This chapter describes why advancing a comprehensive agenda for production transformation will be key to unlocking higher, more inclusive, sustainable growth in Latin America and the Caribbean (LAC). It reviews the macroeconomic context, including an increasingly uncertain global outlook, before turning to the structural economic challenges facing the region. The complexity of these challenges underscores the urgent need for a holistic response: rethinking production structures through a sustainability and equity lens will be essential to unlocking lasting development. The chapter examines the social context in LAC, where informality remains widespread, and the environmental context, including the health consequences of unsustainable production. It finds that achieving sustainable growth that improves citizens’ well-being and reduces environmental impacts requires a broad, systemic transformation across all areas of government.
Latin American Economic Outlook 2025
Abstract
The countries of Latin America and the Caribbean (LAC) face longstanding productivity challenges that constrain their ability to achieve stronger and more inclusive and sustainable development. Despite periods of economic expansion, structural bottlenecks persist across the region. These barriers, such as weak innovation systems and limited adoption of technology, have resulted in stagnating productivity growth and hindered economic diversification and sophistication, leaving LAC economies vulnerable to external shocks and overly dependent on a narrow set of primary exports and trading partners.
However, the region also holds significant untapped potential. In a world marked by increasing geopolitical uncertainty and shifts in global supply chains, LAC is well-positioned to diversify its trade partners and product offerings. The region’s abundant natural resources, demographic advantages and emerging innovation ecosystems offer a strong foundation for responding to commercial disruptions and reorienting production models towards long-term resilience.
Seizing these opportunities requires profound production transformation, and this transformation must be both sustainable and inclusive. LAC countries must adopt a development strategy that not only boosts productivity but also aligns with environmental goals and creates decent jobs (OECD, 2019[1]). The economic, social and environmental trends that will be discussed in this chapter underscore the urgency of such a shift.
This report conceives production transformation as the changes needed in the industrial sector – as well as in every other strategic sector – to enhance production while also “fighting climate change, accelerating economic growth, and generating millions of decent jobs, while harnessing cutting edge technologies” (UNIDO, 2024[2]).
The current production model marked by low productivity, dependence on non-renewable resources and a high prevalence of informal employment is in part the result of having addressed economic, social and environmental challenges in isolation. While governance plays a crucial role in determining a country’s production structure (Chapter 2), this chapter will focus on how to move towards a more productive, more inclusive and greener model by rethinking these priorities – economic, social and environmental – together. A systemic approach is needed, one that addresses the root causes of these challenges, acknowledges their interdependence and promotes policy coherence in the design and implementation of the new production model.
In this context, promoting strategic sectors that are low in carbon emissions and rich in human capital offers a key opportunity. Investing in such sectors can help to build more resilient societies, enhance gender equality while tackling other inequalities and contribute to a better future. As LAC charts a path forward, rethinking its production structures through a sustainability and equity lens will be essential to unlocking lasting development.
An increasingly challenging international context
Global growth proved more resilient than anticipated in the first half of 2025, particularly in many emerging-market economies. Industrial production and trade were temporarily supported by front-loading ahead of tariff increases, while strong investment linked to artificial intelligence boosted outcomes in the United States. In the People’s Republic of China (hereafter “China”), fiscal support helped to offset trade headwinds and persistent weakness in the property sector. Despite rising tariffs, global financial conditions eased, underpinned by buoyant asset prices, improving credit provision and narrow corporate bond spreads. Nonetheless, asset valuations appear stretched and concerns about future fiscal risks are growing. Global GDP growth is projected to ease from 3.3% in 2024 to 3.2% in 2025 and 2.9% in 2026, as the temporary boost from front-loading fades and higher tariffs alongside elevated uncertainty weigh on investment and trade (OECD, 2025[3]).
Global prospects are increasingly constrained by rising trade barriers, subdued confidence and persistent policy uncertainty. Since May, the United States has raised tariffs on nearly all trading partners, with the effective average rate climbing to almost 20% by the end of August, the highest in close to a century. The full impact has yet to be felt, as firms are still absorbing part of the increases, but pressures are emerging in household spending, labour markets and consumer prices. Signs of labour market softening are already visible, particularly in the United States, where unemployment is edging up and job openings are declining relative to the unemployed. Disinflation has also lost momentum: food costs have reignited goods inflation, while services inflation remains persistent. Headline inflation in the G20 economies is projected to ease, with core inflation in advanced G20 economies moderating only gradually (OECD, 2025[3]).
Downside risks have increased. Escalating trade tensions and trade barriers, abrupt shifts in investor sentiment and persistent inflationary pressures could further undermine growth and stability. There are concerns about broader financial stability due to heightened financial market volatility coupled with the vulnerability of highly leveraged non-bank financial institutions. However, a reduction in trade barriers, progress in geopolitical conflict resolution and steps to streamline regulatory frameworks could bolster confidence and support a stronger recovery in investment and output over the medium term (OECD, 2025[3]).
Commodity prices stabilised throughout 2024 and into 2025, following several years of volatility. After sharp increases during the recovery period following the COVID-19 pandemic – especially in fuel and metals – prices gradually moderated. In 2024, all major commodity groups exhibited relative stability, with only modest month-to-month fluctuations. As of August 2025, commodity price indices remained above pre-pandemic levels, with metals showing an upward trend since the end of 2024 that has continued into 2025. (Figure 1.1).
Note: January 2020 = 100. Monthly data from January 2020 to August 2025.
Source: Authors’ elaboration based on (IMF, 2025[4]), accessed on 24 September 2025.
Growth stabilises in LAC, but risks remain
GDP growth is decelerating in LAC, in line with developments in the global economy. After a period of heightened volatility during the pandemic and the subsequent rebound, per capita GDP growth LAC is stabilising around its potential GDP (Figure 1.2). This broader stabilisation reflects both global economic trends and effective domestic policy responses. Proactive monetary tightening, fiscal consolidation and improved investor confidence have supported macroeconomic stability, helping to anchor inflation expectations and sustain output growth across the region (Ayres, Izquierdo and Parrado, 2025[5]; OECD, 2025[6]). Looking ahead, risks remain elevated. Inflation in some countries is still above target, fiscal challenges persist and external uncertainties continue to weigh on the outlook – uncertainties ranging from geopolitical tensions and volatile global interest rates to climate-related disruptions, including record-breaking hurricanes, floods, droughts and wildfires (WMO, 2025[7]). The degree of exposure to these risks is highly heterogeneous across LAC countries, reflecting differences in economic structure, export patterns, climate vulnerability, and fiscal and institutional capacity.
Note: Gross domestic product per capita, constant prices, purchasing power parity; 2021 international dollar. Simple averages of different economic groups. Commodity export-dependent economies have more than 60% of their merchandise exports as commodities (Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Guyana, Jamaica, Paraguay, Peru, Suriname, Uruguay, Venezuela). Service-export-dependent economies have more than 45% in service trade (Antigua and Barbuda, the Bahamas, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines). Economies in the top 60 on the Economic Complexity Index (Costa Rica, the Dominican Republic, Mexico, Trinidad and Tobago) are categorised as diversified with high economic complexity; the remaining economies (Barbados, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, Panama) are categorised as diversified with low complexity.
Source: Authors’ elaboration based on (IMF, 2025[8]).
Economic growth in LAC has shown persistent volatility, with recurrent deviations from potential per capita growth across country groups since 2000. Commodity-export-dependent economies tend to underperform more consistently relative to potential, while service-export-dependent economies display sharper fluctuations, particularly during global crises such as in 2009 and 2020. By contrast, diversified economies – of both high and low complexity – have generally maintained growth closer to potential, though they are not immune to shocks. The aggregate LAC trend mirrors these dynamics, highlighting structural vulnerabilities and the region’s sensitivity to external conditions.
The region’s current economic growth is insufficient to meet its development goals, including the eradication of poverty. In the current context, the space for demand-side policy support – both fiscal and monetary – is increasingly constrained by macroeconomic pressures, limiting the scope for short-term stimuli. To raise overall potential growth, it is essential to address long-standing structural challenges such as low productivity, high informality, limited economic diversification, low public and private investment, increasing environmental degradation and weak innovation capacity. Advancing a comprehensive agenda for production transformation, under a new vision for productive development policies, will be key to unlocking higher, more inclusive, sustainable growth.
Fiscal space to support productive and social investments is limited
The region’s primary fiscal balances have remained stable, particularly in 2023 and 2024 (ECLAC, 2025[9]). However, slowing growth, rising expenditures and increasing debt-servicing costs due to current high interest rates continue to weigh on fiscal accounts (Ayres, Izquierdo and Parrado, 2025[5]). Countries with access to financial markets have generally maintained stronger primary fiscal balances over the past two decades, recording small surpluses in 2023 and near balance in 2024. By contrast, countries with limited market access exhibited more volatile and weaker fiscal outcomes, moving from a small deficit in 2023 to a surplus in 2024, reflecting their higher sensitivity to global shocks and financing constraints (Figure 1.3). With reduced fiscal space, further strengthening of public finances through improved spending efficiency, revenue mobilisation and debt management is essential to ensure fiscal sustainability and support long-term growth.
