (Estevadeordal et al., 2024).
Over time, our trade openness has been extremely limited compared to other regions. Such levels of openness are particularly low for South American countries (Drakopoulos, 2024). Currently, the region shows limited progress in terms of its insertion into global value chains. Figure 5.4 shows that, with the exception of Mexico, foreign value added in the total value-added exports of LAC economies is very low. Although some countries have a significant share of inputs (e.g., Uruguay, El Salvador and Paraguay), their level of foreign integration is still very low. Compared to Asia or Europe, LAC has lower levels of participation in backward or forward linkages, i.e., between the productive sector and its suppliers, and the productive sector and its consumers, but also shows greater weakness in the development of global chains within the region (Estevadeordal et al., 2024).
The other very important element of international trade, which has to do with inputs, is the ever-deepening development of global value chains. The fact that I can produce an input here that someone else is going to use, or a piece of a good that someone else assembles or complements somewhere else so that it is finally built in a third geography of the world is a potential channel for growth, which has been expanding exponentially in the world, and in which Latin America still has a lot of room to insert itself and take better advantage of these gains.
Based on an interview with Marcela Eslava
Figure 5.4 LAC participation in global value chains
For LAC to take advantage of the current geopolitical changes, the region’s Governments need to invest in substantial improvements in their trade facilitation levels, which remain well below those of more advanced regions (see figure 5.5). Trade facilitation indices in LAC tend to show uneven performance, with some countries making progress in simplifying customs procedures and digitalization, while others face significant challenges in infrastructure and regulation. This variability means that while some economies are improving their global competitiveness and attracting more investment, others risk falling behind, limiting their ability to fully integrate into international value chains and reap the benefits of global trade.
By imposing more stringent requirements in terms of sustainability, quality and traceability, global markets are setting the pace for LAC companies to adapt to them, incorporating practices that improve the competitiveness of their goods and services. To this end, it is essential that both the public and private sectors invest in technical infrastructure, capacity building and improvements in governance to facilitate the adoption of these standards. In addition to opening up new market opportunities, certifications linked to environmental, social and governance (ESG) practices allow Latin American products, such as agro-industrial products, to stand out in premium segments, contributing to greater diversification and productive sophistication.
Figure 5.5 OECD trade facilitation indices 2022
Transparent and stable legal frameworks are also essential for attracting foreign direct investment. It is also important to improve specific legal frameworks that facilitate the fight against corruption and money laundering, which helps mitigate the risk associated with interacting with sanctioned partners, suppliers or jurisdictions. Aligning domestic policies with the environmental and technological standards of strategic trading partners, such as Europe and the U.S., can position the countries of the region as attractive partners in the face of new industrial policy conditions in advanced economies. Overall, diplomatic efforts to promote LAC as an attractive region for international capital will be essential.
In this context, the energy transition offers new opportunities for the region’s insertion in GVCs. On the one hand, the technologies that will appear or consolidate—and that will be indispensable for this transformation—require critical minerals that are abundantly found in the region (see figure 5.6). Photovoltaic solar panels, electricity grids and wind energy, for example, will require large quantities of copper. In the case of electric vehicles and batteries, there will be a high demand not only for copper, but also for cobalt, nickel, rare earths and lithium (Allub et al., 2024). On the other hand, some countries such as Argentina, Venezuela or Brazil have ample natural gas reserves. The construction of liquefaction plants could allow a differential insertion of the countries from the region as energy exporters. In addition, the region has the opportunity to consolidate itself in the medium term as a producer and, eventually, as an exporter of low-emission hydrogen.
It also has great potential to position itself in GVCs through the expansion of tradable services such as financial, information technology and business consulting. Such services, which can be exported without requiring the physical presence of the supplier, offer an opportunity for the region to diversify its export base and reduce its dependence on raw materials. Countries such as Costa Rica and Uruguay have demonstrated that with the right policies it is possible to create competitive ecosystems that attract foreign investment in high value-added sectors, especially in technology and shared services.
The growing skilled workforce, particularly in sectors such as technology and digital innovation, is another of LAC’s advantages in offering tradable services in high-value areas. In many countries, increasing access to higher education and the proliferation of technology centers have produced a pool of young, talented professionals. Multinational companies have begun to set their sights on cities such as Bogota, Buenos Aires or Monterrey as emerging technology hubs for the development and export of software, design and data analysis services. This allows LAC to capture a larger portion of the value added generated by these dynamic sectors.
Other areas such as the development of fintechs (see chapter 2 and box 5.3), business process outsourcing (BPO), artificial intelligence and big data analysis also offer the region the opportunity to specialize. To position itself as a competitive provider of highly skilled services globally, LAC requires the integration of new technologies and the modernization of its regulatory frameworks. This will allow it to attract investment and generate quality jobs, while improving its insertion in global value chains.
Figure 5.6 LAC’s global share of production and reserves of critical minerals (2022)
A. Critical minerals production
B. Critical mineral reserves
Box 5.3 Fintech companies in LAC
The LAC fintechecosystem is growing rapidly. Today there are companies that have managed to transform financial services in the region and project themselves internationally. An outstanding and widely known example is Mercado Libre, now one of the largest e-commerce companies in the region, which has developed Mercado Pago, its own digital payments platform. Mercado Pago has been fundamental for the financial inclusion of millions of people and has enormous potential to integrate into global value chains by facilitating cross-border payments and financial solutions for both consumers and small and medium-sized businesses.
Another example is Nubank, now one of the world’s largest fintechs, which was born in Brazil and has expanded its presence in markets such as Mexico and Colombia. Nubank has managed to democratize access to credit and banking services, challenging traditional banking with its digital approach. This company has demonstrated that fintechs can scale quickly and compete in international markets, while taking advantage of the common characteristics of emerging economies, where financial digitalization and inclusion are urgent needs.
Clip, in Mexico, specializing in mobile payment solutions and point-of-sale terminals, and Ualá, in Argentina, a platform that offers prepaid cards and financial services through an app, are other examples of LAC fintechs that are growing and attracting international investment. Clip has been key in the digitalization of payments for small businesses in Mexico, and its technology is highly exportable to other emerging markets. Ualá, with a presence in Mexico and Argentina, has followed the same path, expanding and facilitating financial inclusion through technology.
By their nature, these companies are innovative in their solutions and have the potential to integrate into global value chains by facilitating fast and secure transactions, leveraging technologies such as blockchain and artificial intelligence to optimize financial processes. These capabilities make them attractive for collaborating with large international players in sectors such as trade, logistics and global banking, as well as allowing them to adapt to the regulatory frameworks of various countries and expand their reach beyond the region.