Transforming production in Latin America and the Caribbean requires closing significant financing gaps in key sectors – especially those prioritised by countries under their productive development policies – through enhanced mobilisation of public and private resources. This chapter outlines a multipronged strategy to address these challenges. It highlights the importance of domestic resource mobilisation, including tax system reforms and the catalytic role of national development finance institutions. The chapter also explores capital market deepening, particularly through corporate and sustainable finance instruments, and the expansion of venture capital ecosystems. Finally, it analyses how foreign direct investment can contribute to production transformation by supporting diversification, technology transfer and green growth. Together, these measures provide a comprehensive framework for financing the region’s production transformation.
Latin American Economic Outlook 2025
Abstract
Improved mobilisation of public and private resources is essential to finance investment in production transformation in Latin America and the Caribbean (LAC). Overall investment remains very low, with the private sector providing the bulk of financing. On the public side, limited fiscal space makes it crucial to ensure that expenditure is efficient and effective, maximising its impact. Closing large financing gaps in key production sectors – particularly those prioritised by LAC countries and their territories’ productive development policies – and reversing the persistent trend of underinvestment requires a multifaceted approach, combining complementary instruments to channel both domestic resources and international investment.
Domestic resource mobilisation will be essential. Limited tax revenues in several LAC countries constrain the ability of governments to expand and improve public services and to strengthen institutions. This entails rebalancing tax systems to increase equity, efficiency and simplicity; analysing corporate effective tax rates; and reviewing the design of tax incentives to ensure that they support targeted investments effectively without causing undue revenue losses. Strengthening tax morale will also be necessary in order to improve compliance and foster a fairer tax culture, allowing well-designed tax policies and reforms to become permanent and resistant to political backlash.
National development finance institutions (DFIs) working closely with multilateral development banks (MDBs) and bilateral DFIs can play a catalytic role in promoting investment aligned with productive development policies. Heterogeneity is high among national DFIs in terms of institutional and financial capacity. Accordingly, each national DFI, within its own capacity, continues to play a central role in advancing production transformation efforts in the region. However, more needs to be done to better harmonise mandates and financing strategies with productive priorities defined at the national and territorial levels. MDBs and bilateral DFIs can support these efforts by providing cheaper loans to reduce borrowing costs. In their role as knowledge hubs, they can also facilitate co-ordination among national DFIs to align with their productive development policy strategies, offer technical expertise and help scale up investments by supporting the development of sector-specific project pipelines.
Capital market deepening, particularly in corporate bonds and sustainable finance instruments such as green, social, sustainability, sustainability-linked and blue (GSSSB) bonds, is another important avenue. Capital markets in the region remain small, heterogeneous and concentrated. In 2024, equity market capitalisation reached 37.4% of gross domestic product (GDP), below the OECD level of 64.4%, while in 2023, the outstanding amount of corporate bonds in LAC represented around 2% of the global total. Expanding these markets can provide long-term financing for production sectors with high impact potential; doing so requires stronger institutional investor participation, more robust sustainable finance frameworks with stronger supervisory and monitoring mechanisms, greater financial literacy and deeper regional integration. In parallel, strengthening the venture capital ecosystem is essential to support early-stage and innovative enterprises.
Quality foreign direct investment (FDI) can also be channelled towards the objectives of production transformation. Attracting FDI to sectors such as renewable energy, digital infrastructure and medium- to high-tech industries has the potential to enhance production capacities, diversify the export basket and support technology transfer. It can also contribute to the creation of quality jobs and the greening of energy systems across the region.
This chapter will begin by addressing the financing gap in key production transformation sectors, followed by an analysis of domestic resource mobilisation through an examination of tax system structure, including corporate effective tax rates, tax incentive design and tax morale, and the role of national DFIs in scaling up investment. It will then explore avenues to attract international investment, including developing capital markets and promoting FDI.
LAC shows a persistent trend of low investment in key production sectors such as infrastructure, the digital economy and agriculture, resulting in significant financing gaps that constrain development. In 2024, overall investment in the region – public and private – averaged 19.5% of GDP, below the level in advanced economies (22.3%) and significantly lower than in emerging Asia (37.5%) and the Middle East and Central Asia (26.1%) (IMF, 2025[1]). Furthermore, the LAC region faces an average annual financing gap of approximately USD 99 billion until 2030,1 reflecting the average shortfall across six Sustainable Development Goal (SDG) priority areas, all linked to one or more production sectors: social protection and decent jobs; education transformation; food systems; climate change, biodiversity loss and pollution; energy transition; and inclusive digitalisation (OECD et al., 2024[2]; UNCTAD, 2023[3]).
Underinvestment has left LAC with ageing and insufficient infrastructure
The infrastructure gap in LAC is significant when measured against targets such as achieving a specific economic growth rate, reaching certain coverage levels and matching the infrastructure stock of another country or group of countries (Serebrisky et al., 2015[4]). Over the past decade, infrastructure investment in the region has averaged 1.8% of GDP (Brichetti et al., 2021[5]; OECD et al., 2024[2]). However, to adequately support production transformation and meet minimum infrastructure needs – including new projects, maintenance, asset replacement and investment in the four key sectors (water and sanitation, electricity, transportation, and telecommunications) – an annual investment of 3.12% of GDP will be required until 2030. This indicates that the region underinvests in infrastructure by about 1.3% of GDP annually. In comparative terms, LAC’s required annual investment of 3.12% of GDP is higher than the 2.68% in the ASEAN-5 (Indonesia, Malaysia, the Philippines, Thailand and Viet Nam) and the 2.97% global average but slightly lower than the 3.30% in G7 economies (Brichetti et al., 2021[5]).
Infrastructure shortfalls have a serious negative impact on the production sectors of the economy. Poor transport systems increase logistics costs; unreliable electricity and water supplies hinder industrial and agricultural production; and irregular telecommunications and connectivity inhibit economic growth. Failing to address the infrastructure gap can reduce annual GDP growth in the region by up to 1 percentage point – equivalent to around 15 percentage points of lost growth over a decade. This foregone output, approximately USD 900 billion, directly affects growth and living standards, especially for low-income populations. Vulnerable households depend more heavily on public infrastructure and pay more for lower-quality services, devoting an average of 16% of their income to these services compared to 13.5% for higher-income households (Cavallo and Powell, 2019[6]). These inequalities not only reduce overall economic resilience but also limit the capacity of broad segments of the population to participate in and benefit from production transformation, particularly in sectors where improved infrastructure is essential for competitiveness and innovation. The payoff from eliminating the infrastructure gap in LAC would be substantial, as an increase of infrastructure investment to OECD levels would boost productivity growth in the region by 75% above its recent average, potentially doubling per capita income within a generation (Cavallo and Powell, 2019[6]).
The financing gaps in the digital and agricultural sectors limit transformation efforts in LAC
Underinvestment in the digital economy continues to constrain production capacity and transformation efforts in LAC. In the digital economy, the region faces widespread shortfalls in broadband quality and coverage, particularly in low-income and rural communities. Closing the inclusive digitalisation gap would require USD 221 billion annually2 – the largest financing gap among the six SDG priority areas (OECD et al., 2024[2]). An additional USD 68.5 billion would be needed to reach OECD-level connectivity (Antonio García Zaballos, 2023[7]); this would help advance productivity and support a modern, knowledge-based transformation of production.
At the same time, persistent financing gaps in agriculture investment in LAC are impeding rural development and productivity growth. Smallholder farmers, who are the backbone of rural livelihoods, continue to face limited access to formal credit and essential inputs. Closing an estimated annual financing gap of USD 98 billion is needed to transform the food system in LAC, with the majority needed in South America (USD 73 billion) and Central America (USD 23 billion) (OECD et al., 2024[2]; UNCTAD, 2023[8]). This aligns with estimates of a global USD 170 billion agri-finance gap for smallholder farmers, to which LAC contributes significantly. Investment in agricultural research and development (R&D) in the region is also notably low, at just 0.4% of agricultural GDP, far below the 2-3% benchmark in advanced economies (Alejandro Nin-Pratt, 2018[9]).
Ongoing fiscal deficits in these two sectors severely limit the region's ability to boost productivity, foster innovation and drive a more inclusive and sustainable production transformation.
Given the region’s diversity, enhancing tax collection through a rebalanced tax structure, improved incentive design and stronger tax morale will require country-specific policy mixes tailored to each national context. Corporate income tax (CIT) is not the only important source of revenue in LAC – personal income tax, social security contributions and value-added tax also play major roles. This section focuses on CIT, given its specific impact on production investment in the region.
Tax revenues in LAC are too low to support long-term production transformation
Expanding tax collection and rebalancing the tax structure are essential to support efficient public spending and long-term production transformation in several countries in the region. Enhancing the design of the tax system to promote more equitable growth, while integrating social, environmental and digitalisation considerations, can support the development of a resilient, inclusive and sustainability-oriented production base and help finance the green and digital transitions (OECD et al., 2024[2]). Despite high heterogeneity, tax revenues remain low in LAC, averaging 21.3% of GDP in 2023, far below the OECD average of 34% (OECD et al., 2025[10]). The tax structure is overly reliant on consumption taxes and corporate income taxes, limiting its redistributive impact. In 2023, personal income tax and social security contributions made up just 26.1% of total tax revenues (5.6% of GDP) in LAC, compared to 48.4% (16.9% of GDP) in OECD countries (Figure 3.1). Conversely, CIT contributed more to LAC (18.7% of total tax revenues) than to the OECD (12%). Taxes on goods and services accounted for 47% of tax revenues (10% of GDP), with value-added tax alone contributing 28.5% of tax revenues (6% of GDP) (OECD et al., 2025[10]). Rebalancing the tax structure can enhance equity and ensure stable, sufficient resources for investment in key sectors such as sustainable infrastructure (OECD et al., 2025[10]).
Note: The LAC average excludes Venezuela due to data issues. Ecuador is excluded from the LAC average for personal income tax and corporate income tax revenues due to data quality issues. The OECD average corresponds to the 2022 average and represents the unweighted average of the 38 OECD Member countries, including Chile, Colombia, Costa Rica and Mexico.
Source: (OECD et al., 2025[10]).
Environmentally related taxes, such as energy taxes and pollution levies, as well as other carbon pricing instruments, offer revenue potential and a strategic lever to reshape production systems (OECD et al., 2024[2]; 2025[10]). By internalising environmental costs, these taxes can directly influence business decisions, pushing firms to adopt cleaner technologies, invest in energy efficiency and transition towards circular and low-carbon business models. This is essential for aligning fiscal policy with the long-term goals of sustainable productivity. For instance, higher fossil fuel taxes in LAC countries could help to create a level playing field and increase the competitiveness of hydrogen energy solutions (Cordonnier and Saygin, 2022[11]). In parallel, rationalising and gradually phasing out fossil fuel subsidies can free up public resources for more productive and sustainable uses. However, to ensure an inclusive transition to cleaner energy, these reforms must be accompanied by targeted measures that shield vulnerable populations from fuel price volatility. Additionally, streamlining inefficient corporate income tax incentives and ensuring coherence with environmental objectives can help to avoid distortions and promote greener forms of growth (OECD et al., 2023[12]).
To unlock the fiscal space needed to boost production transformation, LAC countries must strengthen the progressivity and efficiency of their tax systems (OECD et al., 2024[2]). This involves increasing the share of direct taxes like personal income tax in several LAC countries, eliminating regressive and inefficient tax expenditures and broadening the tax base. In parallel, countries should redesign value-added taxes to minimise regressivity, for instance, by refining exemptions and enhancing targeted tax relief for low-income households (OECD et al., 2024[2]). To foster efficiency, it is also essential to advance digitalisation, strengthening data governance, enhancing oversight and improving taxpayer services.
High effective corporate tax rates in LAC could dampen incentives to invest in the region
Relatively high tax rates on corporate profits in the LAC region could deter competitiveness and investments in key production sectors for some firms. In 2023, average statutory CIT rates in LAC were 21.1%, close to the OECD average of 23.7% (OECD, 2024[13]). However, revenue levels and statutory tax rates do not show differences across jurisdictions regarding several important features. These tax provisions include allowances for fiscal depreciation, deductions for interest payments and equity financing. Because these provisions can significantly affect tax liabilities, their level of generosity is vital for the correct measurement of effective taxation across tax systems (Hanappi et al., 2023[14]).
LAC countries have relatively high forward-looking effective average tax rates (EATRs) and effective marginal tax rates (EMTRs).3 EMTRs are a useful tool for best gauging the effective tax burdens on investment projects. This methodology is based on assumptions about the financial returns of hypothetical investment projects, to which existing tax provisions are applied to determine the amount of tax owed and that do not require information from tax returns. A study analysing 21 LAC countries found that the EATR for a given investment project in 2021 averaged 23.9%, compared to 21.9% in OECD countries and 17.1% in the remaining countries in the sample, which included data from countries in Emerging Europe, the Middle East and Central Asia, Emerging Asia, and sub-Saharan Africa (Hanappi et al., 2023[14]). At the country level, Chile, Brazil and Argentina had the highest EATRs (Figure 3.2). In the case of EMTRs, the average rate was 13.8% in the LAC region, almost double the average in OECD countries (7.6%) and the remaining countries (7.8%); Argentina, Bolivia, Chile, Jamaica and Peru were in the top ten.
Note: The LAC average includes only countries with a positive corporate income tax statutory tax rate. Therefore, The Bahamas and Belize are not included. The “Other countries” includes data from Emerging Europe, the Middle East and Central Asia, Emerging Asia, and sub-Saharan Africa.
Source: (Hanappi et al., 2023[14]).
Corporate income tax incentives need better design to help mobilise domestic and foreign investment
CIT are widely used across LAC, but they can entail significant costs and risks. Evidence shows little indication that they play a decisive role in investment location decisions, suggesting they are often redundant – that is, investment would have occurred even without them (IMF et al., 2015[15]). Other elements of the investment climate are often more influential in shaping investment choices. Furthermore, CIT incentives can generate substantial fiscal and economic costs, including foregone revenue, windfall gains and economic distortions, may be of limited effectiveness and can increase the risks of tax avoidance (OECD, forthcoming[16]). They may favour certain sectors, activities or regions over others, leading to inefficient resource allocation and crowding out more productive investment (James, 2020[17]). In addition, they can undermine tax equity by disproportionately benefitting larger, well-connected corporations that are better able to exploit complex incentive regimes, while disadvantaging smaller firms (Zolt and Schill, 2015[18]). Moreover, CIT incentives often increase administrative and compliance burdens for both tax authorities and businesses, straining institutional capacity and reducing overall transparency (OECD, forthcoming[16]). For these reasons, careful cost-benefit analyses are essential before granting tax incentives, which should be considered within broader investment promotion and facilitation frameworks (World Bank Group, 2020[19]; IMF et al., 2015[15])
CIT incentives in LAC have resulted in significant foregone revenue, much of it due to tax exemptions. Tax expenditures accounted for 4.0% of GDP on average in foregone revenue across 18 LAC countries, with CIT incentives representing 0.9% of GDP, second only to tax expenditures on goods and services, which amounted to 2.2% of GDP (Table 3.1). Of total tax expenditures, 72% were due to tax exemptions (CIAT, 2025[20]).