Note: Simple averages are used. “Access” refers to the group of LAC economies that finance more than 50% of their external public debt in the market via bonds or bank loans. This group includes Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Jamaica, Mexico and Peru. “Limited access” refers to the LAC economies that finance more than 50% of their external public debt with bilateral or multilateral creditors. This group comprises Belize, Bolivia, Dominica, Ecuador, Haiti, Honduras, Nicaragua, Paraguay, Saint Lucia, and Saint Vincent and the Grenadines. Here, “LAC” represents the simple average of the economies in both groups.
Source: Authors’ elaboration based on (ECLAC, 2025[9]) and (ECLAC, 2025[10]).
Low tax-revenue growth continues to constrain fiscal space across LAC. In 2023, the average tax-to-GDP ratio in the region stood at 21.3%, well below the OECD average of 33.9%. The highest ratios were recorded in Brazil (32%), Jamaica (29%) and Barbados (28.1%), while the lowest were observed in Guyana (11.6%), Panama (11.9%) and Guatemala (14%) (Figure 1.4, Panel A). Compared to 2022, the regional average declined by 0.2 percentage points in 2023, reflecting subdued revenue performance. This trend was not uniform: 14 countries experienced a decline in their tax-to-GDP ratios, 10 recorded increases and 2 saw no change (Figure 1.4, Panel B). Persistently low revenue mobilisation continues to limit the region’s ability to finance development priorities and respond to emerging fiscal pressures.
Note: In Panel B, p.p. refers to percentage point.
Source: Authors’ elaboration based on (OECD et al., 2025[11]).
Public debt levels in LAC remain elevated, with signs of stabilisation in recent years. After peaking during the COVID-19 crisis, general government gross debt has gradually moderated across the region. In 2024, the average debt-to-GDP ratio in LAC declined but remained high, above pre-pandemic levels, reflecting a combination of improved fiscal balances and still-elevated financing needs. Countries with access to financial markets recorded lower and more stable debt ratios, while those with limited access continued to face higher debt burdens. With rising debt-servicing costs and constrained fiscal space, maintaining debt sustainability will require ongoing fiscal discipline and structural reforms to boost growth and strengthen public finances (ECLAC, 2025[9]). However, fiscal stability is also linked to efforts to foster public spending and investment that improve resilience to external shocks (Expert Review on Debt, 2025[12]).
Rising debt-servicing costs have become a growing fiscal challenge across LAC (ECLAC, 2025[9]). Implicit interest rates – measuring the average cost of debt – have increased steadily in recent years, particularly since 2021. This trend reflects tightening global financial conditions and higher risk premiums in the region. Countries with access to financial markets have seen a more moderate rise but still face upward pressure. Climate vulnerability is another factor to explain the high cost of capital, particularly for the Caribbean (Buhr et al., 2018[13]). The recent uptick in implicit rates across all groups highlights the deteriorating affordability of debt and underscores the urgency of strengthening fiscal frameworks, improving investor confidence and enhancing debt management capacities (Figure 1.5).
Note: The implicit interest rate is calculated by the ratio of debt service over gross debt. Simple averages are used. “Access” refers to the group of LAC economies that finance more than 50% of their external public debt in the market via bonds or bank loans. This group includes Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Jamaica, LAC, LAC simple average, Mexico and Peru. “Limited access” refers to the LAC economies that finance more than 50% of their external public debt with bilateral or multilateral creditors. This group comprises Belize, Bolivia, Dominica, Ecuador, Haiti, Honduras, LMI, Nicaragua, Paraguay, Saint Lucia, and Saint Vincent and the Grenadines. Here, “LAC” represents the simple average of the economies in both groups.
Source: Authors’ elaboration based on (IMF, 2025[8]).
A deeper global slowdown with renewed inflationary pressures could widen fiscal deficits, increasing debt ratios further and reducing fiscal space in the regions that are already constrained, thus creating important vulnerabilities to deal with potential new negative shocks. High levels of debt are conducive to lower growth rates through the well-documented phenomenon known as debt overhang (Powell and Valencia, 2023[14]).
Inflation is lower in LAC as policy rates trend downward, but uncertainty lies ahead
Inflation dynamics in LAC have improved markedly, reflecting strong monetary frameworks and declining global cost pressures. At the end of 2024, inflation in many countries across the region had broadly returned to pre-pandemic levels, although it remained slightly elevated in some cases. Intermediate regimes recorded higher and more volatile outcomes, while fixed regimes experienced the sharpest swings in 2022‑2023 before easing in 2024‑2025. In mid-2025, inflation continued its downward trajectory, with inflation-targeting regimes converging towards 3‑4% and displaying more stability (Figure 1.6). This outcome reflects the credibility built by central banks over the past two decades, coupled with proactive and data-driven policy responses during recent global shocks. While spikes in commodity prices in energy, food and metals fuelled inflation during 2021‑2022, their subsequent stabilisation and the gradual anchoring of expectations across regimes have supported a reduction of inflation rates. Nonetheless, regime heterogeneity persists, with inflation-targeting frameworks maintaining closer alignment with central bank objectives, compared to more volatile paths under intermediate and fixed regimes.
Note: Data from January 2016 (M01) up to June 2025 (M06). Simple averages are used. The figure only includes LAC economies with a central bank. The simple average for LAC countries with an inflation-targeting regime includes Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Guatemala, Jamaica, Mexico, Paraguay, Peru and Uruguay. For intermediate regimes, the simple average includes Bolivia, Ecuador, Guyana, Haiti, Honduras, Nicaragua, and Trinidad and Tobago. The simple average for fixed regimes includes the Bahamas, Barbados and Belize. Data for June 2025 (M06) are not available for Bahamas, Chile, Guyana, Haiti, Jamaica, Mexico, Peru, Trinidad and Tobago, and Uruguay.
Source: Authors’ elaboration based on (IMF, 2025[15]), accessed on 24 September 2025.
External flows to the region remain volatile
Portfolio flows to the region have remained subdued and on a declining trend in recent years (Figure 1.7). In 2025, quarterly flows remain weak, typically oscillating between USD 3 and 5 billion, underscoring the sustained retreat of portfolio capital. Between 2021 and 2024, flows were highly volatile, marked by a brief rebound during late 2020 and early 2021, followed by renewed weakness with annual averages of just USD 11.2 billion in 2022‑2024. This modest performance contrasts sharply with the average of USD 114.5 billion per year observed in 2010‑2014, a reduction of more than 90%. Flows slowed after the commodity supercycle, with a short-lived recovery in 2016‑2017 before falling again in 2018. A brief exception occurred during the pandemic, when debt flows of nearly USD 50 billion, mostly from official sources, temporarily reversed the trend. Since then, both equity and debt flows have remained subdued, with intermittent short-lived recoveries.
Note: The dotted line shows a polynomial trend line fitted to quarterly portfolio flows. It is included to illustrate the medium-term trajectory of total flows, smoothing short-term fluctuations.
Source: Authors’ elaboration based on (IIF, 2025[16]), accessed on 24 September 2025.
Foreign direct investment (FDI) to the region has stagnated in the last decade and slightly trending down more recently. In 2024, FDI inflows to LAC amounted to USD 189 billion, equivalent to 2.8% of GDP and 13.7% of gross fixed capital formation (ECLAC, 2025[17]) (see Chapter 4). While this represented a 7.1% increase compared to 2023, both ratios remain below the averages observed in the 2010s (3.3% of GDP and 16.8% of gross fixed capital formation). However, the region remains among the largest recipients of investment globally. The increase in inflows was largely explained by reinvested earnings of existing transnational firms, while the contribution of new capital inflows stagnated, pointing to limited interest from new investors.
Sluggish productivity hinders potential growth in LAC
Potential GDP-per-capita growth in LAC is insufficient to ensure convergence with advanced economies, with weak productivity growth at the heart of the problem. The region’s potential GDP per capita growth is estimated to be about 0.8% per year, independent of the estimation method and based on data from 1980 to 2024. In comparison, the potential GDP per capita growth of high-income economies is estimated at around 1.7% annually (Figure 1.8). These productivity deficiencies are a key component of the “development traps” that hinder a more productive, inclusive and sustainable future in LAC. The persistence of low growth and low labour productivity underscores the need for virtuous structural transformation to break free of this situation (ECLAC, 2024[18]).
As estimated by different methods since 1980
Note: Average growth is a simple average over the period analysed. HP = the Hodrick Prescott filter, which was used as an alternative model due to its resilience to short-term shocks to create a smoothed curve (lambda equal to 100). AR(1) refers to an autoregressive model of order 1. The AR model uses GDP per capita growth data. The LAC series refers to 33 economies, while the term “advanced economies” includes 41 economies as listed in the International Monetary Fund’s World Economic Outlook database.
Source: Authors' calculations based on (OECD et al., 2024[19]) and (IMF, 2025[8]).
There is a significant gap in labour productivity between LAC and the OECD, driven primarily by lower total factor productivity (TFP), which accounts for over 80% of the difference. The remainder largely reflects shortfalls in human capital. It is important to note that there is significant labour productivity heterogeneity in the region. For example, labour productivity in Chile, Costa Rica, Panama, Trinidad and Tobago, and Uruguay is 45-85% higher than the regional average. In contrast, labour productivity in Bolivia, Honduras and Nicaragua is 56-60% lower (ECLAC, 2025[20]).
LAC’s productivity growth has also underperformed in comparison to developed countries. During the period 1991-2024, labour productivity in the region grew at 0.9% per year on average, well below the 1.2% annual rate observed in OECD countries. This again is due to poor TFP growth performance in LAC. According to Penn World Table data, TFP virtually did not grow in the region after 1990 (0.02% per year on average), whereas it grew at 0.8% annually in OECD countries. A factor for concern is that increasing temperatures due to climate change are already negatively impacting labour productivity, and this can worsen if adequate adaptation measures are not implemented (ECLAC, 2023[21]).
Limited structural transformation has constrained productivity growth in LAC
Sectoral dynamics, not structural change – the shifting of resources towards higher value-added and higher productivity sectors – explain the region’s productivity shortfall. A standard decomposition shows that, during the high-growth years 1950-1979, 61% of LAC annual labour-productivity gain came from within-sector improvements (1.72 percentage points of 2.83%), with the reallocation of labour across sectors explaining the remaining 39%. After 1980, both channels weakened sharply: average productivity growth fell to 0.43% a year, of which within-sector gains accounted for only 0.20% (46%) and between-sector shifts accounted for 0.23 percentage points. The reversal reflects a fall in service-sector productivity (-0.27% a year in 1980-2018 vs. 1.2% in 1950-1979), combined with a marked slowdown in industry (0.48% a year, down from 2.3%).1
There is a need to boost productivity both within individual sectors and across most sectors, as well as to sustain and accelerate the structural transformation of economies. Compared to more developed countries, the region still has a large share of employment in low-productivity sectors, while knowledge-intensive services remain an underutilised source of potential. At the same time, the decline in productivity within key economic sectors over the past decade has led many countries to experience a drop in overall labour productivity (ECLAC, 2025[20]). This structural profile also shapes the region’s export mix and position in global value chains – a challenge explored in the next section.
Services lead structural transformation in LAC, but low value added, informality and unsustainable production methods persist
Services dominate the economic structure of many LAC countries, while industry and extraction have stagnated or declined. However, issues affecting services persist: these include low value added, informality and unsustainable production methods. Services now generate roughly two-thirds of regional GDP and employment, spanning wholesale and retail trade, transport, finance, real estate, tourism, education, health and public administration. A high level of informality – jobs without social protection or stable contracts – remains a defining feature of the region’s services sector. By contrast, industry contributes approximately 31% of GDP and 21% of employment. This includes manufacturing – which accounted for 13.6% of GDP and 12.1% of jobs in 2023 – along with construction, utilities and, in some classifications, mining (UNIDO, 2025[22]). After peaking in earlier decades, the industrial share of GDP has stagnated or slipped in LAC. Mining and hydrocarbons still underpin exports in resource-rich countries such as Chile, Peru, and Trinidad and Tobago, yet the extractive sector overall represents only around 4.0% of regional GDP and an even smaller fraction of jobs.
The agriculture share of GDP has shrunk in LAC, but it remains pivotal to growth, livelihoods and exports – much more so than in OECD economies. Farming accounts for about 6.5% of the region’s GDP and 13% of employment, compared to 1.4% and 4%, respectively, in the OECD (World Bank, 2024[23]). The sector is vital for food security and foreign-exchange earnings, through commodities such as soy, coffee and tropical fruit, and continues to anchor rural employment, particularly in Central America and parts of South America.
Limited diversification of LAC export baskets constrains productivity and growth
LAC’s heavy dependence on raw-commodity exports, combined with limited participation in higher value-added stages of global supply chains (GVCs), dampens learning-by-doing, technology spillovers and investment in productive capabilities. Lacking opportunities to upgrade into more sustainable and sophisticated goods and services, firms stay stuck in low-productivity niches. This is one of the key reasons why sectoral productivity and income growth remain subdued.
The region’s export basket is concentrated in primary goods and low-tech manufacturing. Nearly half of LAC economies are commodity-based, with primary carbon-intensive products such as agricultural goods, minerals and energy commodities accounting for 22-88% of merchandise exports (Figure 1.9) (see environmental section below). Low-tech manufactured products represent up to 75% of exports, including processed foods, textiles and wood- or paper-based products, typically linked to natural resources. Medium-tech manufactured products, such as basic metal products, make up to 40%. Service-exporting economies in the Caribbean remain primarily reliant on tourism, which plays a central role in generating employment, foreign exchange and opportunities for local development. Caribbean merchandise exports continue to reflect limited diversification, often dominated by primary and low-tech goods that generate low value added and offer limited scope for productivity gains.
Note: Tech-intensity manufacturing groups are based on the OECD Technology Classification in ISIC Rev.3. Commodity export-dependent economies have more than 60% of their merchandise exports as commodities (Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Guyana, Jamaica, Paraguay, Peru, Suriname, Uruguay, Venezuela). Service-export-dependent economies have more than 45% in service trade (Antigua and Barbuda, the Bahamas, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines). Economies in the top 60 on the Economic Complexity Index (Costa Rica, the Dominican Republic, Mexico, Trinidad and Tobago) are categorised as diversified with high economic complexity; the remaining economies (Barbados, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, Panama) are categorised as diversified with low complexity.
Source: Authors’ calculation based on (WITS, 2025[24]).
A few countries in the region, mainly Costa Rica, the Dominican Republic and Mexico, exhibit a more diversified and complex export profile, driven by medium- and high-tech manufacturing. In these economies, medium-tech manufactured products, including machinery, motor vehicles, plastics and chemicals, account for 20-68% of total exports, while high-tech products such as electronics and pharmaceuticals account for 17-44% (Figure 1.9). The remaining diversified economies in the region still exhibit low economic complexity, with export baskets heavily concentrated in low-tech goods (up to 61%), followed by primary (up to 31%) and medium-tech (up to 38%) products. This contrast underscores the structural heterogeneity among LAC countries and the existence of barriers to develop towards more dynamic, knowledge-intensive and productivity-enhancing sectors.
While LAC’s traditional exports reveal comparative advantages, tech-intensive sectors offer a path to production transformation
LAC countries show competitive strength in sectors that correspond with their established export patterns. A Revealed Comparative Advantage (RCA) analysis calculates whether a country exports a product more intensively than the global average. It helps reveal sectors where countries hold a comparative advantage, guiding efforts to diversify and upgrade their economies. Commodity-exporting economies show an RCA in primary products and low-tech manufactured products, such as food and beverages. Diversified and low-complexity economies demonstrate RCAs in medium-tech manufacturing, while diversified and high-complexity economies excel in both medium- and high-tech sectors (Figure 1.10).
Note: The horizontal axis displays the number of LAC countries that have a Revealed Comparative Advantage (RCA) value greater than 1 in each sector. RCA is calculated at the ISIC Rev.3 two-digit level following Balassa (1965) methodology. Tech-intensity groups are based on the OECD Technology Classification in ISIC Rev.3. Commodity export-dependent economies have more than 60% of their merchandise exports as commodities (Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Guyana, Jamaica, Paraguay, Peru, Suriname, Uruguay, Venezuela). Service export-dependent economies exceed 45% in service trade (Antigua and Barbuda, the Bahamas, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines). Economies in the top 60 on the Economic Complexity Index (Costa Rica, the Dominican Republic, Mexico, Trinidad and Tobago) are categorised as diversified with high economic complexity; the remaining ones (Barbados, El Salvador, Guatemala, Haiti, Honduras, Nicaragua, Panama) are categorised as diversified with low complexity.
Source: Authors’ calculation based on (WITS, 2025[24]).
Revealed comparative advantages are also evident in a few more technologically intensive industries (Figure 1.10). Commodity-based economies exhibit RCAs in medium-tech sectors like plastics, chemicals and metal products. Service-oriented economies in the Caribbean, though focused on tourism, also show strengths in sectors such as metal products and chemicals. The four countries classified as diversified high-complexity economies, Costa Rica, Mexico, the Dominican Republic and Trinidad and Tobago, have RCAs in high-tech products such as computers, electronics and optical products, revealing potential for further development in these areas. By tapping into these more technologically sophisticated sectors, LAC countries can diversify their export base, driving long-term growth, productivity improvements and greater economic resilience. Among various factors, foreign direct investment has the potential to improve the diversification and sophistication of LAC’s export baskets and to boost sectors holding RCAs (Chapter 3).
Limited intraregional trade may constrain export diversification
Intra-regional trade in LAC remains limited and lower than in other developing regions. The share of Latin America’s intraregional exports in total exports has been relatively stable over the past two decades, but it remains limited, accounting for 15% of total exports in 2000 and 14% in 2023. In the Caribbean, intraregional exports declined from 21% in 2000 to 10% by 2023. During the same period, intraregional trade in Africa increased from 12% to 19%, while in Southeast Asia, China and India it rose from 20% to 26% (Figure 1.11). Figures for import partners show similar patterns, suggesting that these trends broadly reflect the region’s overall trade structure. Intraregional trade enables countries to access larger regional markets, which may encourage firms to diversify their production. It also fosters learning, innovation and upgrading, allowing firms to adopt new technologies and move up the value chain. Moreover, regional markets offer lower barriers for new exporters, facilitating product testing and capability building.