Corporate income tax incentives have the potential to increase domestic and foreign investment if they are well designed and implemented in a favourable investment climate. CIT incentives or investment incentives are targeted tax provisions that deviate from the standard tax treatment in a country, resulting in reduced or postponed tax liability, with the objective of promoting investment (Celani, Dressler and Wermelinger, 2022[21]). By offering such incentives, countries provide measurable economic advantages to specific enterprises or groups of enterprises in the aim of steering investment into priority sectors or regions (James, 2020[17]). Incentives can work more effectively for certain types of investments, in specific situations and in particular sectors. However, incentive design is crucial in the effective achievement of policy objectives and in their costs. Existing policy guidance prioritises expenditure-based tools (e.g. accelerations, allowances, credits) over income-based tools (e.g. CIT exemptions, reduced CIT rates), as expenditure-based tools have been shown to encourage investment with lower revenue losses (OECD, forthcoming[16]). A strong investment climate – including sound governance, transparency and clear standards – can significantly enhance the impact of CIT incentives on FDI, with effects up to eight times greater in favourable environments (James, 2020[17]).
CIT incentives in LAC countries are often used to attract FDI that aims to support job creation, technology transfer and export promotion (Agostini and Jorrat, 2013[22]; ECLAC/OXFAM International, 2020[23]; James, 2020[17]; Artana and Templado, 2015[24]). The fact that FDI can promote employment generation prompts many governments to link tax incentives to job creation targets or to focus the incentives on regions with high unemployment or informality. FDI can also facilitate technology transfer, with governments encouraging high-tech investments by offering incentives for R&D, advanced equipment acquisition and sector-specific innovation. Export-oriented FDI, due to its mobility and growth potential, often receives targeted incentives as countries compete to attract such investments (Zolt and Schill, 2015[18]). Increasingly, CIT incentives are also being aligned with sustainability goals, for instance, by rewarding investments that contribute to green transitions or include measurable environmental targets (Gascon et al., forthcoming[25]).
Analysing the design of CIT incentives and their impact on effective taxation is necessary to understand their effectiveness in achieving policy objectives and the associated costs. A useful first step is to map the many different designs of CIT incentives available across countries and calculate their effect on corporate effective tax rates. A recent study4 that investigated CIT incentives in ten LAC countries will be used to build the core of the following sections (Gascon et al., forthcoming[25]). The analysis includes data for Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Paraguay, Peru and Uruguay. It relies on a methodology, developed through the OECD Investment Tax Incentives Database (ITID), that compiles quantitative and qualitative information on the design and targeting of investment tax incentives available across economies, using a consistent data collection methodology (OECD, 2025[26]). It also relies on the OECD’s forward-looking effective tax rates model incorporating investment tax incentives (Celani, Dressler and Wermelinger, 2022[21]). Such an analysis is particularly important in view of new international agreements on the global minimum effective corporate tax rate (GMT). The GMT can have a significant impact on the effectiveness of certain tax incentives and may require a careful reconsideration of the design and implementation of tax incentives in the region (OECD, 2022[27]).
The design of corporate tax income incentives varies widely across LAC countries
Income-based incentives such as tax exemptions are common in LAC. CIT exemptions are present in all ten LAC countries analysed, a pattern that is also observable in other regions (Figure 3.3). Additionally, 50% of LAC countries analysed have at least one reduced CIT rate, compared to 74% in sub-Saharan Africa and 75% in the South and East Asian countries included in the OECD ITID. Regarding expenditure-based CIT incentives such as tax credits and allowances, the LAC region significantly surpasses others, with 70% of LAC countries analysed having at least one tax credit in place, compared to only 26% in sub-Saharan Africa and 33% in the South and East Asia countries covered in the database. As for tax allowances, LAC also shows high adoption, with 70% of the countries offering them, compared to 90% in sub-Saharan Africa and 67% in South and East Asia (Gascon et al., forthcoming[25]).
Note: CIT = corporate income tax. The figure includes information from ten LAC countries: Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Paraguay, Peru and Uruguay. Tax allowances are deductions from taxable income for current or capital expenditure, which can either increase the amount deducted (enhancement) or accelerate capital asset depreciation (acceleration).
Source: (Gascon et al., forthcoming[25]).
Tax exemptions are the most widely used instrument across LAC countries (Figure 3.4, Panel A). Argentina, Colombia, the Dominican Republic and El Salvador offer more than one permanent CIT tax exemption, while the other countries in the study, except Argentina, provide more than one temporary CIT exemption. Tax credits are also widely used, with Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, Peru and Uruguay applying them at least once as of the end of 2024. Allowances that accelerate cost recovery compared to standard fiscal depreciation schedules (within 100% of capital expenditures) are also used across various countries. Argentina, Brazil, Colombia and Peru apply more than one such allowance, while Costa Rica, the Dominican Republic and Uruguay each use one. Enhanced allowances are less common, with Colombia and Peru offering more than one, and Argentina and Costa Rica applying at least one. Although less frequently applied, temporary and permanent reduced CIT rates are also used in several countries, with Colombia applying more than one permanent reduction and Brazil, Colombia, Costa Rica, Ecuador and Peru offering at least one temporary reduction (Gascon et al., forthcoming[25]).
Sector conditions are the most widely used eligibility criteria for CIT incentives in LAC (Figure 3.4, Panel B). Investment tax incentives typically include specific eligibility criteria based on business and project characteristics. Eligibility criteria for tax incentives can vary and may be based on factors such as the economic sector, the project’s location (e.g. special economic zone or less developed region), outcome conditions like job creation or export growth, or minimum investment thresholds. Incentives may also depend on ownership structure or whether the business is newly established, with expansions often excluded (OECD, 2025[26]). All ten LAC countries analysed apply more than one CIT incentive with sector-specific conditions. Outcome conditions are also widely used across LAC, with CIT incentives often linked to factors such as job creation, environmental impact, use of clean technologies and contributions to social inclusion. Location-based conditions are widely used as well, with all countries analysed except El Salvador applying them to at least one CIT incentive. Colombia, Costa Rica, Ecuador, El Salvador and Peru also provide CIT incentives to companies located in special economic zones (SEZs). Investment size requirements are common as well, with thresholds varying across the region: 33% of LAC’s CIT incentives set the threshold below EUR 200 000, 25% between EUR 200 000 and EUR 1 million and 33% between EUR 1 million and EUR 10 million; only 9% require investments exceeding EUR 10 million. Only Colombia, Costa Rica and the Dominican Republic impose eligibility criteria limiting CIT incentives to newly established firms, while none of the countries analysed applies ownership structure as a condition for eligibility (Gascon et al., forthcoming[25]).
Note: CIT = corporate income tax. The figure includes information from nine LAC countries: Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, Ecuador, Peru, El Salvador and Uruguay. Paraguay is not included, as CIT incentives are outside of scope. Tax allowances are deductions from taxable income for current or capital expenditure, which can either increase the amount deducted (enhancement) or accelerate capital asset depreciation (acceleration).
Source: (Gascon et al., forthcoming[25]).
Sector targeting of CIT incentives in LAC varies by country, and several countries target the same sector with multiple incentives (Figure 3.5). The availability of sector-targeted incentives varies significantly, but 80% of all incentives have a sector condition. Manufacturing benefits from strong support in Argentina, Brazil, Costa Rica and the Dominican Republic, while primary sectors receive numerous incentives in Argentina, Ecuador and Peru. Services benefit from targeted incentives in Colombia, Costa Rica and Uruguay. Renewables, tourism, and information and communications technology (ICT) receive support across nearly all countries. Overlapping sector targeting suggests that countries could benefit from streamlining their incentive policies (Gascon et al., forthcoming[25]).
Note: The figure only includes incentives that have a sector condition. The figure uses the ISIC classification from the United Nations.
Source: (Gascon et al., forthcoming[25]).
Activity-specific incentives, such as those for R&D, are also used in LAC, though less frequently. Governments use the tax system to provide financial incentives for companies to invest in R&D, aiming to boost business R&D performance and drive innovation, economic growth and social well-being (OECD, 2025[28]). R&D incentives, primarily in the form of expenditure-based tax benefits, are available in six of the ten countries analysed. Argentina, Colombia, El Salvador and Uruguay offer multiple such incentives, while Brazil and Peru each provide one. In Colombia, companies can access a 30% investment tax credit for eligible science, technology and innovation projects that involve collaboration between large firms and micro, small and medium-sized enterprises (MSMEs) and that consider environmental impact and demonstrate strong execution. Brazil allows companies to deduct 60-100% of R&D expenses from net profit, with additional deductions for projects that result in registered patents or cultivars, alongside benefits such as accelerated depreciation and reduced taxes on equipment and remittances. Peru offers a tax allowance of up to 240% for R&D spending, depending on whether the project is conducted by the taxpayer, a resident or a non-resident research centre, with slightly reduced rates for larger companies. R&D incentives must be carefully designed to meet policy objectives and should be complemented by direct public funding. While tax incentives are well suited to supporting experimental development, direct funding is generally more effective in advancing basic and applied research (OECD, 2025[28]).
SEZs often apply income-based CIT incentives, particularly benefiting the manufacturing and services sectors. SEZ-related tax incentives are widely used across the ten economies analysed, accounting for more than a quarter (28%) of all 139 identified incentives. These incentives primarily target the promotion of manufacturing industries, including supply chain companies, infrastructure megaprojects and service centres or innovation hubs. Within SEZs, tax exemptions are used in all ten countries, reduced CIT rates are used in 30% of them, tax credits are used in 10% and tax allowances are not used at all (Figure 3.6). Most SEZ-related exemptions are highly generous, typically offering 100% exemptions over extended durations, with some covering a broad range of sectors. Outside SEZs, the use of different tax incentive instruments tends to be more evenly balanced (Gascon et al., forthcoming[25]).
Outside or within SEZs, by instrument
Note: SEZ = special economic zone. The figure includes information from ten LAC countries: Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Paraguay, Peru and Uruguay and 128 CIT incentive entries. Tax allowances are deductions from taxable income for current or capital expenditure, which can either increase the amount deducted (enhancement) or accelerate capital asset depreciation (acceleration).
Source: (Gascon et al., forthcoming[25]).
The governance of CIT incentives in LAC is highly fragmented. In most economies, CIT incentives are regulated through multiple and often inconsistent legal instruments – such as investment laws, SEZ laws and repeated amendments – rather than being consolidated in the tax law, which complicates compliance and monitoring. Overlapping responsibilities among ministries of finance, investment promotion agencies, and SEZ authorities further increase complexity, although co-ordination can provide benefits if clearly defined roles and objectives are established. In addition, legal frameworks rarely embed mechanisms for robust monitoring of compliance or ex-ante or ex-post evaluations, thus limiting policymakers’ ability to assess whether incentives achieve their intended goals. Uruguay stands out as a positive example where both monitoring and ex-ante and ex-post evaluation processes are embedded in the legal framework (Article 17 of Decree 268, established in 2020), helping to assess whether tax incentives align with their intended objectives and deliver measurable impact. While Uruguay’s system offers strong safeguards against misuse, it may pose administrative challenges, as tracking firm-level compliance with the matrix of indicators requires substantial oversight, monitoring and evaluation efforts. Nevertheless, more unified governance frameworks in LAC could improve transparency, reduce redundancies and ensure that incentives are more effectively designed and implemented.
Corporate income tax incentives can have a significant impact on effective corporate tax rates in LAC
Forward-looking effective tax rates are useful for evaluating the size of the tax relief provided by tax incentives for hypothetical projects and for informing tax incentive policy decisions. The EATR provides insights into investors’ decisions when evaluating mutually exclusive projects, e.g. in different locations or sectors, that earn positive rent over their lifetime (extensive margin decisions). Forward-looking EATRs can be calculated across countries with different standard tax systems, holding all other project characteristics equal. They are therefore useful for comparing tax treatment across countries and incentive design (Gascon et al., forthcoming[25]).This section focuses on the tax incentives and their impact on EATRs for three specific cases: tourism, renewable energies and SEZs.
The tax relief provided by tourism tax incentives in LAC varies widely across countries and designs, with income-based incentives being, on average, more generous than expenditure-based incentives. Several countries offer incentives to encourage investments in tourism, using different instruments and targeting strategies. Six countries – Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador and Uruguay – use either income- or expenditure-based tax incentives. Among the income-based incentives are three exemptions and one reduced rate, and among the expenditure-based instruments are two instances of accelerated depreciation and one tax credit. The targeting strategies involve different types of eligibility conditions. While one country targets hotel services or tourism activities relatively broadly (Uruguay), others apply additional eligibility criteria linked to the location or size of an investment (Colombia and Ecuador), and another applies both approaches (the Dominican Republic). Costa Rica includes transport activities for tourists (air or water) next to hotel services, while El Salvador focuses on the restoration of historical buildings. On average, the incentives granted for tourism provide a reduction in EATRs of 47%, or 12.5 percentage points (pp), compared to the country-specific standard tax treatment (Figure 3.7, Panel A). Income-based instruments provide a 77% (20.9 percentage points) reduction in EATRs, while expenditure-based ones granted a 5% (1.2 percentage points) reduction on average (Gascon et al., forthcoming[25]).
The effectiveness of tax incentives in generating tourism investment will not depend on the amount of tax relief granted but rather on context and incentive design. Policymakers should be cautious, as income-based incentives can have a high fiscal cost and provide little real benefit, since they often go to investors who would have carried out their projects even without the support. In contrast, incentives tied to actual spending – such as tax credits or accelerated depreciation – are generally seen as achieving more additional investment per revenue foregone, as they are directly tied to new investment. This is particularly relevant in sectors like tourism or natural resources, where location-specific factors such as beaches or mineral deposits are the main draw for investors. In such cases, tax incentives tend to produce limited behavioural change, resulting instead in foregone public revenue (Gascon et al., forthcoming[25]). While some evidence, for example from Antigua and Barbuda, suggests that tax incentives can influence tourism investment decisions in small open economies, a better approach in most cases is to strengthen the broader investment climate by improving infrastructure, legal certainty and support for local development (Van Parys, 2012[29]; Gascon et al., forthcoming[25]).
The impact of tax incentives for the renewable sector on EATRs varies widely across countries and instruments used. Many countries in LAC offer tax incentives to boost investment in renewable energy, with some applying multiple measures simultaneously. These include tax exemptions (Colombia, Ecuador), tax credits (Argentina, the Dominican Republic), accelerated depreciation (Colombia), enhanced deductions (Colombia) and reduced tax rates (Costa Rica). Compared to other sectors, renewable energy incentives in the region are more often expenditure-based. Most schemes have been introduced recently and are relatively simple in terms of eligibility, typically requiring only that the investment or output relates to renewable or non-conventional energy sources. Only Argentina includes an eligibility condition: a local content requirement. Renewable energies in LAC obtain an average tax reduction of 55% (14.8 percentage points) relative to baseline EATRs. Income-based incentives are, on average, more generous than expenditure-based ones, with reductions of 21.8 percentage points (79%) and 6.4 percentage points (24%), respectively (Figure 3.7, Panel B). Expenditure-based incentives vary widely in generosity, bringing their EATRs relatively close to the results achieved by income-based incentives (Gascon et al., forthcoming[25]).