Note: Africa includes the 54 African countries. The Caribbean includes 15 countries: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, the Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, and Trinidad and Tobago. Latin America includes 16 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela. Southeast Asia includes 12 countries: Brunei Darussalam, Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand and Viet Nam.
Source: Authors’ calculation based on (WITS, 2025[24]).
The low levels of intraregional trade in LAC are closely linked to the region’s limited participation in robust regional value chains. In contrast to regions where GVCs are strongly underpinned by regional production linkages, such as East and Southeast Asia, Europe and North America, LAC remains weakly engaged in such regional dynamics. Although imported value added accounts for approximately 23% of total value added in the region’s exports, the share originating within the region is notably low, at just over 10% (Sanguinetti et al., 2021[25]). This limited integration has hindered the development of a strong base for intraregional trade.
The underdevelopment of regional value chains in LAC is reflected in the limited exchange of intermediate goods and relatively limited intra-industry trade across the region. Mexico, thanks to its close integration within North American value chains, and some Central American countries have developed stronger linkages, often as final processing hubs in extra regional chains. But most South American countries continue to participate in GVCs primarily as exporters of basic inputs to global markets rather than to regional markets. Strengthening regional productive linkages is therefore essential. Reducing trade costs, enhancing transport and logistics infrastructure and improving regulatory coherence – particularly through harmonised rules of origin and targeted incentives for vertical foreign direct investment – can play a central role in fostering deeper regional integration. It will also be essential to advance regional productive development agendas in priority sectors, including fostering interactions between cluster initiatives and other productive articulation initiatives from different countries (see Chapter 2). These efforts are critical for boosting intraregional trade and enabling LAC’s firms to leverage regional markets as springboards to enhance their global competitiveness.
The complexity of the region’s economic challenges, from limited productivity to fiscal vulnerability and external imbalances, underscores the urgent need for a holistic response. As explored in Chapter 2, productive development policies are a key instrument for overcoming these constraints, fostering sustainable and inclusive production transformation that can enable the region to move towards a more resilient and dynamic development model.
High levels of informality remain widespread in LAC labour markets
Improving social conditions in LAC will require production transformation, with its challenges linked to boosting productivity and strengthening long-term economic growth. Although social conditions differ hugely across the region’s countries, common characteristics include high levels of informality, persistent vulnerabilities and insufficient social protection for many people. This section will explore labour informality as one of the main drivers of such conditions and present effective policy practices to boost formal job creation and better protect informal workers, improving people’s livelihoods in the region.
LAC’s widespread labour informality has deep socio-economic impacts, affecting people’s living conditions and public finances. It erodes the tax base while increasing the welfare needs of informal workers and their families (OECD et al., 2024[19]; IDB, 2025[26]; ECLAC, 2024[27]; OECD/OISS, 2024[28]).
In 2023, one out of two workers was informal in Latin America (55.1%), for countries for which data are available over time (ILO, 2025[29]). Although the share has declined since 2009 (62.5%), much of the improvement took place in the 2010s. Since 2018, the share has been stable, with little change even after the COVID-19 crisis (OECD, 2023[30]). The share of informal workers in the workforce varies highly across the region, from 27% in Chile to 83% in Guatemala (ILO, 2025[29]; Ulyssea, 2020[31]). Women, youth and older workers are particularly impacted by labour informality. Between 2013 and 2022, the only group in which informality intensified was youth aged 15-24, while higher employment rates for women came together with higher incidences of informal work (ECLAC, 2024[27]).
Informality is correlated with lower educational achievement in the region. In 2023, the average person aged over 25 in LAC had studied for 9.3 years, 2.2 years more than in 2000. In comparison, the average person aged over 25 in OECD countries had studied for 12.3 years in 2023, an increase of 1.9 years since 2000 (UNDP, 2025[32]). The educational achievements of formal and informal workers also differ substantially. In 2023, workers with no schooling in LAC accounted for 5.4% of formal workers and 20.3% of informal workers on average, while tertiary graduates accounted for 39.9% of formal workers vs. 19.9% of informal workers (OECD, 2024[33]).
Selected LAC countries, 2023 or latest available year
Note: Data for Argentina, Brazil, Colombia, El Salvador and Peru refer to 2023; for Chile and Guatemala to 2022; for the Dominican Republic and Uruguay to 2018. Technological intensity is defined using the OECD Taxonomy of Economic Activities Based on R&D (Research and Development) Intensity. Industries are classified according to five quintiles of the value or R&D investment relative to the value added. Panel A shows data on the distribution of employment in industries with an intensity ranging from medium to high. Digital intensity is defined using the OECD Taxonomy of Digital-Intensive Sectors. Industries are classified in four quartiles of the digital inputs used in their production. Panel C shows data on the distribution of employment in industries with high, medium (which corresponds to medium-high and medium low in the taxonomy) and low digital intensity.
Source: (OECD, 2024[33]), Key Indicators of Informality based on Individuals and their Households (KIIbIH) database, based on (Galindo-Rueda and Verger, 2016[34]) and (Calvino et al., 2018[35]).
The lack of formal employment opportunities in LAC reflects the sectoral distribution of firms in the formal sector and their lack of dynamism. Formal firms are more likely to operate in sectors with relatively low levels of productivity, such as the private services sector, where the distribution of firms by size is skewed towards smaller firms and job quality is persistently low (OECD et al., 2023[36]). As a result, jobs with high technological and digital content are scarce (Figure 1.12, Panels A and C). In the latest available year for which data are available, jobs with high and medium-high technological intensity represented 2.0% of total employment in LAC, compared to 7.7% in OECD countries, while jobs with high digital intensity represented 13.8% of total jobs in LAC, compared to 21% in the OECD (OECD, 2022[37]). Investing in those sectors is key to creating well-paid jobs, as wage premiums are substantial. Workers in high-intensity technological and digital jobs receive far more than the average wage (Figure 1.12, Panels B and D).
More generally, 79% of jobs in LAC offered daily wages above USD 6.85 in 2023, compared to 76% in 2013, among countries for which data are available. Jobs provided health insurance or retirement benefits to only 44% of workers in 2023, up from 40% in 2013. In 2023, 63% of workers had a written contract with a relatively long tenure (three years or more), compared to 62% in 2013 (World Bank, 2025[38]).
In this challenging context, the production transformation is a unique opportunity to foster decent labour-augmenting technological shifts, which increase productivity and the creation of good-quality jobs, in contrast to the recent past, when the region experienced a labour-saving industrialisation process (OECD et al., 2023[36]; Apella and Zunino, 2022[39]). Moreover, the use of information and communication technologies (ICTs) in formalisation policies can become an important tool for reducing informality in LAC. Recent studies have highlighted how ICTs have helped in formalising small firms, through better traceability of informal activities, productivity enhancement due to digital applications, or better access to financial instruments for small firms (OECD et al., 2024[19]).
The extent of labour informality seems negatively correlated with the level of unemployment across LAC labour markets, although imperfectly (IDB, 2025[26]). Workers in LAC labour markets face trade-offs between formal employment, informal employment and unemployment, each of which is associated with distinct costs and benefits. Formal jobs tend to offer higher wages and greater stability, while informal work may allow workers and employers to avoid labour tax obligations while providing workers with access to certain social benefits, such as non-contributory cash transfers. Unemployed individuals may receive government support – such as conditional cash transfers or unemployment insurance (even if unemployment benefits barely exist in LAC) – if certain requirements are met, and must weigh sector-specific job-finding probabilities (ECLAC, 2023[40]; OECD et al., 2024[19]). All of these factors contribute to an interconnected decision framework where individuals evaluate labour market options simultaneously, given the quality of jobs demanded by firms and the benefits provided by social policies (David, Pienknagura and Roldos, 2020[41]; Rubião and Santos, 2022[42]).
A recent analysis of labour-market transition rates in LAC reveals patterns between unemployment and informality (Aristizabal-Ramirez, Santos and Torres, 2024[43]). The study showed that people tend to remain unemployed longer in countries with high unemployment rates and low informality, while they persist in informal work status in economies characterised by low unemployment and high informality. It also showed that transitions from formal jobs to unemployment are more frequent in countries where unemployment is more prevalent and that transitions from formal to informal jobs are more frequent in countries where informality is more prevalent. This suggests that the transition path is shaped by labour market structures. Informal employment rarely acts as a stepping stone to formal jobs, with such transitions out of informality being disproportionately rare (Aristizabal-Ramirez, Santos and Torres, 2024[43]; IDB, 2025[26]).