Tax incentives for clean energy must be evaluated as part of a country’s broader climate policy mix in order to understand their real benefits and costs and to ensure policy coherence. Tax incentives can either complement or substitute for other climate measures, like carbon pricing, regulation or direct subsidies, depending on national contexts, capacities and political realities. When used as a complement, tax incentives can help to address barriers to clean investments – such as reducing financing constraints or promoting technology adoption spillovers like learning-by-doing. They thereby reinforce the impact of carbon pricing and other climate policies. When countries with incomplete carbon pricing use tax incentives, the tax measures can only act as an imperfect substitute. This is due to the fact that they do not provide continuous incentives to cut emissions and also due to the general risks and costs involved in their use. International evidence underscores the importance of removing tax incentives in favour of fossil fuels, as well as the major challenge of determining when tax incentives add value in addressing barriers to clean investments without duplicating existing measures. Where tax incentives are used, their policy rationale, interaction with other policies, and merits and costs compared to alternative policies should be clearly defined (Gascon et al., forthcoming[25]). CIT incentives could be integrated into wider green productive development policies to reinforce structural transformation and accelerate the shift to sustainable production models. Green productive development policies combine environmental sustainability goals with sectoral strategies and industrial policies aimed at increasing competitiveness, innovation and job creation in climate-aligned sectors (see Chapter 2) (Martinez et al., 2025[30]).
Tax incentives offered in SEZs are typically highly generous, often reducing a firm’s effective tax rate to zero or near-zero levels (Figure 3.7, Panel C). On average, EATRs are lowered by 22.5 percentage points compared to the baseline, representing an 85% reduction. These incentives frequently apply broadly across the firm’s entire taxable income rather than being limited to income linked to new investments or specific activities, thereby amplifying the risk of windfall gains without creating additional investments. In addition to income tax incentives, firms in SEZs often benefit from other advantages, such as preferential value-added tax or customs regimes and streamlined regulatory procedures. While these additional financial and non‑financial benefits are not captured in the current analysis, they are essential for a full evaluation of the overall costs and benefits of SEZ policies (Gascon et al., forthcoming[25]).
While some countries target their SEZ incentives to specific activities, like manufacturing or services, most do not differentiate but make SEZ incentives widely available. EATRs are presented for companies operating in manufacturing and basic industries, services, and other relatively innovative sectors. Ecuador stands out by targeting its SEZ incentives to touristic services, logistics, technology transfer and disaggregation, and industrial diversification operations (excluding manufacturing and basic industrial activities). El Salvador provides more generous treatment to international service parks and centres than to manufacturing, agriculture, fishing and aquaculture, and the production of food or animal feed. In contrast, Colombia, the Dominican Republic and Peru do not differentiate generosity in treatment based on activities within their SEZs (Gascon et al., forthcoming[25]).
Forward-looking effective average tax rates (%), by instrument
Note: The calculations are based on a weighted average between equity and debt financing (respectively, 65% and 35%) and a fixed macroeconomic scenario (inflation at 1%, real interest rate of 3%). All three panels use baseline tax-system parameters from the OECD Corporate Tax Statistics database for the year 2023. The figures show only countries that provide incentives in the relevant sectors. Paraguay is excluded, as these incentives are out of scope. Effective average tax rates (EATRs) evaluate investment decisions at the extensive margin. They summarise the effect of taxation on the decision to invest in comparable but mutually exclusive projects, assuming that investment projects earn economic rents over their lifetime. Panel A shows EATRs for an investment in non-residential structure assets (buildings); Panel B shows EATRs for an investment in industrial machinery assets; Panel C shows EATRs for an investment in tangible assets. The EATR for tangible assets is the simple average of the EATRs for the following asset classes: air, rail and water transport; computer hardware; equipment; industrial machinery; and road transport vehicles.
Source: (Gascon et al., forthcoming[25]). Tax incentives data collection methodology follows the OECD Investment Tax Incentives Database (OECD, 2025[26]). EATR calculations follow (Celani, Dressler and Wermelinger, 2022[21]).
Reforming corporate income tax incentive design can make incentives more efficient and effective, with the potential to enhance their impact on development
Tax incentives have important shortcomings, and their costs must be weighed against the potential benefits of increased investment. Evidence and policy guidance suggest that tax incentives, when well-designed, can increase investment effectively and create positive spillovers. However, they are not always the most efficient policy tools. Investment responds to taxation, but tax incentives also involve costs, including foregone revenue, tax-system complexity, reduced transparency and administrative and compliance burdens. Without a strong rationale to favour targeted investment, incentives also risk a misallocation of resources and may not effectively support production transformation in the region. Finally, incentives often result in windfall gains for projects that would have occurred anyway, without creating additional investment.
LAC countries need to improve the design of tax incentives by adopting best practices throughout the entire policy cycle. Due to the costs and risks of tax incentives, policy guidance cautions against the use of certain incentive designs. Some strategic design and implementation principles could be considered across LAC countries to ensure that tax incentives are more efficient and effective, while phasing out those that result in significant revenue losses without commensurate benefits (Box 3.1). The OECD’s new guide to tax incentive policymaking offers practical guidance to improve the design and implementation of investment tax incentives at each step of the incentive lifecycle (OECD, forthcoming[16]). Enhancing the design of tax incentives must be accompanied by strengthened measures to combat tax evasion and profit shifting, including real-time customs tracking and increased transparency in ownership structures (Gascon et al., forthcoming[25]).
Conception stage
Tax incentives should be grounded in a clear rationale and well-defined policy objective at the outset, including why tax incentives are the appropriate policy tool.
Ex-ante assessment of expected benefits, costs and unintended consequences across policy options is helpful and can support alignment with broader national priorities.
Instrument design
Expenditure-based incentives (e.g. accelerated or enhanced deductions, tax credits) are expected to deliver more additional investment per unit of revenue foregone than income-based incentives (e.g. reduced rates, tax exemptions or holidays). Expenditure-based incentives targeted to payroll or tangible assets will also be less affected by the global minimum tax.
Design features such as carry-over of unused tax incentive benefits, as well as refundability, transferability and marketability of credits, could be appropriate to support smaller or riskier investors, but such features can increase complexity, compliance and monitoring costs.
Temporary incentives or sunset clauses can limit fiscal costs and prompt evaluation, though frequent or unclear changes may increase investor uncertainty.
Targeting strategy
Eligibility criteria should be clear, measurable and stable to improve certainty, limit discretion and avoid misuse or disputes.
Narrow targeting may limit revenue foregone and promote alignment with social and environmental standards to reach sustainable policy goals, but it can raise administrative burdens and economic distortions.
Broad targeting supports neutrality and simplicity of the tax system, but it can be costly for the government and less focused on specific policy goals.
Evaluation
Incentives should be regularly monitored and evaluated to ensure they are fit for purpose.
Associated tax expenditures should be quantified and published regularly.
Enacting legal requirements for tax incentive evaluation and reporting can ensure regular and systematic review.
Legislation and implementation
Tax incentives should be subject to ministry of finance review and opinion and be ratified by the law-making body or parliament.
Tax incentives should be consolidated in the core tax legislation and made publicly available.
Effective interagency co‑ordination is essential, with clear mandates and a central role for the ministry of finance and the revenue authority.
Too many actors and laws increase complexity, reduce transparency and raise risks of abuse.
Citizen support will be crucial for phasing out inefficient and ineffective incentives. Building public understanding and trust is essential to making such reforms politically feasible (see below on tax morale). This requires clear, transparent and accessible tax expenditure reports, which are regularly shared with the public, showing how much these incentives cost, which sectors benefit and whether the outcomes justify the expense. Investment tax incentives are generally perceived positively in LAC, with 62% of citizens considering it appropriate to grant such incentives to multinational companies, while 14% believe it is inappropriate (IFAC/ACCA, 2024[31]). However, this perception comes with the caveat that most citizens are not informed about the specifics of tax incentive design or effectiveness.
Strengthening tax morale can improve compliance and foster a fairer tax culture
Low public trust in government institutions represents a major governance challenge facing the financing agenda in LAC, among other important governance matters. As a foundational pillar of the fiscal contract, trust underpins citizens’ willingness to contribute through taxes in exchange for essential public goods and services. When trust in institutions erodes, tax compliance tends to decline as well, weakening the state's fiscal capacity. This in turn undermines the government's ability to implement sound public policies and finance critical enablers of production transformation, such as infrastructure, education, health and care policies (OECD et al., 2024[2]).
Gaining a deeper understanding of trust and tax morale is essential for enhancing both the effectiveness of tax collection and the overall level of revenue mobilisation. Tax morale refers to individuals’ intrinsic willingness to comply with tax obligations (Torgler, 2005[32]; OECD, 2019[33]). It is typically assessed through perception-based surveys, which often ask whether individuals believe tax evasion is ever justified. Understanding tax morale through the correlation between individuals’ characteristics and attitudes can help governments identify how citizens perceive tax systems and how to reform these systems to foster tax morale. Socio-demographic and economic factors play a significant role, with characteristics such as age, gender, income level and education level affecting trust and tax morale. Individuals with higher levels of education, as well as older adults, women and those with stronger religious affiliations, tend to show a greater willingness to comply with tax obligations (OECD, 2019[33]). As for attitudes, perceptions of fairness and equity serve as useful indicators for understanding how legitimate and effective the fiscal contract is perceived to be. Taxpayers’ perceptions of the tax system, and of the respective roles of governments and citizens within it, shape the context in which any reform efforts must be pursued and are therefore crucial (IFAC/ACCA, 2024[31]).
Even though a large share of LAC citizens condemn tax evasion, this share has declined steadily since 2011. In 2024, 63% of respondents in selected LAC countries said they would never cheat on taxes. In most of the countries surveyed in the region, more than 60% of citizens condemned tax evasion. However, in Argentina and Brazil, the share was 55% and 56%, respectively (Figure 3.8).
Responses to the question “Do you justify cheating on taxes if you have the chance?”
Source: Authors’ elaboration based on (IFAC/ACCA, 2024[31]).
While a large share of citizens in developing countries view taxation and the fiscal pact positively, few believe that tax revenues are properly invested, indicating room to strengthen tax morale. Survey data from developing countries suggest broad theoretical support for the idea of a fiscal contract: an average of 52% of respondents see their tax payments as a way to support their community (IFAC/ACCA, 2024[31]). In LAC, with 47% expressing support and 29% expressing disagreement, agreement is slightly lower than in Africa and Asia (Figure 3.9, Panel A). While citizens in developing countries generally perceive their tax contributions as supporting the community, only 32% believe that the public services they receive are a fair return for what they pay. Once again, Latin America reported the lowest level of satisfaction, with only 25.4% agreeing and 55.7% disagreeing (Figure 3.9, Panel B). The gap between the more theoretical perception of tax payments as community support and the experiential perception of receiving a fair return indicates a fracture in the fiscal contract. To reduce this gap and strengthen tax morale, governments should pay particular attention to citizens’ perceptions of the quality and efficiency of public goods and services, as well as to the evolution of corruption perception indexes.
Note: The online survey covered 10 308 individuals from 26 developing countries in Africa, Asia and LAC (see details of countries and socio-economic conditions of respondents in the figure’s source). The countries surveyed cover a range of economic, political, geographic and cultural conditions. The survey focused closely on countries in Latin America, with eight each in South America and Central America (and Mexico), and five in each of Africa and Asia. The current estimated population of the surveyed countries is 1 566 billion, including five of the seven largest non-G20 countries and representing 19.5% of the world population. The column totals may not equal exactly 100 due to rounding adjustments.
Source: Author's elaboration based on (IFAC/ACCA, 2024[31]).
Daily interaction with deficient public services and corruption scandals discourage tax compliance, as citizens do not perceive an effective use of their contributions. Policymakers seeking to understand the low tax morale in LAC, and in other developing regions, should consider variables beyond demographic and socio-economic factors and also measure the standard of public services, which can further motivate citizens to support the tax system through their contributions. People’s willingness to pay taxes is closely linked to how they perceive the use of public funds, particularly through the quality of services like education, healthcare and justice (OECD, 2019[33]). In many LAC countries, satisfaction with these services declined between 2011 and 2022 (Figure 3.10, Panel A). This decline in citizen satisfaction – likely influenced by the effects of the COVID-19 pandemic in recent years – has coincided with a weakening of tax morale. Individuals who believe that their taxes are used effectively to provide essential services are more inclined to view tax payment as a civic duty (Castañeda, 2024[34]). Similarly, trust in government and the perceived level of corruption are strongly related and have an impact on tax morale in developing regions. A decrease in corruption increased the willingness to pay taxes in Africa by 3.5% in 2015 and in LAC by 4% in 2016 (OECD, 2019[33]). Also in LAC, in 2023, the average perception of corruption was 72%, while the average tax morale was 55.3% (Figure 3.10, Panel B).
Note: Panel A shows citizen satisfaction with the education, healthcare and judicial systems, based on the following questions: “In the city or area where you live, are you satisfied or dissatisfied with the educational system and the schools?”, “...with the availability of quality health care?” and “Do you have confidence in each of the following, or not? How about the judicial system and courts?”. In Panel B, perception of corruption reflects the share of respondents who answered “yes” to the question “Is corruption widespread throughout the government of this country, or not?”. The dotted line represents a two-period moving average of perceived corruption levels, smoothing short-term fluctuations to highlight long-term trends. Tax morale is based on the question “Do you justify cheating on taxes if you have the chance?” and is calculated as the share of respondents who rated tax evasion as at least somewhat justifiable (responses between two and ten on a ten-point scale), excluding those who answered “never justifiable”. Only years with available data are shown.
Source: Authors’ calculations based on (Latinobarometro, 2023[35]) and (Gallup, 2023[36]).
The transparency and efficiency with which public institutions invest public funds raised from tax collection are crucial to reducing corruption, fostering trust and encouraging tax compliance. In 2024, 60% of citizens from selected developing countries said they believed that taxes were essential to funding sustainable development (Figure 3.11, Panel A), but only 33% believed that taxes were spent for the overall public good (Figure 3.11, Panel B). Argentina and Brazil were the only LAC countries where fewer than half of the respondents viewed tax funds as a vital source for funding sustainable development. Demonstrating how public funds are efficiently used to address citizens’ top priorities can not only boost tax morale but also lower, to some extent, the perception of corruption. Digital tools and online platforms can prove particularly useful to reduce the opportunities for corruption (OECD, 2019[33]) and to support greater transparency, accountability and citizen engagement, thus helping to bridge the gap in perceptions between tax collection and public spending.
Source: Authors’ elaboration based on (IFAC/ACCA, 2024[31]).
Production transformation offers one relevant framework for enhancing tax morale by demonstrating tangible connections between tax contributions and sustainable development outcomes. Production transformation integrates social and environmental sustainability into economic development objectives through public-private co‑ordination and experimentalist governance approaches. By directing tax revenues towards visible green infrastructure projects, renewable energy initiatives and sustainable manufacturing sectors, governments can strengthen the fiscal contract by showing citizens how their contributions directly support both economic growth and environmental protection. This dual benefit approach can be particularly effective in LAC, where 79.5% of citizens support tax incentives for green energy projects, indicating strong public backing for policies that align fiscal contributions with sustainability goals (Martinez et al., 2025[30]).
Implementing educational programmes for taxpayers can be a powerful tool to explain how tax systems work and how public funds are used, which can ultimately strengthen tax morale. This suggestion is grounded in survey responses indicating that such programmes are perceived as valuable by participants and are also welcomed by those who have not yet had access. Most respondents hold favourable opinions about taxpayer education. Across all countries surveyed, a majority of respondents had either received tax education in school and found it beneficial (34.1% on average) or had not received it but believed it would have been valuable (28.1% on average) (IFAC/ACCA, 2024[31]). While many countries do undertake taxpayer education initiatives, these initiatives are often underresourced and insufficiently prioritised. It is important to ensure that tax education be included in the school curriculum and to establish links between the ministry of finance or tax administration and the education department, not least to provide support for training teachers to teach tax effectively (OECD, 2021[37]).
There is scope to strengthen tax morale by incorporating targeted actions based on socio-demographic factors. For instance, evidence suggests that older people are less likely to view tax evasion as acceptable, indicating that compliance efforts might be more effectively directed towards younger taxpayers. Similarly, women generally appear to have higher tax morale than men, suggesting that it may be worth exploring tailoring compliance efforts to gender, though to date, very few countries have undertaken analysis on the gender implications of tax administration and compliance (OECD, 2022[38]).
The relatively passive role that taxpayers are frequently given in educational initiatives merits reconsideration. Policies that promote civic participation may have a more lasting impact than programmes that treat citizens merely as recipients of training. Engagement could be enhanced by providing taxpayers with both online and in-person opportunities to voice their experiences – for example, on the user-friendliness of tax systems or areas for improvement. Many of the most successful taxpayer education initiatives targeting current taxpayers incorporate feedback opportunities (OECD, 2021[37]). Feedback on the complexity of tax systems can help countries design more friendly procedures to facilitate payment. In addition, improving transparency around public spending – by offering accessible data and participation on how, where and when tax revenues are used – could further reinforce tax morale, provided this information is presented in a meaningful way with open government parameters.
The financial and institutional capacities of national development finance institutions differ significantly across LAC
Production transformation is among the most common objectives of national DFIs. Many DFIs in LAC include in their mandates specific references to advancing one or more aspects of production transformation. Many also finance MSMEs’ development or have a sector-specific focus. There is, however, significant heterogeneity in their financial and institutional capacities.
The financial capacities of development finance institutions in LAC differ greatly. Total assets, which include everything a DFI owns (e.g. cash, loans to clients, investments, property), vary widely as a share of GDP across and within LAC economies. In this regard, the region’s largest DFIs, in Mexico and Brazil, reach around 7.4% and 6.9% of GDP, respectively, while the smallest, in Brazil and Argentina, represent only 0.04-0.08% and 0.14% of GDP, respectively. A similar divergence is observed in equity, defined as the portion of assets belonging to a DFI’s owners (governments or shareholders) after subtracting liabilities. The largest DFIs in this regard reach 2.1% of GDP in Chile and 1.6% in Brazil, whereas the smallest account for only 0.02‑0.03% of GDP in Brazil and 0.04% in Argentina. The amount of loans provided by DFIs in the region also varies widely and in some cases is related to countries’ income and population levels. In Brazil, DFI loans average USD 36.6 billion, and in Chile, USD 12.3 billion, while at the lower end, DFIs in Belize and Haiti average USD 41 million and USD 188 million, respectively (Cipoletta Tomassian and Perez Caldentey, 2024[39]).
Note: The dataset covers 73 DFIs across 22 countries in LAC (Antigua and Barbuda, Argentina, the Bahamas, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Curaçao, the Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay and Peru).
Source: Authors’ calculations based on (Jiajun et al., 2025[40]).
DFIs in the region also show significant heterogeneity in their mandates. While 29 institutions (35%) have a flexible mandate, many focus on MSMEs (27 institutions, 32%) or agriculture (13 institutions, 15%) (Figure 3.12). Other mandates include housing (7 institutions, 8%), international trade (5 institutions, 6%), local government (2 institutions, 2%) and infrastructure (1 institution, 1%). This reflects a strong emphasis on supporting small business development and also highlights the diverse objectives of these institutions.
DFIs in LAC also exhibit significant heterogeneity in their technical and operational capacities. Divergence in capacities is reflected in the constraints reported across institutions in the region. Major challenges include weak risk management, reported by 51% of DFIs in the region, and financial sustainability issues (48%). Both challenges hinder the ability of DFIs to manage risks, mobilise long-term resources and support production transformation. Other common problems are poor corporate governance and transparency (39%), difficulty in hiring qualified staff (31%) and political interference (14%) – issues that undermine technical autonomy, innovation and strategic independence (Cipoletta Tomassian and Perez Caldentey, 2024[39]). These qualitative constraints show that heterogeneity among DFIs is reflected not only in their mandates or objectives, but also in their operational and technical capacities.
National development finance institutions already play a central role in advancing production transformation efforts, but more can be done
National DFIs in LAC use diverse instruments to support production transformation. Their focus is on MSMEs, financial inclusion and sustainability. Instruments include short‑ and long‑term loans, guarantees, green and social bonds, venture capital funds, and leasing and co‑financing schemes. For instance, direct loans from the Brazilian National Development Bank (BNDES) and Mexico’s National Development Bank (NAFIN) support working capital and technological upgrades. To improve access to assets for firms with limited credit capacity, concessional loans and guarantees are also used by DFIs, including Argentina’s Guarantee Fund (FOGAR), Brazil’s BNDES Investment Guarantee Fund (BNDES FGI) and Colombia’s National Guarantee Fund. Guarantees hold significant potential to enhance MSME access to credit markets. However, their effectiveness depends on a sustained process of institutional development and capacity building among all stakeholders involved (ECLAC, 2021[41]). More innovative instruments include green and social impact bonds, such as those issued by Costa Rica’s National Bank (BNCR) and the Government of Colombia for youth employment; venture capital funds, such as BNDESPAR, a subsidiary of the Brazilian National Development Bank; and co‑financing schemes that combine public and private resources, such as NAFIN’s Infrastructure Investment Fund. Other instruments include microcredit, leasing, factoring, crowdfunding and revolving funds, which provide MSMEs with liquidity and access to assets without relying on traditional credit. This diversity of instruments highlights the strategic role of development banks in adapting their tools to strengthen production sectors, foster modernisation and promote inclusive, sustainable growth in the region (Cipoletta Tomassian and Perez Caldentey, 2024[39]; OECD et al., 2024[2]).
Instruments addressing the green and digital transformation agendas and targeting women’s inclusion and gender equality remain limited within national DFIs in LAC. During the COVID-19 pandemic in 2020, DFI loan portfolios expanded in most LAC countries, with 71.2% of DFIs reporting an average portfolio increase of 21%, primarily aimed at supporting the production sector (OECD et al., 2024[2]). Despite this growth, a stronger commitment by DFIs to developing financial instruments for MSMEs that integrate green, digital and gender-responsive objectives would be timely. Such instruments can help create enabling conditions that make investment in production transformation more attractive and viable. Of the 473 financial instruments offered to MSMEs by national DFIs in the LAC region in 2023, only 19% addressed at least one of these cross-cutting priorities: 9.7% focused on the green transition, 3.8% on digital transformation or innovation and 5.5% on gender equality (OECD et al., 2024[2]).
Looking ahead, further support for climate financing requires DFIs to strengthen technical capacity both for themselves and their clients. As of 2023, extreme weather events had damaged the physical assets of 40% of public development banks5 and affected the asset quality of 59%, yet 93% view the climate transition as an opportunity and 77% align with Paris Agreement targets (EIB, 2024[42]). Despite this, fewer than half see themselves as leaders or promoters of the green transition, with 46% following industry practices and 7% remaining sceptical. Expanding climate financing will require public development banks to build capacity internally and among clients, for example, through technical assistance programmes like the European Investment Bank’s Greening of the Financial Sector initiative, which has reached 15 countries in Africa and Europe (EIB, 2024[42]).
To enhance their contribution to production transformation, national DFIs can reinforce their traditional financing role while aligning more closely with the productive priorities defined at the national and territorial levels. This involves financing not only firms in strategic sectors but also public-good projects emerging from productive development agendas, such as cluster initiatives. DFIs can also expand their value proposition with instruments that allow countries to compete on equal terms in global markets. For instance, export credits and guarantees under the OECD Arrangement on Officially Supported Export Credits could provide a major advantage; they permit certain deviations from World Trade Organization (WTO) subsidy rules but remain scarcely used in the region.
At the same time, DFIs can embrace a market intelligence role that helps identify bottlenecks that limit production transformation. This can be achieved through lending activity, the assessment of the viability of projects, as well as complementary activities such as developing tools and analyses that serve as public goods for production transformation. An example of this was the work carried out by Bancóldex in Colombia with the Economic Complexity Atlas, which helped territories identify new economic activities and products to diversify the country’s production structure (Fernández-Arias, Hausmann and Panizza, 2019[43]).
For national DFIs to play a central role in production transformation, several conditions must be met. First, national DFIs need a clear mandate defining their participation in the design and implementation of productive development policies at both the national and territorial levels. Second, their strategies should be adjusted to align closely with these policies and the priorities they establish. Third, national DFIs must actively participate in governance spaces for production transformation, including institutional arrangements at the national and subnational levels. Fourth, to effectively carry out this role, it is crucial to strengthen their institutional capacities. Finally, greater efforts are required to promote pedagogy and harmonisation of language around what is understood by productive development policies – both among those working within national DFIs and those leading policymaking efforts (Fernández-Arias, Hausmann and Panizza, 2019[43]).
Multilateral development banks and bilateral development finance institutions can support the co‑ordination of national development finance institutions while addressing some of their challenges
MDBs and bilateral DFIs can play an important role in enhancing the impact of national DFIs on development. In LAC, only 9% of countries’ financing needs are met through external sources, with MDBs contributing half of this amount. However, MDBs and bilateral DFIs have strong transformative potential, given their ability to address market and co‑ordination failures through supranational authority, as well as long-term strategies that extend beyond political cycles, which are often a risk to the continuity of investment programmes (CAF, 2025[44]).
MDBs and bilateral DFIs can help national DFIs in LAC both reduce borrowing costs and crowd-in private investment. Many national DFIs, especially smaller ones, face higher financing costs and capacity constraints that limit their ability to scale impact. Tailored approaches are needed to address these disparities. MDBs and bilateral DFIs can provide concessional loans and grants to absorb initial costs, simplify financing procedures for smaller institutions and establish a dedicated joint facility to channel resources. Such a structure could pool funds from multiple MDBs and bilateral DFIs, deploy staff to identify promising DFIs and provide long-term support for institutional strengthening (Florian, 2025[45]). Beyond lowering borrowing costs, MDBs and bilateral DFIs can also help national DFIs crowd in private capital. By offering risk-mitigation instruments such as first-loss guarantees or insurance contracts, they can de-risk portfolios and make investments more attractive to private investors. The experience of the African Development Bank, which insured over USD 1 billion of its portfolio using quasi-equity structures and private insurance, illustrates how such tools can enhance resilience and unlock broader flows of development and climate finance (AfDB Group, 2025[46]). MDBs and bilateral DFIs can play a greater role in creating an enabling environment for private investment, such as by supporting initiatives to address risk misperceptions and improve investor confidence (OECD, 2024[47]).
MDBs and bilateral DFIs can also act as knowledge banks, offering national DFIs in LAC technical expertise, capacity building and policy support tailored to their financial and institutional profiles. Beyond financing, MDBs and bilateral DFIs can help national DFIs generate knowledge, develop cohesive medium-term production strategies and strengthen data collection. For instance, MDBs and bilateral DFIs can support national DFIs with sufficient capacity to develop taxonomies and frameworks for climate adaptation projects, create sector-based impact metrics and share international best practices for building project pipelines (CPI, 2024[48]). In addition, MDBs and bilateral DFIs can support national DFIs in project preparation and pipeline development in areas such as renewable energy, clean urban mobility, agro-industrial development and digital infrastructure, which are essential for advancing decarbonisation, productivity and competitiveness in LAC (FAO and ECLAC, 2021[49]). The OECD’s 2022 consultation on green hydrogen highlighted the importance of strategy, governance, technology development and de-risking mechanisms for developing sustainable green markets (Cordonnier and Saygin, 2022[11]). MDBs, bilateral DFIs and national DFIs are well positioned to facilitate these processes, helping to reduce financial risk perceptions and drive long-term investment in green technologies.
MDBs and bilateral DFIs can also foster co‑ordination among national DFIs by creating forums and platforms that connect them across different levels and key production sectors. Acting as facilitators, MDBs and bilateral DFIs can promote peer learning and more cohesive productive development policies among national DFIs across sectors and borders. For example, the Inter-American Development Bank (IDB) has collaborated with the Latin American Association of Development Financing Institutions (ALIDE), Brazil’s BNDES and other institutions to create a Latin American Development Banking Hub, which serves as a central platform to collect and share publicly accessible data and information on major areas of interest for development banks, particularly digital transformation, knowledge exchange, public-private partnerships and infrastructure investment. Within this initiative, the Development Banking Community of Practice enables national DFIs in the region to exchange knowledge, foster dialogue and share experiences related to sustainable finance (ALIDE, 2025[50]). Similarly, the Development Bank of Latin America and the Caribbean (CAF) provides the region with co‑ordination platforms that act as enabling and supervisory bodies for joint action, as well as spaces for knowledge dissemination (CAF, 2025[44]).
Partnerships between bilateral DFIs and national DFIs can also combine targeted financing with technical assistance. For example, in 2021, the French Development Agency (AFD) signed a Tier 2 agreement with Banco Nacional de Costa Rica (BNCR) to support climate-related projects, particularly electric mobility. The programme includes a USD 50 million senior loan and a USD 15 million subordinated loan, providing long-term liquidity and leveraging additional BNCR financing. This is complemented by a four-year European Union grant of EUR 3 million for technical assistance to align BNCR project financing with Costa Rica’s climate objectives (AFD, 2024[51]). Strengthening the capacity of national DFIs through MDB-led training, technical assistance and the promotion of sustainable taxonomies is essential for aligning investments with climate and social impact goals, while unlocking greater private and concessional finance for transformative development. AFD is partnering with national development banks in Brazil and Colombia to integrate sustainability into financial systems and scale green investment. In Brazil, AFD works with Banco da Amazônia to foster bioeconomy value chains in the Legal Amazon through an EUR 80 million facility and with CAIXA to finance climate-smart infrastructure via a EUR 250 million sustainable bond, targeting sanitation and waste management, particularly in underserved regions (AFD, 2025[52]). In Colombia, collaboration with Bancóldex supports climate, biodiversity, gender and social inclusion goals, backed by a USD 100 million loan and technical assistance to expand green lending for small and medium-sized enterprises (SMEs) (AFD, 2024[53]).