The informal or formal status of workers affects not only their living standards but also the welfare of members within their households. For instance, the formal employment status of at least one household member may increase the household’s access to social insurance programmes, work-related programmes, or other private and public services, such as care, which often cover the contributor’s spouse and/or children, as in the case of health insurance. For this reason, households with only informal workers face different vulnerabilities than mixed households. Adding the household dimension to the analysis of informality may help policy makers to identify the recipients of social assistance programmes and to design well-targeted policies to address the vulnerabilities of informal workers and their households (OECD et al., 2024[19]; OECD/OISS, 2024[28]).
Within the Global South in 2023, LAC was the region where the share of the population living in completely informal households was the lowest (42.3%). The share in Africa was 80.1%, while in Asia and the Pacific it stood at 67.2%. In East and Central Europe, the share was 55.3% (Figure 1.13, Panel A). Nonetheless, two out of three Latin Americans lived in a household depending entirely or partially on the income of informal workers, with little social protection coverage.
Note: Households are categorised based on the level of informality of their earners. Informal households are those in which all earners are informal workers, mixed households are those in which at least one earner is an informal worker and formal households are those in which all earners are formal workers.
Source: (OECD, 2024[33]), Key Indicators of Informality based on Individuals and their Households (KIIbIH) database.
The share of the region’s population living in households in which all earners are informal workers has been remarkably stable in the last two decades, in countries for which data are available consistently since the beginning of the 2010s. Some 36.4% of people lived in this type of household in the latest available year (Figure 1.13, Panel B), down from 39.1% at the beginning of the 2010s. The share of the population living in households in which at least one earner is informal was 23.5% in the latest available year, down from 25.2% at the beginning of the 2010s. Taken together, these figures signal a marginal improvement in the overall dependency of LAC families on informal income. However, they also indicate that six out of ten people in the region rely on income from informal work.
Nonetheless, the differences across countries and over time are significant. In Chile and Uruguay, fewer than four people out of ten live in households that rely totally or partially on informal workers. Those countries also experienced a significant improvement in the last decades, with a drop of more than 10 percentage points for Chile and more than 20 for Uruguay. The share also dropped in Brazil, by 12 percentage points, and Costa Rica, by 8.8 percentage points. In contrast, the situation did not improve notably in Argentina, Bolivia, El Salvador, Mexico and Paraguay (Figure 1.13, Panel B).
As poverty declines in LAC, informality remains the main driver
Monetary poverty has been declining steadily in LAC in recent years, yet extreme poverty remains high and persistent. In 2024, 26.8% of the region’s people were living in households with income below the national poverty line, a decline of 4.7 percentage points since 2010 (Figure 1.14, Panel A). However, people living in extreme monetary poverty – those not having the monetary resources to fulfil basic human needs, including food, safe drinking water, and basic services such as sanitation facilities, health, shelter, education and information – in 2024 represented 10.4% of the overall population, an increase of 1.8 percentage points since 2010 (ECLAC, 2024[27]).
Informality is the main driver of low pay for individuals and of low income and poverty for LAC households, which negatively impact living conditions. In the latest year for which data are available, 42% of the people living in completely informal households were poor; of those living in mixed households, 16.4% were poor; and of those living in completely formal households, 14.6% were poor (Figure 1.14, Panel B). This signals that the presence of at least one formal worker in the family significantly improves living conditions. The poverty rates across different typologies of households have been broadly stable since 2018, with a drop of 1.3 and 0.4 percentage points for informal and mixed households, respectively, and a slight increase of 0.6 percentage points for formal households.
Percentage of the population, latest available year
Note: In Panel B, data refer to an unweighted average of the following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, El Salvador, Jamaica, Mexico, Paraguay, Peru, Suriname and Uruguay. Households are categorised based on the level of informality of their earners. Informal households are those in which all earners are informal workers, mixed households are those in which at least one earner is an informal worker and formal households are those in which all earners are formal workers.
Source: (ECLAC, 2024[27]) for Panel A; (OECD, 2024[33]), Key Indicators of Informality based on Individuals and their Households (KIIbIH) database for Panel B.
The reduction in poverty in LAC is confirmed using non-monetary measures which estimate poverty in other dimensions of well-being, such as education, health, access to basic services and quality of life. People in the region experienced a steep reduction in non-monetary poverty, as measured by multidimensional poverty indexes. According to the most available comparable and homogenous data, the multidimensional poverty rate across the region has declined by more than 22 percentage points since 2008, when 45.7% of people were living in non-monetary poverty conditions, to reach 26.5% in 2022 (ECLAC, 2025[44]). The substantial decline in multidimensional poverty between 2008 and 2022 can be attributed to reductions in 11 of the 12 deprivation indicators in the overall index, with notable improvements in several of these indicators.2
At the regional level, the most pronounced reduction occurred in Internet access deprivation, which decreased at an average annual rate of 3.7 percentage points. This was followed by declines in low adult educational attainment (1.0 percentage point per year), inadequate sanitation (0.8 percentage points) and overcrowding (0.5 percentage points). Within the employment dimension, the most significant improvement was observed in the subdomain of job opportunities, which fell by 0.4 percentage points annually, while precarious employment declined at a rate of 0.2 percentage points per year. Pension inadequacy was the sole indicator within this dimension, and across all indicators, to exhibit an increase in incidence over the period, confirming that the prevalence of informal work persists as a major contributor to material deprivation, combined with gender and other inequalities, by not providing sufficient pension coverage. Production transformation, by boosting inclusive job opportunities in the formal sector, will be an opportunity to further improve the material conditions and social protection coverage of people and families.
Labour income differences between formal and informal workers explain the variations in monetary poverty rates across household typologies. The wage gap between formal and informal work is correlated with the higher proportion of informal workers in the first few income quintiles. According to recent evidence, the average wage of formal workers across LAC countries is three to four times the average wage for informal work, revealing a considerable wage disadvantage related to informality (ECLAC, 2023[40])
Observable characteristics of jobs and workers explain about half of the wage gap between informal and formal workers in LAC countries (Figure 1.15). Informal workers are less educated than formal workers and less likely to be employed in high-paid industries and occupations. Nonetheless, more than half of the in gap is unexplained, indicating that other factors, such as productivity and labour market efficiency, are at play.
Earnings of informal workers as a percentage of average monthly wage of formal workers aged 15 or over, 2023 or latest available year
Note: Data for Argentina, Brazil, Colombia, El Salvador and Peru refer to 2023; for Chile and Guatemala to 2022; for the Dominican Republic and Uruguay to 2018; and for Barbados to 2016. The decomposition is based on the methodology developed by (Oaxaca, 1973[45]) and (Blinder, 1973[46]), pooling the two groups of reference (informal and formal workers). The dependent variable is defined as the natural logarithm of the monthly earnings in a primary job. Demographic characteristics are defined using information on age (and the square of age) and gender. Hours worked refer to the actual or usual weekly hours worked in the job. Education refers to four categories of the highest education attained: no schooling, primary, secondary and tertiary education. Job characteristics refer to the one-digit international classifications of industries (ISIC Rev. 2008) and occupations (ISCO-08).
Source: Estimates based on (OECD, 2024[33]), Key Indicators of Informality based on Individuals and their Households (KIIbIH) database.
Although the poverty status of individuals is associated with the informality status of households, a non-negligible share of people in LAC countries live in non-poor informal households (21.7%), with an additional 18.8% living in non-poor mixed households and 30.4% in non-poor formal households (Figure 1.16). This signals that some households, although informal, may be able to contribute to social protection systems.
Percentage of the population, selected countries, 2023 or latest available year
Note: Data refer to 2023 for Argentina, Brazil, Colombia, Costa Rica, El Salvador, Paraguay, Peru and Uruguay; to 2022 for Bolivia, Chile, Guatemala, Mexico and Suriname; to 2019 for Honduras; to 2018 for the Dominican Republic; to 2016 for Barbados; to 2014 for Trinidad and Tobago; and to 2013 for the Bahamas. Households are categorised based on the level of informality of their earners. Informal households are those in which all earners are informal workers, mixed households are those in which at least one earner is an informal worker and formal households are those in which all earners are formal workers.
Source: (OECD, 2024[33]), Key Indicators of Informality based on Individuals and their Households (KIIbIH) database.
Social protection systems in LAC are far from universal and can be improved
There remain substantial gaps in social protection for Latin American households. As of 2022, one in four households (23.5%) across Latin American countries lacked any form of social protection, contributory or not. In the same year, 27.1% of people lived in households receiving conditional cash transfers, but the benefits were insufficient to bridge the poverty gap fully (ECLAC, 2024[27]). In many middle-income countries, including in the LAC region, policies to tackle persistent poverty are shifting towards non-contributory, tax-financed programmes to help close the social protection gap for people not having contributor capacity (OECD, 2024[47]; Kolev, La and Manfredi, 2023[48]).
A 2021 ECLAC study across 15 countries (2014-2017) found that non‑contributory transfers reduced poverty by 2.0 percentage points and extreme poverty by 1.7 percentage points (Cecchini, Villatoro and Mancero, 2021[49]). This is particularly relevant given the high share of vulnerable dependants living in households relying entirely or partially on informal labour income. In 2023, 61.1% of children aged under 15 and 63.5% of people over 65 lived in such households. However, this share has decreased slightly since 2010, by 3.7 percentage points for children and 4.0 percentage points for the elderly (Figure 1.17). Household informality status may also affect other people with high care needs and other basic services (e.g. health and education), such as younger or older populations or persons with disabilities.
Percentage of the population in each age group
Note: Children refer to people aged under 15; elderly refer to people aged 65 years or over. Data refer to an unweighted average of the following countries and years: Argentina (2010, 2018, 2023), Brazil (2009, 2018, 2023), Chile (2009, 2017, 2022), Colombia (2010, 2018, 2023), Costa Rica (2010, 2018, 2023), El Salvador (2015, 2018, 2023), Mexico (2010, 2018, 2022), Paraguay (2009, 2018, 2023), Peru (2010, 2018, 2023) and Uruguay (2008, 2018, 2023). Households are categorised based on the level of informality of their earners. Informal households are those in which all earners are informal workers, mixed households are those in which at least one earner is an informal worker and formal households are those in which all earners are formal workers.
Source: (OECD, 2024[33]), Key Indicators of Informality based on Individuals and their Households (KIIbIH) database.
Despite consensus around supporting poor groups with cash transfers and non-monetary programmes, agreement is less common when it comes to providing informal workers who are not classified as poor with benefits such as universal health care, pensions and cash transfers. Extending social protection to this group presents a range of complex policy choices, such as whether to provide universal entitlements or rely on other mechanisms like voluntary or mandatory public social insurance schemes. According to a 2024 study, universal social protection systems – reaching all vulnerable workers, regardless of their labour market status – are preferable (Arnold et al., 2024[50]). Under this line of thinking, a basic set of social protection benefits should be made available to all workers, with no distinction between formal and informal workers. However, a policy mix for achieving better social protection for informal workers may also consider different entry points, depending on the specific employment status of informal workers. In 2023 or the latest year for which data are available, own-account workers were overrepresented among informal workers (47.6% of the total), followed by employees (41.6%), unpaid family workers (6.2%) and employers (4.6%) (OECD, 2024[33]).3
Many LAC countries currently have presumptive tax regimes (also known as simplified tax regimes), aimed at encouraging tax compliance and business formalisation by reducing tax compliance costs and by levying lower tax rates than the standard tax system. These regimes usually target micro and small businesses and levy tax on a presumed tax base that intends to approximate taxable income by indirect means. Hence, such regimes can be particularly relevant where actual taxable income is difficult to assess accurately (Mas-Montserrat et al., 2023[51]). Presumptive tax systems have the potential to expand social protection coverage and gradually increase revenue generation, especially when they incorporate social security contributions (OECD et al., 2024[19]). Under such a regime, a small business could be allowed to pay a single tax that replaces as many taxes as possible, including social security contributions. By offering social protection access and the possibility to opt in to various programmes (such as health insurance), these systems may encourage individuals to formalise their businesses. Specific cases in LAC demonstrate that simplified tax regimes can effectively reduce informality. Uruguay, for instance, now boasts the lowest level of informal employment in the region following implementation of the Monotributo regime (Mas-Montserrat et al., 2023[51]; Teixeira, 2021[52]). Introduced in 2001 and expanded in 2006, Monotributo offers a simplified framework that consolidates social security contributions and income tax into a single payment. It allows self-employed individuals running small businesses to register either as personal enterprises with one employee, as partnerships with two partners or as family businesses with a maximum of three partners and no employees.
In LAC countries as in other developing economies, contributory social protection schemes mainly cover formal employees with defined employment contracts. Some schemes also include other categories, like the self-employed. Expanding these schemes to informal workers normally involves legal reforms, simplified registration and payment processes, and the use of new digital tools, which may help in formalising jobs. Key challenges in this expansion include i) determining whether informal work relationships can support employer-employee contributions, with a sustainable contribution rate; ii) assessing workers’ financial capacity to contribute, especially for the informal self-employed; and iii) deciding between voluntary or mandatory enrolment approaches (ECLAC, 2024[27]; OECD, 2024[47]; IDB, 2025[26]; OECD/OISS, 2024[28]). Better linkages between contributions and benefits can foster voluntary enrolment in social protection. Recent policies such as Colombia’s guaranteed minimum pension scheme demonstrate how such incentives can foster participation. At the same time, risk pooling through social insurance is becoming less common, with deep impacts on social policy design, due to the changing socio-demographic structure of Latin American families. According to the most recent estimates, the share of households with a single, separated or divorced person as head of household has considerably increased, from 24.5% of the total in the 2000s to 31.9% in the early 2020s, while households headed by a married couple have decreased, from 63.2% in the 2000s to 57.8% in the early 2020s (OECD, 2024[33]).4
Given the high levels of vulnerability confronting households in LAC, many of the region’s countries have expanded the range of non-contributory social protection policies (ECLAC, 2024[27]; ECLAC, 2025[10]; OECD et al., 2024[19]). The importance of wide coverage was especially evident during the COVID-19 pandemic, but such coverage was not enough to prevent severe consequences for the population, leading to a prolonged social crisis with effects that still persist (ECLAC, 2025[10]; OECD et al., 2021[53]). Non-contributory public and private transfers account for a large share of the income of the poorest groups. Around 22% of the income of the first quintile comes from this source, while the share decreases for higher household income quintiles. It represents around 14% of income for the second quintile, 10% for the third, 7% for the fourth and 4% for the fifth (ECLAC, 2023[40]).5
Labour market dynamics played a crucial role in poverty reduction in LAC during the period 2019-2023 (Maloney, Melendez and Morales, 2025[54]). During this period, the performance of real labour income kept pace with inflation and outweighed the negative impact on employment levels, although not consistently across all LAC countries for which data are available. Poverty reduction is expected to depend less on this channel in the coming years, given that pandemic-era public transfers have returned (incompletely) to pre-2020 levels and that governments are addressing fiscal concerns (OECD et al., 2024[19]; ECLAC, 2023[40]), Looking to the future, formal job creation stemming from production transformation will be increasingly decisive in the fight against poverty. It will be necessary to implement policies to generate an inclusive labour market, increasing decent labour opportunities while generating competitive advantages for the country through production transformation.
Financing the extension of social protection to informal workers remains key in LAC countries, especially due to the constraints posed by limited fiscal space (OECD et al., 2024[19]; Arnold et al., 2024[50]; OECD, 2024[47]). According to the International Monetary Fund (IMF), increasing the tax-to-GDP ratio by five percentage points over a decade is ambitious but manageable for most developing countries (Gaspar, 2019[55]). Raising significant amounts of additional tax revenue over time will require alignment with sustainable economic growth objectives – that are compatible with production transformation – through country-specific tax reforms that need to be carefully developed, implemented and evaluated over time.
A preliminary OECD analysis indicates that, in economies with high informal employment, a good mix of direct personal taxes and indirect taxes, such as value-added tax (VAT) and sales taxes, offers the greatest short-term revenue potential due to their broad and inelastic base (OECD, 2024[47]; Arnold et al., 2024[50]). In Latin America, conditional cash-transfer programmes are already predominantly funded through general government revenues, positioning them as effective foundational components for expanding social protection systems. If these programmes are developed to respond more efficiently to transitory income shocks, they could partially substitute for or complement contributory social insurance schemes – particularly for low-income earners, for whom mandatory contributions may significantly reduce formal employment incentives. Analogous to reforms in pension systems, an economically efficient benchmark may be to target near-zero effective social contribution rates at income levels around the formality threshold, commonly proxied by the minimum wage (Arnold et al., 2024[50]).
However, indirect taxes are already high in the region (OECD et al., 2025[11]). Increasing them to fund universal social protection may disproportionately affect the poor and risk expanding informal market activity, for example, in the case of small informal businesses operating in the sales sector. While evidence suggests that wealthier households bear a larger share of VAT in some developing countries (Bachas, Gadenne and Jensen, 2020[56]), affordability remains a concern for the poorest. Policy options include eliminating reduced VAT rates and exemptions on non-essential goods to fund targeted social protection. In the meantime, VAT systems create paper trails that enhance regulatory enforcement and encourage formalisation along supply chains (Ulyssea, 2020[31]). Evidence suggests that digital tools are powerful instruments for better tax enforcement, with direct positive impacts on formalisation (Barreix et al., 2025[57]). Expanding the VAT base or reducing exemptions can increase tax revenues to fund social protection, but such policies must be implemented with well-designed compensatory measures, such as targeted transfers or exemptions for basic goods, in order to avoid worsening regressivity and mitigate political and social backlash.
LAC’s demographic structure may pose challenges to production transformation
The population structure of LAC countries poses both challenges and opportunities for production transformation. Between 1975 and 2023, the region’s population grew by 105%, from 321 million to 658 million. The sharpest increase came between the years 1975 and 2000, when the population grew by 200 million. The growth rate has slowed since 2000. By comparison, sub-Saharan Africa experienced much faster growth, quadrupling its population from 337 million in 1975 to 1.26 billion in 2023. South Asia also saw significant expansion, nearly tripling in size, from 799 million to 1.95 billion over the same period, while regions like Europe and Central Asia and North America showed much slower growth, with signs of stabilisation in recent years (Figure 1.18).