MDBs and bilateral DFIs can also support national DFIs to expand financial inclusion, especially for MSMEs (OECD et al., 2024[2]). Regional MDBs such as CAF and the Central American Bank for Economic Integration (CABEI) already allocate a significant share of their portfolios to MSME inclusion (12% and 12.9%, respectively), often acting as second-tier banks that channel funds through domestic financial institutions (Cipoletta Tomassian and Perez Caldentey, 2024[39]). However, further efforts are needed, as MSMEs in the region continue to face major financial inclusion challenges. MSMEs in LAC primarily use the financial system for deposits and payments, with low uptake of loan and credit products, which limits their ability to expand and grow. Enhancing financial inclusion could therefore drive higher investment, income, poverty reduction, equality, more efficient resource allocation and innovation (OECD et al., 2024[2]). The IDB, for example, is helping Colombia’s Bancóldex to strengthen its institutional capacity and develop new products for MSMEs, focusing on credit access, production modernisation, environmental sustainability and solutions for bioeconomy enterprises in the Amazon. The initiative also promotes products for women and diverse groups, aligns Bancóldex’s portfolio with the Paris Agreement and improves data and impact evaluation (IDB, 2025[54]). Several DFIs in LAC promote financial inclusion through microcredits, providing micro and small firms with access to capital, particularly in informal or emerging sectors. In Ecuador, the State Bank’s Banco de Oportunidades offers flexible rural microcredits, while Banco Nacional de Bolivia provides agricultural microcredits without requiring traditional collateral. Yet many national DFIs still face capacity constraints that limit their reach, underscoring the need for MDBs to help scale up financial inclusion efforts.
Collaboration among multilateral agencies is also necessary to maximise joint impact, avoid duplication and create synergies. MDBs and multilateral institutions lend credibility, helping overcome trust barriers and mobilise capital, technology, and expertise that might otherwise be unavailable. This approach underpins the European Union’s Global Gateway Strategy, which brings together the European Union, its Member States, development finance institutions and the private sector to drive sustainable private-sector investment. Global Gateway fosters a 360-degree enabling environment for quality investments, promoting high environmental, social and governance standards, climate neutrality, the green and digital transition, and respect for human rights, decent work and social inclusion.
Concrete initiatives illustrate this collaborative model. The Kuali Fund, a pioneering Spanish investment fund launched in 2024 with a target of over EUR 200 million, supports countries in LAC and India to transition to low-carbon economies and increase climate resilience. It promotes good climate practices among small financial institutions, co-operatives, microfinance institutions and fintechs, while backing innovative businesses that expand mitigation and adaptation solutions, with financing from the Green Climate Fund, the European Union, the Development Promotion Fund (FONPRODE) of the Spanish Agency for International Development Cooperation (AECID), and private investors, including GAWA Capital and COFIDES (LACIF, 2025[55]). Another example is the EUR 200 million CAF-AFD partnership launched in May 2024, which combines non-earmarked funding, technical assistance, and expert exchanges to advance CAF’s goal to become the region’s green bank and tackle climate and biodiversity challenges in LAC (OECD et al., 2024[2]).
A well-functioning financial system has the potential to mobilise and channel private resources towards development objectives. Financial markets in LAC have experienced significant growth over the last three decades in terms of volume, participants, instruments and products. Households have greatly increased their participation in financial markets through access to savings accounts and borrowing, although a large proportion of informal households still do not have a credit account. The expansion of the financial sector has benefitted the growth and development of large companies, including the largest. However, MSMEs still face challenges in accessing financial markets. LAC has the second-largest MSME financing gap of any region in the developing world. Regarding the development of capital markets, although most LAC countries have limited domestic capital market access for private companies, the region has expanded its presence in international markets through debt issuance and depositary receipts while continuing to advance regional financial integration (OECD et al., 2024[2]).
Banks still serve as the primary source of financing for households and firms in LAC
Given the limited development of capital markets in LAC, banks are the main intermediaries for households and businesses. Banking credit serves as the primary source of external financing for firms. However, banking financial inclusion remains limited for many households and for MSMEs. The development of more diversified and efficient financial markets is an imperative for driving inclusive development in LAC (OECD et al., 2024[2]).
To assess the functioning of the banking system, three aspects are commonly considered: depth, access and efficiency. Depth measures the size of financial markets; access examines the extent to which individuals can use them; and efficiency evaluates the system’s effectiveness in delivering services. This approach can capture the key features of financial systems and the evolution of the financial structure in the region (OECD et al., 2024[2]).
Depth, access and efficiency
Although financial depth in LAC has improved over the last decade, it remains low. Domestic credit to the private sector has doubled over the last 20 years, reaching 52% of GDP in 2024. Despite this growth, LAC’s depth is similar to the levels of South Asia and sub-Saharan Africa and lags behind regions such as East Asia (178%) and the European Union (76%) (Figure 3.13, Panel A). Domestic credit is mainly provided by banks. However, bank deposits as a percentage of GDP stood at 55.1% for LAC in 2021, compared to 99.3% for OECD countries (Figure 3.13, Panel B).
Note: EAP = East Asia and the Pacific, SSA = sub-Saharan Africa, EU = European Union and SAS = South Asia. In Panel A, SSA and SAS figures for 2022 and 2023 reflect the latest available data. In Panel B, figures for bank deposits as a percentage of gross domestic product (GDP) correspond to 2021 due to data availability.
Source: Authors’ elaboration based on (World Bank, 2024[56]).
LAC has seen improvements in access to financial services for both households and MSMEs, but significant challenges remain. These include high costs, financial illiteracy, informal employment, lack of adequate and quality products, and regulatory hurdles. For households, disparities in access to formal financial services and reliance on informal borrowing persist. Formal MSMEs also face difficulties accessing credit due to the high cost of financing, often paying higher interest rates than large firms because of their riskier profile. Around 30% of MSMEs in the region face credit constraints. In 2022, the spread of interest rates between loans to SMEs and to large firms was notably high in LAC countries (Figure 3.14). A major barrier is the lack of collateral; for example, 90% of SMEs in Colombia need to provide collateral to obtain bank credit. Overcoming these challenges is essential to expanding access to financial services and promoting inclusive economic growth across LAC.
Note: High-income countries include Australia, Belgium, Canada, Chile, Czechia, Denmark, Estonia, Finland, France, Greece, Hungary, Ireland, Israel, Italy, Korea, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Portugal, Slovenia, Sweden, Switzerland and the United Kingdom. RHS = right-hand scale.
Source: Authors’ elaboration based on (OECD, 2024[57]).
The banking system in LAC shows relatively high profitability, but this may reflect inefficiencies that limit credit access. In 2021, the region’s average return on assets (ROA) stood at 1.6%, higher than the OECD average of 0.9%. Similarly, the net interest margin (NIM) stood at 5%, compared to 1.7% in the OECD, pointing to high credit spreads that increase borrowing costs and discourage savings (Figure 3.15). While these margins can attract investors, they often stem from market concentration, macroeconomic risks, limited revenue diversification and weak legal and regulatory frameworks. High banking costs are also prevalent in the region. In 2021, banks in LAC faced a ratio of overhead cost to total assets of 3.7%, higher than the OECD average of 1.4%.
Note: ROA = return on assets, Costs = overhead costs to total assets and NIM = net interest margin.
Source: Authors’ elaboration based on (World Bank, 2025[58]).
Challenges and opportunities for greater financial inclusion
Financial inclusion in LAC has improved, particularly in terms of access and usage, but major challenges remain around the quality of services. Inclusion rests on three pillars: access, usage and quality. While access has expanded across the region, many vulnerable groups remain excluded due to low income, lack of collateral and informal, unstable or precarious employment. Poorer households face limited financial options, while wealthier ones enjoy easier access and more diverse tools. Informal workers also struggle to access financial products due to unstable income and missing employment records. Women face barriers such as cultural norms, expectations based on gender and low integration into the formal labour market. However, usage is growing rapidly, driven by digital innovation. In some LAC countries, fintech has simplified access to financial services, with digital payments, neobanks, insurtech and alternative finance leading growth. These innovations are enhancing competition and lowering borrowing costs. However, the quality and the availability of adequate financial products for low-income populations remain challenges. Limited financial literacy and weak consumer protection frameworks hinder the effective and responsible use of financial products. Many adults in the region still lack basic financial knowledge, impacting their ability to make informed decisions. Strengthening financial literacy and consumer protection is crucial to ensuring inclusive and resilient financial systems (OECD et al., 2024[2]).
Increased financial inclusion, especially when combined with access to quality financial services, can significantly improve household well-being, firm productivity and broader economic development in LAC. High-quality financial products, supported by strong consumer protection and financial literacy, allow households to save, invest and manage consumption. For firms, particularly SMEs, quality inclusion facilitates access to credit, enabling growth, innovation and job creation (OECD et al., 2024[2]).
Deeper capital markets in LAC can help drive financing for production transformation
Capital markets are essential mechanisms to intermediate savings and to provide long-term financing for production transformation, offering opportunities to medium-sized firms in particular. These markets include both equity and debt instruments, which can be issued in the primary market through new bonds or initial public offerings (IPOs) or traded in the secondary market. Private capital markets also involve direct investments in companies that are not publicly listed. These mechanisms allow for an efficient allocation of capital and enable firms to scale, innovate and modernise. By improving access to large-scale and long-term financing, capital markets can drive investment and productivity and support economic growth and development (Fiorella and Didier, 2024[59]; OECD et al., 2023[12]). Capital market instruments have also proven useful for advancing strategic development priorities, such as the transition to a circular economy (UNEP, 2023[60]).
Public equity markets
Public equity markets are essential for economic development, as they enable long-term financing, support business innovation and offer households investment opportunities. In LAC, equity markets remain underdeveloped and illiquid, with significant differences across countries. In 2024, LAC’s average market capitalisation was 37.4% of GDP, well below the OECD average of 64.4%. It ranged from 79.3% in Chile to just 3.2% in Costa Rica (Figure 3.16, Panel A). Market liquidity is also limited, with a regional average turnover ratio of 24%, compared to 52% in the OECD, and with wide variation, from 162.7% in Brazil to 1.4% in Jamaica (Figure 3.16, Panel B).
Note: GDP = gross domestic product. In Panel A, the LAC simple average for 2024 includes 7 countries due to data availability: Brazil, Chile, Colombia, Jamaica, Mexico, Panama and Peru. Argentina and Costa Rica correspond to 2022 data. The OECD simple average includes 23 countries: Australia, Austria, Belgium, Canada, Chile, Colombia, Czechia, Germany, Greece, Hungary, Ireland, Israel, Japan, Luxembourg, Mexico, New Zealand, Poland, Slovenia, Spain, Switzerland, Türkiye, the United Kingdom and the United States.
Source: Authors’ elaboration based on (World Bank, 2025[58]).
Public equity markets in LAC are highly concentrated, with limited listings and strong dominance by a few large firms and corporate shareholders. This undermines market depth and inclusiveness. Most LAC countries have more concentrated equity markets than benchmark economies like Korea or the New York Stock Exchange, with large companies accounting for about 80% of market capitalisation. Activity in these markets relies heavily on secondary public offerings (SPOs), as net listings have been negative for much of the past two decades, reflecting delistings and challenges for medium-sized firms to go public. Brazil leads regional equity market activity, followed by Mexico and Chile. Ownership is also highly concentrated: in LAC: the top 1% of shareholders hold 46% of listed equity – well above the global average – with corporate ownership dominating over institutional investment. For instance, in Argentina, Chile and Colombia, the three top investors hold on average over 60% of the shares in listed companies (Medina, de la Cruz and Tang, 2022[61]).
Given the wide disparities in equity market development across LAC, it is crucial to implement context-specific strategies that promote both expansion and accessibility. In less developed markets, priorities include simplifying listing procedures, improving transparency and disclosure standards, and broadening domestic investor participation through low-cost and streamlined digital platforms and financial literacy (OECD, 2025[62]). Proportional requirements and simplified prospectuses for SMEs can make equity financing more accessible for such firms, enabling them to raise capital more efficiently (OECD, 2024[63]). Moreover, the development of growth equity markets, which are tailored to SMEs and growth-stage firms, can also help by offering more flexible entry requirements such as lower financial thresholds, simplified prospectus rules and smaller free float requirements (OECD, 2025[64]). Greater cross-border integration and regulatory harmonisation can help to close the gap between advanced and emerging markets in the region (OECD, 2025[62]). Strengthening public equity markets overall can enhance corporate resilience and boost regional competitiveness (OECD, 2025[62]).
Private markets: A focus on venture capital
Venture capital (VC) is the most prominent segment within private capital markets in LAC. In the third quarter of 2023, VC represented 82% of total transactions and 47% of the invested capital in the region (OECD et al., 2024[2]). However, in comparative terms, VC activity remains limited. In 2023, total VC investment in LAC amounted to USD 8.06 per capita and represented only 0.078% of the region’s GDP, significantly below Asia’s levels of USD 59.19 per capita and 0.757% of GDP (Preqin, 2025[65]; World Bank, 2024[56]). Despite their potential, equity and venture capital remain underutilised by SMEs in developing economies, due to weak financial ecosystems. Equity financing is often costly for small firms, which tend to rely instead on informal financial networks or personal resources. Development gaps in the financial sector limit the availability and affordability of formal private capital solutions (OECD et al., 2024[2]).
Venture capital is an alternative financing form provided to emerging or new companies (start-ups) that have high growth potential but also involve a high level of risk. The investment does not come from traditional banks but from private investors or specialised funds that are willing to take on those risks in exchange for an equity stake in the company. Venture capital investors not only provide funding but also offer strategic advice, market connections and management experience, which can be vital to the success of a young company, particularly in the complex context of LAC (Chapter 1). Strengthening private equity and VC ecosystems is essential to ensuring the availability of funding across all stages of business growth, from start-ups to large-cap firms (OECD, 2025[62]). Venture capital supports the survival of new entrepreneurs, fosters job creation and drives innovation by enabling dynamic business models that can transform key sectors such as technology, energy, healthcare and education.
After booming in 2021, venture capital dynamics have slowed more recently in LAC. VC funding in the region increased from USD 1.1 billion (249 deals) in 2016 to USD 25.1 billion (859 deals) in 2021. This growth was driven by factors including post-COVID-19 incentives to reactivate the market; increased demand for digital services since the pandemic; participation of a few deep-pocketed, non-domestic investors; a surge of profitable exit opportunities; and the development of a supportive local ecosystem for start-ups (Rudolph, Miguel and Gonzalez-Uribe, 2023[66]). However, as in other regions, investment in LAC fell below pre‑pandemic levels after 2021, declining to USD 5.4 billion in 2023 (OECD et al., 2024[2]).