Note: Population is based on the de facto definition, which counts all residents regardless of legal status or citizenship. The values shown are midyear estimates.
Source: Authors’ elaboration based on (World Bank, 2025[58]).
If properly trained and empowered, LAC’s young population can be a strategic element to foster the region’s productive potential. In 2024, the LAC population comprised approximately 194.7 million women and 189.2 million men of working age (15-64 years). A slight increase is projected by 2050, with 197.6 million women and 195.9 million men of working age. However, this trend shows signs of stabilising, with growth in older age groups, suggesting future challenges in terms of population aging, the attractiveness of labour markets, and the sustainability and adequacy of pension systems (OECD et al., 2024[19]; ECLAC, 2024[27]; Arenas De Mesa, 2019[59]; ECLAC, 2022[60]).
Urbanisation levels are high in the region
According to recent estimates, 81.2% of the population in LAC lived in urban areas as of 2018 (ECLAC, 2025[61]). However, urban population growth in LAC has experienced a significant slowdown, decreasing from an annual rate of 2.1% in 2000 to just 0.98% in 2023. In comparison, developing regions such as sub-Saharan Africa and South Asia continue to show high urban growth rates, with sub-Saharan Africa maintaining a rate of 3.8%, while South Asia's rate dropped from 2.9% to 2.4% from 2000 to 2023. Over the same period, North America saw a decrease in its urban growth rate (from 1.5% to 1%), while Europe and Central Asia continued with growth of only 0.3%, reflecting a more stabilised and less dynamic urbanisation (Figure 1.19).
Note: Regions positioned above the diagonal line experienced a decline in their urban growth rate, while those below the line saw an increase in urbanisation trends over the period. The size of each bubble represents the total population of the region in 2023 (B = billion).
Source: Authors’ elaboration based on (World Bank, 2025[58]).
Although growth of LAC’s urban population is now low, most of the region’s working-age population lives in urban areas (Figure 1.20). In 2023, 73.5% of people between 15 and 64 years of age lived in urban areas: 26.8% in informal households, 18.8% in mixed households and 27.8% in formal households. People in rural areas (26.5% of the total) lived predominantly in informal households (17.7%), with 4.3% in mixed households and 4.6% in formal households. In El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, and Trinidad and Tobago, however, the share of the working-age population living in rural areas was close to or significantly higher than 40%, with people living in informal households being the substantial majority.
2023 or latest available year
Note: Data refer to the distribution of people aged 15-64. Households are categorised based on the level of informality of their earners. Informal households are those in which all earners are informal workers, mixed households are those in which at least one earner is an informal worker and formal households are those in which all earners are formal workers. Data for Argentina refer only to urban areas. Data refer to 2023 for Argentina, Brazil, Colombia, Costa Rica, El Salvador, Paraguay, Peru and Uruguay; to 2022 for Bolivia, Chile, Guatemala, Mexico and Suriname; to 2018 for the Dominican Republic; and to 2014 for Nicaragua and Trinidad and Tobago.
Source: (OECD, 2024[33]), Key Indicators of Informality based on Individuals and their Households (KIIbIH) database.
The LAC region stands at a crossroad where bold and urgent action is essential to address the challenges of climate change and biodiversity loss. Historically, production strategies in the region have been closely tied to significant environmental degradation, threatening the very ecosystem services on which the economies depend (Dasgupta, 2021[62]). Climate action in several LAC countries increased considerably between 2010-2023 but has slowed down from 2020, mostly due to increased fossil fuel subsidies as part of countries’ COVID-19 measures (OECD, 2025[63]). Moving forward, a new production model must integrate both social equity and environmental sustainability goals. Otherwise, the burden of transformation risks falling unevenly on specific communities, deepening existing inequalities and potentially weakening public support for much-needed reforms, while eroding the provision of critical ecosystem services to the economy.
For this transformation to be truly inclusive and sustainable, it must prioritise the region’s distinctive natural endowments and human capital (ECLAC, 2024[64]). Aligning productive development policies with the principles of green, blue and circular economies offers a pathway to reshape the region’s productive and energy systems (ECLAC, 2025[20]). An integrated approach fosters higher productivity, the development of new economic activities and quality jobs – and it also plays a vital role in reducing greenhouse gas emissions and protecting the environment. The region holds tremendous potential: it has a unique green energy matrix and abundant critical minerals for the global energy transition. With the right productive development policies – supported by international co-operation, climate finance and technology transfer – LAC can become a competitive supplier of the green goods and services needed to meet global climate goals. Strengthening local and regional green value chains can attract investments, lower transition costs, offer tailored solutions to territorial challenges and unlock gains in diversification, technological upgrading, productive inclusion, job creation, inequality reduction and competitiveness. Achieving these interlinked goals requires a systemic vision for a green and just transition – one that combines effective strategies to protect the environment and mitigate climate change and adaptation with a firm commitment to enhancing social well-being and reducing inequalities (OECD et al., 2022[65]; 2025[66]).
This section will examine why the use and preservation of LAC’s natural assets must be afforded equal priority with the economic and social objectives of production transformation, presented above. The analysis presented here is limited to a selected set of indicators intended to highlight some of the most pressing priorities and alternatives. When possible, regional comparisons are included to provide a picture of the main trends of developing countries. For a more comprehensive examination, readers are encouraged to consult the Latin American Economic Outlook 2022: Towards a Green and Just Transition (OECD et al., 2022[65]).
This brief analysis is structured around the principle of fair consumption, defined as an ecologically sustainable boundary within which resources and opportunities are equitably distributed, allowing individuals and societies to meet their needs and achieve well-being (Hot or Cool Institute, 2021[67]). It includes a summary of emission levels, trends in natural resource consumption and potential alternatives to make production and consumption more just and more sustainable.
Carbon emissions continue to grow in LAC under its current production model
Greenhouse gas (GHG) emission levels have grown in LAC under its current production model, even though LAC remains among the lowest GHG-emitting regions globally. GHG emissions in LAC increased by 10% between 1990 and 2022, reaching 4.1 gigatonnes of carbon dioxide equivalent (GtCO₂e) and representing approximately 8.4% of global emissions. Although this increase may appear modest, it is largely the result of declining net emissions from land-use change and forestry (LUCF), which partially offset significant growth in emissions from energy- and agriculture-related sources. Excluding LUCF, GHG emissions in LAC would have increased by around 56% over the same period.
While the region’s contribution to greenhouse gas emissions still remains similar to its contribution to total population, GHG emissions in LAC grew across all sectors between 1990 and 2022, with the increase mainly driven by key strategic sectors of the current production model. The growth came from both energy-related activities and non-energy sources (primarily land use and agriculture). Energy-related emissions increased by 53%. The transport sector, embedded with energy, is a key driver of higher emissions, linked to urban expansion, increased car ownership and underinvestment in public transport. Agricultural emissions, historically the largest non-energy source, rose by 39%, highlighting the role of livestock, land-use practices and fertiliser use in sustaining high emission levels. Emissions from industrial processes more than tripled (+223%), reflecting deep transformations in manufacturing, construction and the extractive industries. Despite the recent decline in LUCF emissions, that sector remains a dominant source in the region (Figure 1.21, Panel B).
Looking at other regions, between 1990 and 2022, East Asia and the Pacific experienced the highest growth in emissions, which surged by 165%, while Europe and Central Asia reduced emissions by 28%. The rising emissions in LAC mirror trends in sub-Saharan Africa, where emissions also surged from agriculture (+81%) and energy-related activities (+80%) in the same period. In contrast, Europe and Central Asia managed to reduce emissions from agriculture by 33% and energy-related emissions by 26%. This example offers pathways for a low-carbon transition that LAC could adapt to its context (Figure 1.21, Panel A). The upward emission trends in LAC underscore the challenges of decoupling growth from emissions in key economic sectors.
Note: LAC includes data available from 33 countries. The energy sector includes emissions from electricity and heat production, transportation, buildings, manufacturing and construction, other fuel combustion, and fugitive emissions. GHG refers to greenhouse gases, and MtCO₂e denotes million tonnes of carbon dioxide equivalent.
Source: Authors’ elaboration based on (Climate Watch, 2025[68]).
In 2020, end-users of energy, such as industries, the transport sector and households were responsible for more than 50% of all GHG emissions. Within industry, which accounted for 24% of direct energy-related emissions in LAC, the cement, steel and chemical subsectors were particularly significant, representing 57% of these industrial emissions and often proving difficult to decarbonise. Transport accounted for 25% of energy-related emissions in 2021. Urban passenger transport and freight were particularly important, representing nearly 90% of the sector's emissions (CAF, 2024[69]).
In seven LAC countries, transport is the largest emitter among energy sectors but shows the lowest level of climate action, highlighting a critical misalignment (OECD, 2025[63]). While overall household energy consumption is modest, the type of fuel used has environmental implications. Despite progress in reducing reliance on dirty fuels (down from 82% in 1970 to 36% in 2021), firewood remains the primary household energy source in 8 out of 19 countries studied, contributing to indoor air pollution and impacting health outcomes and local air quality (IEA, 2020[70]; CAF, 2024[69]).