Compared to other regions, a significant share of VC funding in LAC goes towards mobile apps and fintech, while venture capital trails in manufacturing, agricultural technology and clean technology. From 2016 to 2024, financial technology accounted for nearly 22% and mobile apps for 19% of total VC investment in the region. Other outstanding verticals include e-commerce (17%), artificial intelligence (19%) and healthcare technology (6%) (Figure 3.17). Regarding VC funding globally, LAC ranks first in terms of its concentration in the financial services industry and second in terms of the relevance of the fintech vertical (Rudolph, Miguel and Gonzalez-Uribe, 2023[66]).
Note: Other countries include the Bahamas, Belize, Bolivia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Jamaica and Venezuela.
Source: Authors’ elaboration based on (Preqin, 2025[65]).
Most VC inflows to LAC originate from the United States, which accounted for 42% of total VC investments between 2016 and 2024. The United States is the top source of VC investment in every major LAC market, including Brazil (USD 1.16 billion), Mexico (USD 951 million) and Colombia (USD 449 million). While intraregional VC flows are notable in countries like Brazil and Mexico, United States investment remains a dominant trend (Figure 3.18). These figures underscore the strategic role of international investors in scaling start-ups across LAC, especially in larger markets such as Brazil and Mexico, which together attracted more than 70% of all VC inflows during the 2016-2024 period.
Note: Other includes the Bahamas, Belize, Bolivia, Costa Rica, Ecuador, El Salvador, the Dominican Republic, Guatemala, Jamaica and Venezuela.
Source: Authors’ elaboration based on (Preqin, 2025[65]).
In venture capital, an exit denotes the process by which investors reach returns on their investments, typically through mechanisms such as mergers and acquisitions (M&A) or initial public offerings (IPOs) (Ahluwalia and Sul, 2024[67]). Exits of venture capital in LAC were concentrated in digital sectors. During the period 2016‑2024, the mobile apps sector accounted for the highest proportion of VC exits in LAC, at 44.4%, followed by fintech (17.3%) and cloud computing (15.1%) (Preqin, 2025[65]). The peak year was 2021, concentrating 63.5% of all exits within the period. This distribution underscores the robust demand for digital and mobile solutions in emerging markets over the last decade. Verticals such as clean technology, blockchain and agricultural technology exhibited significantly lower exit activity (Preqin, 2025[65]).
Domestic corporate bonds
Domestic corporate bond markets have emerged as a significant source of private-sector financing. These markets enable firms to diversify their funding sources beyond traditional bank loans and equity while offering benefits such as lower transaction costs, reduced currency risk, and greater familiarity with local regulations and investors. At the end of 2023, global corporate bond debt reached USD 34 trillion, and over 60% of the increase since 2008 came from non-financial corporations (OECD, 2024[68]).
Yet corporate bond markets remain underdeveloped in LAC. The outstanding amount of corporate bonds in the region accounted for only about 2% of the global total in 2023. Domestic bond issuance in LAC is dominated by the public sector, which made up 81% of total issuances between 2015 and 2023, while corporate bonds represented just 19% (Figure 3.19). There is considerable variation across the region, with higher corporate issuance in some Caribbean economies, such as the Bahamas, Barbados, and Trinidad and Tobago.
Note: Shares are of the amount issued in United States dollars. Bonds refer to those issued during the period from 1 January 2015 to 31 December 2023. This includes bonds with an original maturity greater than one year and issues greater than USD 1 million.
Source: Authors’ calculation based on (OECD, 2024[69]).
Corporate bond markets in LAC are highly concentrated and lack diversification. Between 2015 and 2023, Brazil and Mexico accounted for nearly three-quarters of all corporate bonds issued in local markets, followed by much smaller shares in Argentina, Chile and Colombia. This concentration is partly explained by economic size: larger economies support liquid government bond markets that provide benchmark yield curves for pricing corporate bonds and that host firms with greater financing needs; this leads to larger issuances and lower relative bond costs through economies of scale (OECD, 2024[70]). The rest of the region has only marginal participation, with 13 countries contributing less than 1% each, highlighting the need to expand market depth and issuer diversity. Demand is largely driven by pension funds, with a strong preference for investment-grade bonds, which limits access for SMEs and lower-rated issuers.
Non-financial firms dominate corporate bond issuance, but they face challenges in currency and maturity structures. These firms account for most of the total amount and number of bond issuances, and they tend to issue in larger amounts than financial firms. However, a significant share of issuances remains in foreign currency (58% between 2015 and 2023), exposing firms to currency mismatches and exchange rate risks. While there has been a recent shift towards local-currency issuance, average maturities have declined slightly in the last two years, narrowing the gap with other emerging markets but still leaving room for improvement (OECD et al., 2024[2]; OECD, 2024[68]).
There is untapped potential for strengthening corporate bond markets through targeted reforms and regional integration. Policy tools such as subsidised credit-rating costs, well-designed tax incentives for specific bonds (e.g. infrastructure) and robust sovereign yield curves could stimulate market growth. Updating bond issuance guidelines to broaden issuer eligibility and prioritise strategic sectors, such as green development and technological innovation, could enhance access to capital for high-tech and research-oriented firms. For instance, the Shanghai Stock Exchange recently revised its corporate bond rules to support green growth and innovation by expanding eligible issuers and refining criteria for science and technology bonds (OECD, 2025[62]). Promoting environmental, social and governance bonds and regional bond-market integration could also help smaller countries to access deeper and more liquid investor pools. A regional approach could reduce borrowing costs and support medium-sized enterprises, although it would require overcoming technical, regulatory and currency-related barriers.
Regional financial integration
Regional financial integration can help to deepen and diversify participation in capital markets across LAC by broadening stakeholder access and enhancing market efficiency. It also lowers transaction costs for investors, increases liquidity, and helps to mitigate financial risks (Bonita et al., 2020[71]). Fostering a more interconnected market can attract a wider range of foreign investors interested in acquiring diversified assets across multiple countries within a unified framework. A more integrated regional market could expand the base of issuers and channel investment into previously underrepresented sectors (Bown, 2017[72]). Additionally, increased demand for securities listed on a single regional platform could help to lower borrowing costs for issuers.
Despite these benefits, several barriers hinder integration efforts in the region. These include macroeconomic disparities, limited supply and demand in local markets, fragmented regulatory systems, and incompatible market infrastructures. Countries in the region exhibit varied levels of economic stability and different exchange rate systems, which complicate harmonisation. Moreover, the limited number of active issuers and investors, as well as insufficient financial literacy, contribute to low market participation. Differences in tax regulations, legal frameworks and the use of separate trading systems across national exchanges further challenge integration across LAC (Bonita et al., 2020[71]). Addressing these barriers is crucial, and initiatives promoting capital market integration should help advance the adoption of measures needed to strengthen such integration.
Existing initiatives of regional financial integration, such as nuam exchange, offer a concrete opportunity to advance the integration of capital markets in Latin America. The nuam exchange aims to integrate the Colombia, Lima and Santiago Stock Exchanges into a single market. Its goal is to provide a dynamic and modern offering that fosters business growth and creates value for investors through a more attractive and diversified portfolio. By consolidating assets and business operations on a shared platform, nuam exchange is working to align regulatory frameworks, promote cross-border investment and improve market efficiency (Nuam exchange, 2025[73]; Rodríguez Martínez, 2024[74]). As of August 2025, market capitalisation reached USD 212 billion in Chile, USD 100 billion in Colombia, and USD 204 billion in Peru, with 162, 61, and 192 issuers respectively, providing a strong foundation for growth through regional integration (Figure 3.20, Panel A). Currently, the three exchanges, still operating as independent market infrastructures, have adopted the same trading system provided by Nasdaq.
There are well-established international precedents that offer valuable models for regional capital market integration, such as Euronext in Europe. Euronext in Europe has successfully unified multiple national exchanges while preserving the existence of individual stock markets. Similar to nuam, Euronext started with the merger of three exchanges – Amsterdam, Brussels and Paris – and, in 2025, it operates seven European regulated exchanges and provides clearing, settlement and custody services, covering the entire capital markets value chain. Nuam is following the example of Euronext, and to reach its full potential, it needs to start establishing mutual recognition of market participants and ensure interoperability among clearing houses in the three countries, thereby enabling efficient cross-border trading and settlement (OECD et al., 2024[2]).
Regional financial integration offers an opportunity to diversify portfolios through the development of key sectors across markets. The sectoral composition of the stock exchanges integrating nuam varies across countries, reflecting a focus on strategic sectors and the potential for diversification for both investors and issuers. In 2025, financial institutions played a central role, representing 28% of market capitalisation in Chile, 24.3% in Colombia, and 32% in Peru, supporting broader access to finance (Figure 3.20, Panel B). Beyond finance, other sectors hold significant potential. Industrials contribute to value-added production, while utilities can underpin the supply of renewable energy. Together, they account for 16% of the market each in Chile and 17% for utilities in Colombia, though they represent a smaller share in Peru. Materials remain a major driver in Peru, comprising 69% of market capitalisation, highlighting opportunities for greater sectoral diversification. This sectoral composition reveals both potential complementarities across markets and areas where diversification could strengthen the region's production transformation and enhance portfolio diversification as nuam exchange advances toward full integration.
Note: 2025 data refer to information available up to 31 August 2025. Panel B: Other includes consumer discretionary, communication services, healthcare, information technology and real estate. Sector classification follows the MSCI Global Industry Classification Standard (GICS).
Source: Authors’ elaboration based on (Nuam, 2025[75]).
International capital markets
LAC bond issuance in international markets continued to rise in 2024 after a rebound in 2023. The total amount issued by public and corporate sectors reached USD 121.77 billion in 2024, up from USD 89.1 billion in 2023 (Figure 3.21, Panel A). Sovereign and corporate issuers contributed almost equally to this performance, with sovereign bonds making up 56.6% of the total. This recovery was driven by favourable macroeconomic conditions, such as currency appreciation, slowing inflation and the halt in interest rate hikes.
International bond issuance remains concentrated in a few LAC countries and limited production sectors. Mexico, Brazil, Chile and Colombia accounted for 65% of total issuance in 2024 (Figure 3.21, Panel B). Corporate bonds – issued by private financial and non-financial firms, state-owned enterprises and supranational entities – represented 58% of the total, while sovereign issuances made up 42%. From a sectoral perspective, most corporate debt was issued by firms in the financial, energy and transportation sectors, which together accounted for 73% of total corporate issuance (ECLAC, 2025[76]).
Note: Other includes Ecuador, Honduras, Jamaica, Paraguay, and Trinidad and Tobago.
Source: Authors’ elaboration based on (ECLAC, 2025[76]).
Larger firms in LAC are the main issuers of corporate bonds in international markets and play a central role in shaping investment dynamics in the region. An analysis of 295 listed non-financial corporations across the 6 largest economies in the region – Argentina, Brazil, Chile, Colombia, Mexico and Peru – shows that only 24% of them issued bonds between 2013 and 2023. However, these bond-issuing firms accounted for roughly 60% of total assets and net income and more than half of total investment in property, plant and equipment. This pattern holds across most countries in the sample, particularly in Chile, Colombia and Mexico, where bond-issuing firms contribute the majority share of corporate financial indicators. Sector-level data confirm this concentration: although fewer in number, bond issuers dominate in capital-intensive sectors such as manufacturing, mining, information and utilities. As a result, the financing decisions of these firms have a significant influence on gross fixed capital formation and the broader economic trajectory of the region (Méndez Lobos and Pérez Caldentey, forthcoming[77]).
Risk perception in LAC’s corporate bond market improved during 2023. High solvency and balanced risk are crucial factors for maintaining well-developed and strong capital markets. Risk in the region decreased in 2023 after a difficult first quarter. The JP Morgan Corporate Emerging Markets Bond Index (CEMBI) measures the extra interest (in basis points) that a corporate international bond pays over a government international bond in emerging markets. This is a measure of the level of risk that emerging market corporations are perceived to have. The CEMBI for the region stood at 3 521 basis points at the end of December 2023 after losing 36 basis points during the year. This was 62 basis points lower than the region’s sovereign counterpart, the JP Morgan Emerging Markets Bond Index Global Core (EMBIG). After an increase in corporate spreads in the region in the first quarter of 2023 due to the default of Brazil’s Lojas Americanas in January, the region was able to readjust in the following quarters and outperformed Asia and the Middle East.
Capital market regulation in LAC has evolved to reduce risk and improve efficiency, but significant challenges remain. Chile has implemented reforms to boost international integration and attract foreign investors, while Brazil is modernising its regulatory framework to lower compliance costs and enhance efficiency through new technologies. Colombia has advanced in aligning with the principles of the International Organization of Securities Commissions (IOSCO), reinforcing regulatory oversight. However, further efforts are needed across the region to simplify processes, attract new issuers and ensure that regulations are dynamic and responsive to changing market conditions. Priorities include promoting investment diversification, reducing barriers for foreign investors, enhancing governance to build investor confidence, protecting minority shareholder rights and improving financial literacy.
Green, social, sustainability, sustainability-linked and blue bond issuance in international markets can support sustainable production
Globally, green, social, sustainability and sustainability-linked (GSSS) bond issuance has experienced rapid growth and diversification, with the outstanding amount reaching USD 4.3 trillion in 2023, up from USD 641 billion just five years earlier (OECD, 2024[68]). Green, social, sustainability, sustainability-linked and blue (GSSSB) bonds are also emerging in LAC as a powerful financing mechanism to support the region’s production transformation towards more sustainable and resilient economic models. The share of GSSSB bonds in total LAC bond issuance in international markets increased to 27.2% in 2024, a sharp rise from 9.3% in 2020. Raising funds through these instruments instead of traditional bonds has become an attractive option in LAC for increasing returns on liquid global capital, diversifying the investor base, mobilising direct capital into sustainable activities and acquiring financial support for creating sustainable capital markets. Between 2014 and 2024, the GSSSB international bond market in LAC reached a cumulative value of USD 164.4 billion (Figure 3.22). Total green bond issuance in LAC more than doubled over five years, from a cumulative total of USD 18.7 billion in 2019 to USD 46.6 billion in 2024. The growth was even more pronounced for social, sustainability, sustainability-linked and blue bonds, reaching a cumulative issuance of USD 117.8 billion in 2024 (OECD, 2024[78]).
By type of instrument and percentage of total international LAC bond issuance
Note: GSSSB = green, social, sustainability, sustainability-linked and blue.
Cumulatively, LAC holds a significant share of global blue-labelled debt. Europe accounts for 40%, Asia and the Pacific 35%, LAC 23% and Africa 2%, with North America and supranational entities each under 1%. In 2023, LAC led global blue bond issuance, reaching USD 2.74 billion and surpassing Asia and the Pacific, the second-highest issuing region, which recorded USD 1.95 billion (CBI, 2023[80]). Most of LAC’s blue bond issuance came from non-financial corporates, followed by sovereigns, government-backed entities, financial corporates and development banks. Key economic sectors in LAC are increasingly benefitting from blue bonds, which support both social and environmental objectives. In July 2023, Águas do Rio – a subsidiary of AEGEA, Brazil’s largest private sanitation company – issued four bonds totalling USD 1.16 billion, maturing in 2034 and 2042, to finance projects in green categories such as renewable energy, pollution prevention and control, biodiversity conservation, and sustainable water and wastewater management, as well as social categories like affordable infrastructure and socio-economic advancement (CBI, 2023[80]). This issuance exemplifies how the sustainable debt market can be leveraged to drive blue development.
GSSSB bonds have become attractive instruments for raising capital in a growing number of economic sectors in LAC. The sovereign sector dominated international GSSSB bond issuances in the 2014‑2024 period, mainly due to Chile’s large sovereign issuances since mid-2019, when it issued the region’s first sovereign green bond in international markets. Between 2014 and 2024, the main sectors that issued GSSSB bonds in international markets, after sovereign (51.6%), were finance (11.5%), energy (9.6%), and construction and real estate (5.6%) (Figure 3.23, Panel A). Sovereign issuers’ preferred instruments in the ten-year period were social, sustainability and sustainability-linked bonds. However, private-sector participation was also significant in the period, especially in the issuance of green and sustainability-linked bonds. The top five sectors (excluding sovereign) were finance, energy, forestry and paper, food and beverage, and the chemical industry. Combined with the sovereign sector, they accounted for 87.5% of the region’s total international GSSSB bond issuances in the 2014-2024 period (ECLAC, 2025[76]; Velloso and Perroti, 2023[79]).
Excluding the sovereign sector, the financial sector showed the steadiest growth, and the energy sector surged in 2024 to become the region’s top GSSSB bond issuer (Figure 3.23, Panel B). The region’s international GSSSB bond issuances from the financial sector are growing steadily, as financial institutions increasingly align capital with sustainability goals to attract sustainability-focused investors. The energy sector saw a sharp rise in 2024, overtaking the financial sector to become the region’s top GSSSB issuer after the sovereign sector. In the energy sector, GSSSB corporate bonds are important instruments for financing the energy transition and decarbonisation. In forestry and paper, GSSSB bonds support conservation, sustainable forest management and low-impact manufacturing; the sector maintained a relatively stable presence, though there were no issuances in 2020 or 2022. Issuances from the food and beverage sector peaked in 2021 but declined sharply in 2023 and 2024 amid rising scrutiny over deforestation and supply chain emissions. GSSSB bonds in this sector hold the potential to support a more sustainable food system through investments in plastic reduction, decarbonisation and climate resilience. In contrast, the chemical industry experienced rapid growth in 2023 and 2024, with GSSSB bonds increasingly financing decarbonisation and circular economy initiatives.
Note: GSSSB = green, social, sustainability, sustainability-linked and blue. The data include only international bonds and are based on market sources, including Dealogic, LatinFinance and Bloomberg, among others. Panel A: The category “Others” includes chemical industry (4.2%), transportation (3.1%), telecommunications and information technology (2.4%), construction and real estate (2.0%), and retail and consumer products (1.3%). The sovereign sector includes three sub-sovereign green bond issuances by Argentina’s provinces of La Rioja and Jujuy. The infrastructure sector includes four green bonds (totalling USD 6 billion) issued in 2016 and 2017 by the Mexico City Airport Trust to finance the construction of a new airport, but the project was cancelled in 2018. Panel B: Sovereign sector issuances do not include sub-sovereign issuances.
Brazil, Chile and Mexico are the region’s leading issuers across the top five sectors. Chile (61.5%) and Mexico (15.6%) accounted for the largest share of sovereign international GSSSB bond issuances. The financial sector was dominated by issuances from supranational entities (43.3%) and Brazilian companies (34.7%). In the energy sector, the top issuers were from Chile (33.0%), Mexico (22.5%) and Brazil (22.5%). In forestry and paper, Brazilian issuers accounted for 64.6% of the international GSSSB bond issuances from the sector over the ten-year period, and Chilean issuers for 35.4%. Brazilian issuers also dominated in the food and beverage and chemical industry sectors. They accounted for a share of 57.2% in the food and beverage sector, followed by Mexican issuers with 25.6%, and for a share of 40.7% in the chemical industry, followed by Mexican and Chilean issuers with shares of 33.0% and 20.8%, respectively.
Issuer types and instrument preferences varied across sectors between 2014 and 2024, with private corporates dominating most sectors and green bonds showing greater sectoral diversity than other GSSSB instruments. Across the top five sectors (excluding the sovereign sector), different types of issuers predominated (Figure 3.24, Panel A). Private corporate (non-bank) issuers dominated in the energy, forestry and paper, food and beverage, and chemical industry sectors. In the financial sector, there was a mix of private banks, quasi-sovereign issuers and supranational entities. In the energy sector, 78% of issuers were private corporates, while 22% were quasi-sovereign. Sectors also diverged in their preferred types of instruments. The energy sector was the top issuer of green bonds, while the sovereign sector led in sustainability, social, sustainability-linked and blue bond issuances (Figure 3.24, Panel B). Social, sustainability and blue bonds were issued predominantly by the sovereign sector, while the issuance by sector of international green bonds and sustainability-linked bonds (SLBs) was more diverse.
SLBs have proven particularly attractive to corporates in LAC. From a private-sector perspective, their appeal lies in their flexibility in terms of both sectoral diversity and credit quality. A significant share of SLB issuance in the region came from non-investment-grade (high-yield) issuers, who accounted for 66% of total international SLB issuances (Figure 3.24, Panel B). However, SLBs have come under scrutiny due to concerns over their credibility, particularly the lack of ambitious sustainability improvements following issuance (Sustainable Fitch, 2024[81]). This has led some investors to shift their focus back to green bonds. Like SLBs, green bonds have drawn a wide range of issuers across sectors and credit ratings, with approximately 67% of green bond issuers in the region falling into the non-investment-grade category.
Note: The data include only international bonds and are based on market sources, including Dealogic, LatinFinance and Bloomberg, among others. Panel A: The figure includes only the top five sectors excluding the sovereign sector, accounting for USD 59.10 billion (36%) of the total amount of international green, social, sustainability, sustainability-linked and blue (GSSSB) bonds issued by LAC issuers from 2014 to 2024. Panel B: The figure includes only the top sectors, which together accounted for USD 143.91 billion (87.5%) of the total amount of international GSSSB bonds issued by LAC issuers from 2014 to 2024. SLB = sustainability-linked bonds.
GSSSB bonds can serve as strategic instruments to finance high-impact sectors that drive the green transition and support production transformation in LAC. As noted above, the financial, energy, forestry and paper, food and beverage, and chemical industry sectors have emerged as important drivers of sustainable growth. The green transition provides an opportunity to reorient the region’s economic structure towards high-impact sectors such as renewable energy, sustainable agriculture, biodiversity conservation, and advanced manufacturing. Investment in these areas not only helps to mitigate climate risks but also supports quality job creation, strengthens regional value chains and fosters technological innovation, all of which are central to a transformative and inclusive development path (Martinez et al., 2025[30]).
The integration of GSSSB bonds with green productive development policies can significantly enhance the effectiveness of sustainable financing in LAC. Green productive development policies can provide the strategic framework needed to ensure that the proceeds of GSSSB bonds are directed towards high-impact sectors that deliver both economic and environmental returns. Some countries have demonstrated this integration through initiatives such as Brazil’s USD 10.8 billion platform supporting conservation and green industrial hubs, which represents a comprehensive approach to aligning sustainable finance with productive development strategies. This model shows how green productive development policies can help to structure robust project pipelines, enhance the credibility of GSSSB instruments and ensure that sustainable financing contributes to long-term economic transformation rather than isolated environmental projects (Chapter 2) (Martinez et al., 2025[30]).
Efforts to expand green bond markets in low- and middle-income countries are gaining momentum, with the European Union and LAC institutions taking a leading role. Building on Europe’s track record of successful green bond issuance, the European Union is advancing its Global Green Bond Initiative (GGBI), designed to catalyse green finance in low- and middle-income countries by mobilising EUR 15 billion to EUR 20 billion for sustainable investment (Présidence de la République, 2023[82]). This initiative combines financial support, technical assistance and risk mitigation tools to strengthen local green bond ecosystems. In LAC, the LAGreen Fund stands out as the region’s first dedicated green bond fund. Launched in 2021 with backing from the European Union’s Latin America and Caribbean Investment Facility (LACIF) and the German Government, LAGreen invests in green bonds and provides technical support to new issuers, helping them to adopt high-impact standards and to access international capital markets. By end-2024, LAGreen had subscribed to nine green or social bonds across seven countries, having mobilised a total of USD 866 million through bonds in which it invested, for which it provided advice and/or for which it built capacity. Around 83% of the use of proceeds went to green projects, the remaining to social projects (LAGreen, 2025[83]). Both GGBI and LAGreen can contribute to aligning financial flows with sustainability goals, while supporting the broader transformation of production systems through investment in clean energy, sustainable infrastructure and climate-resilient sectors.
Robust sustainable finance frameworks can ensure the effectiveness of green, social, sustainability, sustainability-linked and blue bonds
Establishing robust sustainable finance frameworks in LAC is crucial for regulating GSSSB bond issuance and directing investment to priority sectors. These frameworks, aligned with national development goals, rely on taxonomies, standards, policies and international co-operation, aiming to integrate environmental, social and governance factors, manage climate risks and facilitate sustainability financing. At the international level, two widely used private-sector standards classify bonds as sustainable – the International Capital Market Association (ICMA) and Principles and the Climate Bonds Initiative (CBI) – with the caveat that these overarching guidelines provide a broad, non-exhaustive list of eligible green and social projects, and issuers often refer to third-party taxonomies or their own classifications. Globally, corporate GSSS bond issuance following various international standards and taxonomies grew from under USD 150 billion in 2014 to USD 450 billion in 2023 (OECD, 2024[68]). Sovereign issuance following any kind of international standards also rose sharply over the same period, from less than USD 150 billion to over USD 300 billion, with nearly USD 200 billion issued following some type of taxonomy (OECD, 2024[68]). Increasing GSSSB bond issuance in LAC has also prompted the region's issuers, both public and private, to develop more robust frameworks that guide issuance and boost investor confidence. By the end of 2023, 14 LAC countries had launched initiatives, standards, guidelines or taxonomies, totalling 221 actions (OECD, 2024[78]). Moving forward, the region needs clearer, harmonised frameworks to enhance transparency, credibility and investor confidence. Strengthening governance, co-ordination and data availability will be critical to ensuring effective, long-term financing that supports sustainable development and decarbonisation (OECD, 2024[78]).
When examining sustainable finance frameworks in LAC countries, green and sustainable taxonomies stand out. Taxonomies are crucial for the credibility of use-of-proceeds bonds, such as green, social, sustainability bonds, as they define eligible projects and help to prevent greenwashing and SDG-washing (OECD, 2024[78]). As of September 2025, taxonomies had been published in Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Mexico and Panama, and were under development in Peru. The first in the region was Colombia’s 2022 green taxonomy, which focused on the agriculture, forestry and other land uses (AFOLU) sectors. These frameworks typically address one or more areas such as climate change mitigation and adaptation, the circular economy, and biodiversity. In Costa Rica, for example, the first edition of the taxonomy focused on climate change mitigation and adaptation, and the country is now preparing a second edition to include the conservation, restoration, and sustainable use of biodiversity and ecosystems.
Sustainable and green taxonomies are crucial for making regional markets more attractive and reliable, yet their use and implementation remain limited in the LAC region. As they are not legally binding and often little known by financial actors, their impact depends on wider adoption by key stakeholders across both banking and non-banking sectors. A case in point is Costa Rica’s Sustainable Finance Taxonomy, currently in its implementation phase through three pilots involving a diverse set of actors: one with seven banks, a second with three insurance companies, and a third with an investment fund and a pension fund. Conducted with the United Nations Environment Programme Finance Initiative (UNEP FI) and regulators such as the Superintendency of Financial Institutions (SUGEF), Insurance (SUGESE), Securities (SUGEVAL), and Pensions (SUPEN), these pilots aim to build capacity, identify and close gaps between current practices and taxonomy requirements, and provide training and guidance to facilitate adoption. In parallel, Costa Rica is developing a web platform to make the taxonomy more accessible for regulators, financial institutions, issuers, consultants, NGOs, academics, production sectors, and citizens. The platform will serve as a strategic tool to support implementation and foster transparency, standardisation, and informed decision-making in sustainable investments. It will feature interactive dashboards, self-assessment modules, a resource centre with tutorials, and tools to compare taxonomies and assess eligibility (MINAE et al., 2024[84]; SUGEVAL, 2024[85]). These types of initiatives can serve as best practices for other countries in the region seeking to improve understanding and use of their taxonomies, identify eligible projects, strengthen the alignment of financial instruments, and build confidence among investors and regulators.
LAC is one of the world’s most attractive destinations for FDI. In 2024, LAC received high FDI inflows, accounting for 12.6% of global FDI (ECLAC, 2025[86]). In 2024, FDI inflows represented 2.8% of the region’s GDP and played a particularly significant role in Caribbean countries (Figure 3.25). In 2024, reinvested earnings became the largest component of FDI inflows into LAC (52%), followed by equity (34%) and intercompany loans (15%) (ECLAC, 2025[86]). FDI can be a key driver of production transformation by boosting sectoral productivity, fostering innovation and accelerating the development of strategic industries. Foreign firms often outperform domestic ones due to their access to advanced technologies, managerial expertise and greater capital intensity. FDI can generate positive spillovers for local firms through supply-chain linkages, competition, imitation and knowledge transfers, thus narrowing productivity and innovation gaps and supporting structural transformation (OECD, 2019[87]; OECD et al., 2023[12]). However, the impact of FDI is not automatic, and it depends on the enabling conditions and policies implemented by host countries (ECLAC, 2024[88]).
Note: Data for LAC corresponds to a weighted average as in (World Bank, 2025[58]).
Source: Authors’ calculations based on (World Bank, 2025[58]).
FDI trends reflect long-standing investment ties while also highlighting opportunities to diversify destination countries across the region. Over the last two decades, the European Union, followed by the United States, have been the leading greenfield investors in LAC. In 2024, they accounted for 40% and 23% of total capital investment, respectively (Figure 3.26, Panel A). Other sources included intraregional investment (6%), the People’s Republic of China (5%) and the United Kingdom (3%). On the receiving end, FDI remains concentrated in a few economies, with Mexico (31%) and Brazil (27%) attracting the largest shares of total FDI, while Chile increased its share to 23%, followed by Colombia (7%) and Argentina (4%) (Figure 3.26, Panel A). These patterns highlight the potential to broaden FDI across a wider set of countries in the region.
Source: Authors’ calculations based on (Financial Times, 2024[89]).
Foreign direct investment in medium-tech sectors has the potential to support production transformation
Over the past decade, a significant share of FDI has been directed towards sectors with medium levels of technological sophistication. In commodity-based economies, such as Argentina, Bolivia, Brazil, Chile and Uruguay, between 40% and 69% of merchandise-related FDI flowed into medium- and high-tech sectors, highlighting opportunities to diversify and upgrade their production structures (Figure 3.27).
Note: Capital investment corresponds to ISIC Rev.4 Divisions A-C, covering the primary sector and manufacturing industries. Tech-intensity manufacturing groups are based on the OECD Technology Classification in ISIC Rev.3. Commodity export-based economies have more than 60% of their merchandise exports as raw commodities and resource-based products (Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Guyana, Jamaica, Paraguay, Peru, Suriname, Uruguay and Venezuela) (UNCTAD, 2023[21]). Service export-based economies exceed 45% in service trade (Antigua and Barbuda, the Bahamas, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines). Economies in the top 60 on the Economic Complexity Index (Costa Rica, the Dominican Republic, Mexico, and Trinidad and Tobago) are categorised as diversified with high economic complexity (Harvard Growth Lab, 2023[22]). The remaining economies (Barbados, El Salvador, Guatemala, Haiti, Honduras, Nicaragua and Panama) are categorised as diversified with low complexity.
Source: Authors’ calculations based on (Financial Times, 2024[89]).
In diversified and complex economies, between 44% and 88% of FDI was channelled into medium- and high-tech industries. Services-exporting countries also attracted the most investment in these segments, particularly in digital-oriented sectors such as ICT goods, electronic components and pharmaceuticals. Some less complex economies, such as El Salvador and Honduras, also received a high share of FDI in medium- and high-tech sectors (78% and 68%, respectively), while others saw investment concentrate in primary and lower-tech activities, reflecting the current structure of their production base.
FDI can support production transformation by enhancing export sophistication, export diversification and industrial capacity. FDI can have a positive impact on recipient economies by i) fostering technological diffusion, innovation and productivity spillovers, ii) facilitating access to international markets and mobilising resources to diversify economic activity and expand industrial bases, and iii) investing in human capital. In LAC, a 10% increase in capital expenditure from announced FDI projects is associated with a rise of 0.05 percentage point in the share of medium- and high-tech goods in total exports, a 0.04‑point increase in the export diversification index and a 0.02 percentage point increase in manufacturing value added as a share of GDP, when everything else is held constant (Figure 3.28) (Box 3.2). These results underscore the importance of attracting quality investment to support sustainable and inclusive production transformation.
Note: The figure displays the estimated percentage-point impact of a 10% increase in capital investment from announced greenfield FDI projects on the share of high and mid-tech exports, on the export diversification index and on the share of manufacturing value added relative to gross domestic product, along with their 95% confidence intervals.
Source: Authors’ calculations based on (Financial Times, 2024[89]), (WITS, 2023[90]) and (World Bank, 2025[58]).
This analysis draws on fixed-effects panel regressions to evaluate the impact of capital investment from announced greenfield projects on two key outcomes. The model covers 28 LAC countries over 2003‑2023 and is specified as follows:
where is one of the following dependent variables for country i in year t :
1) Export sophistication measures the share of medium- and high-technology goods in total merchandise exports. This indicator reflects the complexity and technological advancement of a country’s export structure. Data from exports are sourced from the World Integrated Trade Solution (WITS) and classified according to the OECD Technology Classification in ISIC Rev.3.
2) Export diversification captures the degree of diversification in a country’s merchandise export basket. It is calculated as the inverse of the export product concentration Herfindahl-Hirschman Index (HHI) in the following specification: (100 – HHI). The HHI measures how concentrated exports are across products, with higher values indicating greater concentration. By inverting the index, higher values reflect a more diversified export structure. HHI data are sourced from UNCTADstat.
3) Manufacturing value added represents the manufacturing sector’s contribution to GDP, expressed as a percentage. It captures the level of industrial upgrading and structural transformation within the economy. Data are sourced from the World Development Indicators of the World Bank.
The explanatory variable is the one-year lagged capital investment from FDI, capturing the delayed effect of project implementation. Control variables include GDP per capita, trade openness (trade as a percentage of GDP), financial development (private-sector credit as a percentage of GDP) and infrastructure (fixed broadband subscriptions per 100 people). Regressions include country and year fixed effects, and standard errors are clustered at the country level.
The results reflect robust empirical associations but do not establish causal relationships.
FDI in the renewable energy sector has expanded over the last two decades
Capital investment in renewable energy amounted to USD 2 billion across 10 projects in 2003, increasing to USD 27.66 billion across 74 projects in 2024 (Figure 3.29, Panel A). The share of renewable energy greenfield investment of total FDI has also increased, from 2% in 2003 to 17% in 2024 (Figure 3.29, Panel B). Between 2011 and 2021, FDI in renewable energy consistently exceeded FDI in fossil fuels, reflecting a global shift towards cleaner energy sources. However, from 2022 to 2024, fossil fuel investment surpassed renewables, driven primarily by country-specific developments rather than by a broader regional trend in LAC. Investment in renewables can contribute to advancing towards a more sustainable and diversified energy mix; it can reduce emissions, lower energy costs, enhance energy security and lessen dependence on fossil fuel imports. Moreover, it can boost productivity, generate formal employment and support a more resilient and inclusive development path (OECD et al., 2022[91]).
Note: The figures include 27 LAC countries: Argentina, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Saint Lucia, Suriname, Trinidad and Tobago, Uruguay, and Venezuela.
Source: Authors’ calculations based on (Financial Times, 2024[89]).
FDI plays a major role in advancing the green transition in LAC. Investment in renewable energy is positively associated with both the expansion of clean energy supply and the transformation of recipient countries’ energy matrices. In LAC, a 10% increase in capital investment in the renewable energy sector is associated with an increase of 0.79 tonnes of oil equivalent (toe) per 1 000 people in renewable energy supply. It also corresponds to an increase of 0.03 toe per million USD of GDP (purchasing power parity) and a 0.19 percentage point rise in the share of renewables in the energy matrix, when all else is held equal (Figure 3.30) (Box 3.3). These results suggest that greenfield FDI may be particularly effective in supporting the region’s energy transition, with potentially higher technological spillovers, stronger environmental safeguards or greater alignment with long-term sustainability goals.
Note: Toe = tonnes of oil equivalent, GDP = gross domestic product and PPP = purchasing power parity. The figure displays the estimated percentage-point impact of a 10% increase in capital investment from announced renewable energy foreign direct investment projects on three variables, along with their 95% confidence intervals.
Source: Authors’ calculations based on (IRENA, 2023[92]), (Financial Times, 2024[89]) and (OLADE, 2023[93]).
This analysis draws on fixed-effects panel regressions to assess the impact of greenfield FDI on three renewable energy outcomes. The model covers 16 LAC countries over the period 2003-2023 and is specified as follows:
where is one of the following the dependent variables for country i in year t:
1) Renewable energy supply per capita measures the amount of renewable energy available per person, expressed in tonnes of oil equivalent (toe) per 1 000 inhabitants. It reflects the intensity of renewable energy supply relative to population size, offering insights into access to and distribution of clean energy.
2) Renewable energy supply per unit of output captures the volume of renewable energy supplied per unit of economic output, measured in toe per million USD of GDP (PPP). It serves as a proxy for the energy intensity of the economy, indicating how efficiently renewable energy is integrated into production.
3) Share of renewables in the primary energy matrix represents the proportion of a country’s primary energy derived from renewable sources. It reflects the level of renewable energy integration into the national energy matrix and the shift away from fossil fuel dependence.
All dependent variables are sourced from OLADE-sieLAC, a comprehensive regional database that compiles and harmonises energy statistics for Latin America and the Caribbean.
The main explanatory variable is the two-year lagged capital investment from renewable energy announced projects, capturing delays between project announcements and operational impact. It is sourced from the fDi Markets database, which tracks cross-border greenfield investment.
Control variables include electricity consumption (megawatt hours per 1 000 people) and two-year lagged public investment in renewable energy (as a percentage of GDP). Regressions include country and year fixed effects, and standard errors are clustered at the country level.
The results reflect robust empirical associations but do not establish causal relationships.
Integrating foreign direct investment strategies with green productive development policies
Green productive development policies offer a comprehensive framework for maximising the developmental impact of FDI by strategically channelling foreign investment towards sectors that deliver both economic growth and environmental sustainability. Green productive development policies go beyond traditional investment promotion by establishing clear criteria for green value-chain development, technology transfer requirements and measurable environmental outcomes. This is particularly relevant for LAC, given the region’s transition towards renewable energy and sustainable manufacturing (Martinez et al., 2025[30]). Countries implementing green productive development policies can leverage FDI to build competitive advantages in emerging green sectors. This is demonstrated i) by Argentina’s advances in sustainable agriculture and lithium extraction, which illustrate how green productive development policies help countries to position themselves strategically in global green value chains while attracting quality FDI that supports both export diversification and environmental objectives, and ii) by Brazil’s electric bus industry development, which shows how co‑ordinated policies can attract foreign investment while building domestic capabilities in clean transportation technologies. The success of integrating FDI with green productive development policies depends on establishing clear transition pathways, harmonised regulatory standards and robust monitoring systems that set specific targets for green technology transfer, quality job creation in sustainable sectors and environmental impact reduction. Such steps ensure that FDI contributes to long-term transformation rather than short-term gains, an approach essential for LAC countries seeking to move beyond commodity dependence towards more sophisticated, environmentally sustainable production structures.
Enhancing domestic resource mobilisation is essential to finance an inclusive and sustainable production transformation in LAC. In a context of limited fiscal space and growing development challenges, governments will need to increase the mobilisation of public funds through more effective taxation, greater spending efficiency, and improved debt management. At the same time, they must design policies that channel private resources towards investments aligned with national development objectives. This includes expanding the role of development finance institutions (DFIs) and aligning their activities more closely with long-term development goals. Similarly, strengthening policy frameworks for capital markets will be key to fostering long-term investment, while ensuring that foreign direct investment (FDI) contributes more effectively to production transformation and sustainable growth. The key policy recommendations for LAC on financing production transformation are presented in Box 3.4.
Enhancing domestic resource mobilisation to finance an inclusive and sustainable production transformation in LAC
Strengthen tax revenue mobilisation by broadening the tax base, increasing the share of direct taxes and reducing inefficient and regressive tax expenditures and subsidies.
Leverage environmentally related tax revenues by expanding energy and pollution taxes and phasing out fossil fuel subsidies, while protecting vulnerable households.
Improve the design of CIT incentives to better mobilise investment aligned with national development policies, and prioritise expenditure-based over income-based tools.
Strengthen targeting strategies by setting clear, measurable and stable eligibility criteria, and minimise distortions and administrative burdens.
Institutionalise monitoring and evaluation through requirements for systematic reviews, tax expenditure reports and assessments.
Improve governance and transparency, for example, by consolidating incentives into tax legislation, ensuring ministry oversight and fostering interagency co-ordination.
Enhance tax morale by improving transparency, efficient use of tax revenues and actively engage citizens.
Align DFIs more closely with productive development policies by clarifying mandates, financing strategic sectors and public-good projects and enhancing their role in market intelligence and governance spaces.
Expand and diversify financial instruments offered by national DFIs to better integrate green, gender-responsive and digital objectives, and strengthen technical capacity for climate financing and risk management.
Improve collaboration between MDBs, bilateral DFIs and national DFIs to reduce fragmentation, align with national priorities and expand cohesive pipelines for green, digital and inclusive investments.
Expand MDB and bilateral DFI support for national DFIs to mobilise private capital, advance financial inclusion (especially for MSMEs) and align portfolios with climate and social goals.
Strengthening capital markets to channel financing towards productivity, decarbonisation and inclusive transformation
Increase market depth, liquidity and long-term financing by expanding institutional investor participation in domestic financial markets.
Modernise regulatory frameworks to streamline processes, diminish compliance costs, incentivise new issuers and reduce barriers for foreign investors in bond and equity markets.
Lower issuance costs through policies that simplify procedures, enhance market infrastructure, foster competition among intermediaries and encourage greater participation of issuers in sectors aligned with production transformation.
Promote regional financial integration to expand investment opportunities, increase market efficiency, enhance liquidity and reduce transaction costs and risks.
Strengthen the integration of GSSSB bonds with productive development policies to ensure proceeds finance high-impact sectors that drive decarbonisation, competitiveness and long-term economic transformation.
Expand regional and international initiatives to provide technical assistance, risk-mitigation tools and capacity building for new GSSSB bond issuers, broadening market access and scaling sustainable investment.
Develop and harmonise sustainable finance frameworks and taxonomies across LAC to enhance transparency, prevent green/SDG-washing and strengthen investor confidence in the region’s capital markets.
Channelling FDI towards the objectives of production transformation
Promote quality FDI towards long-term development objectives, ensuring investment contributes to production transformation, innovation, and sustainable growth.
Promote FDI in renewable energy, leveraging instruments such as tax incentives, feed-in tariffs, standardised power purchase agreements and renewable energy auctions.
Reinforce investment promotion frameworks by building stronger agencies, improving co-ordination across levels of government and fostering international co-operation to expand market size, diversify investors and broaden the base of recipient countries.
Strengthen the enabling environment for FDI by reinforcing macroeconomic stability, upgrading infrastructure, investing in skills development, deepening financial markets and enhancing regulatory certainty.
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← 1. For LAC, the UNCTAD study focuses on 19 countries (LAC19). It covers 7 Central American countries – Belize, Costa Rica, El Salvador, Guatemala, Honduras, Mexico and Panama; 3 Caribbean countries – the Dominican Republic, Haiti, and Jamaica; and 9 South American countries – Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, Uruguay, and Venezuela. In calculating the total cost of reaching Sustainable Development Goal (SDG) pathways, UNCTAD focuses on government spending but also considers other financing sources like foreign direct investment and official development assistance. The methodology emphasises the importance of government expenditure for achieving SDGs while acknowledging the role of private investment and external financing. It highlights the need for caution in interpreting results due to data limitations and assumptions, providing valuable insights into progress towards SDGs and identifying financing gaps for policymakers to address.
← 2. Financing gaps by priority SDG area are based on (UNCTAD, 2023[3]) estimates and represent average annual shortfalls. Since many of these gaps were calculated separately, they should not be summed to derive a total financing gap.
← 3. EATRs evaluate investment decisions at the extensive margin. They summarise the effect of taxation on the decision to invest in comparable but mutually exclusive projects, assuming that investment projects earn economic rents over their lifetime. The EMTR measures the tax burden on a project that is just breaking even before tax in order to evaluate investment decisions at the intensive margin, i.e. on how much to invest once the location or activity has been defined. For further details on the calculation of EATRs and EMTRs, see (Hanappi et al., 2023[14]).
← 4. The study on tax incentives in LAC benefited from the financial support of the Spanish Agency for International Development Cooperation (AECID) in the framework of the activities aimed at improving fiscal systems in LAC.
← 5. In this case, public development banks do not include other national DFIs. The broader category of national DFIs encompasses a wide range of financial institutions, including public development banks, guarantee funds and others.