GHG emissions in LAC have rebounded after a temporary decline. Between 2014 and 2020, emissions fell in the key sector of energy (−23.7%), while industrial process and waste emissions rose by +13.3% and +13%, respectively. This reduction aligns with a temporary slowdown linked to structural shifts and the start of the COVID-19 pandemic. However, between 2020 and 2022, emissions rose again, increasing by +3.1% in agriculture, by +9.3% in energy, by +10.5% in industry and +2.6% in waste (Figure 1.21, Panel B). This rebound reflects persistent structural challenges, such as emissions-intensive agriculture, dependence on fossil fuels and limited progress in waste management. Illustrating this trend are countries like Chile, Colombia and Mexico, where progress is needed on zero- and low-emission vehicles, supportive infrastructure and consumer behaviour in order to reduce emissions effectively. The buildings sector, which has the lowest emissions share, demonstrates the highest level of climate action across six of the seven countries analysed (Figure 1.22).
Note: The energy sector includes emissions from electricity and heat production, transportation, buildings, manufacturing and construction, other fuel combustion, and fugitive emissions. The figure includes only ten Latin American countries, selected based on their emission levels. This selection was made to avoid disproportionately small representation of other countries when compared to Brazil. MtCO₂e denotes million tonnes of carbon dioxide equivalent.
Source: Authors’ elaboration based on (Climate Watch, 2025[68]).
Consequences of unsustainable production: Air pollution and natural disasters
Air pollution
Core processes in the current production model are significant contributors not only to GHG emissions but also to air pollution. High GHG emissions augment air pollution, causing severe damage to human health: respiratory diseases, heart problems and premature death. Air pollution levels of fine particulate matter less than 2.5 microns in diameter (PM2.5) have steadily declined in LAC over the past two decades, from an annual average exposure of 25.6 micrograms per cubic meter (µg/m³) in 2000 to 15.6 µg/m³ in 2020. Yet pollution levels remained above those of North America (7.7 µg/m³) and Europe and Central Asia (14.3 µg/m³) in 2020 (Figure 1.23).
Note: Population-weighted exposure to ambient PM2.5 pollution is defined as the average level of exposure of a country’s population to concentrations of suspended particles measuring less than 2.5 microns in aerodynamic diameter, which are capable of penetrating deep into the respiratory tract and causing severe health damage. Exposure is calculated by weighting mean annual concentrations of PM2.5 by population in both urban and rural areas.
Source: Authors’ elaboration based on (World Bank, 2025[58]).
Among all environmental risks, air pollution poses the greatest threat to human health given the harmfulness of PM2.5 (UNECE, 2021[71]). Key activities from the current production model directly contribute to air pollution. Transport is a major contributor to certain types of air pollution and elevated GHG emissions, a challenge amplified by the vast geography, car dependency, congestion, old vehicle fleet and poor infrastructure of many LAC countries. In urban areas across Latin America, private motor vehicles account for approximately 75% of carbon dioxide (CO₂) emissions and 82% of particulate matter less than 10 microns in diameter, both of which are linked to adverse health effects (Vasconcelos, 2019[72]). However, it is important to note that some pollutants, such as sulphur dioxide, are primarily emitted by fixed sources like coal-fired power plants.
Natural disasters
Despite contributing relatively little to cumulative GHG emissions, LAC countries experienced a sharp rise in climate-related natural disasters such as floods and storms between 1975 and 2024. The number of such events more than doubled over two 25-year periods, from 569 in 1975-1999 to 1 328 in 2000-2024 (Figure 1.24, Panel A). LAC accounted for 17% of natural disasters worldwide during 2000-2024, underscoring the region’s exposure to natural catastrophes with high economic losses (Figure 1.24, Panel B) and direct consequences in terms of productivity and stranded assets. The only region more affected was East Asia and the Pacific (26%), while the shares in Europe and Central Asia (17%) and sub-Saharan Africa (16%) were similar to LAC’s.
Note: The data by region show the total number of events per year during the periods 1975 to 1999 and 2000 to 2024. Natural disasters are defined as situations or events that exceed the ability of local resources to respond effectively, requiring help from national or international sources. They are unexpected and often sudden occurrences that result in significant damage, destruction and human suffering. The following types of natural disasters have been considered: droughts, wildfires, extreme temperatures, storms and floods.
Source: Authors’ elaboration based on (CRED, 2025[73]).
Current production practices are driving climate change and environmental degradation, leading to more frequent and intense extreme weather events. Floods and storms were the most frequent types of natural disasters in LAC over the full 1975‑2024 period. Comparing the two 25-year periods, 1975‑1999 and 2000‑2024, the number of floods increased from 306 to 736, and the number of storms from 175 to 412 (Figure 1.25, Panel A). Deforestation, land-use changes and GHG emissions reduce ecosystems’ capacity to absorb water, leading to faster runoff and higher flood risks. The number of droughts increased from 45 to 86, wildfires grew from 25 to 46 and extreme temperature events rose from 18 to 48. Storms caused the most economic damage to the region, and the cost doubled over the two 25-year periods, from USD 47.2 billion (1975‑1999) to USD 96.8 billion (2000‑2024) (Figure 1.25, Panel B). Floods also caused significant economic damage, costing USD 42.3 billion in the latter period. Although less frequent, droughts also caused substantial damage, with losses amounting to USD 31.5 billion over 2000‑2024 (CRED, 2025[73]).
Note: The figure categorises natural disasters based on their originating event type, measured as a percentage of the total recorded events. Natural disasters are defined as situations or events that exceed the ability of local resources to respond effectively, requiring help from national or international sources. They are unexpected and often sudden occurrences that result in significant damage, destruction and human suffering. Economic damage from disasters is often underreported, with data mainly available for high-impact events in insured countries. The economic damage figures available are based on reports submitted to EM-DAT, and less than 40% of those reports include economic damage data. The LAC regional aggregate includes the following countries: Antigua and Barbuda, Argentina, the Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominica, the Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, the Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, Uruguay, and Venezuela.
Source: Authors’ elaboration based on (CRED, 2025[73]; Brassiolo et al., 2023[74]).
There is growing evidence that extreme climate events are becoming more interconnected, leading to escalating economic losses and unprecedented social impacts. Current production methods contribute to environmental degradation and climate change, which increase the frequency and severity of extreme climate events and their economic and social impact. In 2024, the increasing frequency of natural disasters severely impacted agricultural productivity and food security in LAC, affecting not only enterprises investing in the region but also low-income populations. These groups not only rely on climate-sensitive businesses such as farming, but they also lack simple access to insurance or savings and live in areas that are more vulnerable to environmental hazards. In Brazil, in 2024, floods in Rio Grande do Sul affected key crops such as soybeans and led to agriculture-sector losses amounting to approximately USD 1.575 billion. In Guatemala, 56% of farmers reported insufficient water irrigation in 2024, while in Colombia, 42% of agricultural producers faced similar problems due to drought. In the Orinoco region of Colombia, wildfires destroyed 125 000 hectares of pasture, harming livestock farming. In Ecuador, milk production fell by 20% due to drought, and in Haiti, food insecurity affected 48% of the population. In Peru, the El Niño phenomenon reduced anchoveta catches by 50%, significantly impacting the fishing sector (WMO, 2025[7]).
These events highlight the urgent need to increase, in an inclusive manner, mitigation and adaptation policies. These include land use and ecosystem resilience, strengthen early warning systems, improve climate risk management and promote resilient agricultural practices. Further investment in land protection, biodiversity conservation, ecosystem restoration, climate technologies and locally adapted data is crucial to ensuring new private investments, sustainable production and stable supply chains (WMO, 2025[7]). Strengthening institutional capacities will be key to progress. The use of digital solutions, such as earth observation systems, the Internet of Things, artificial intelligence, cloud and blockchain, provides enterprises and farmers with fundamental information to make better decisions aimed at optimising their investments, increasing productivity and improving disaster prevention and risk management (Telefónica, 2023[75]). Including natural capital in economic and financial decisions will also be essential to ensure investment for nature-based strategic sectors (Systemiq, 2025[76]).
Towards sustainable and inclusive production and consumption in LAC
In response to the current levels of GHG emissions and their impact on the environment and humans, LAC governments are promoting initiatives to support the implementation of various sustainable methods of production. Ensuring that production is balanced across its economic, social and environmental dimensions requires careful design and management of complex trade-offs and potential synergies. To achieve this, the region needs to implement active policies to mitigate pressures on the environment and health arising from the development of its main production sectors.
Efforts at the domestic level should go beyond the emissions of the main supply chains and integrate a systemic perspective for the development model of each country, based on environmental performance. Environmental performance is defined by the environmental impact per unit of product or service generated by key strategic activities. Productive policies should prioritise the environmental performance of each output as a guiding principle. In this regard, the strengthening and implementation of sustainable finance taxonomies is a useful guide for investments (UNEP, 2023[77]). This horizontal approach for sustainable production aims to advance several goals at once: lower GHG emissions, minimise the impact of wastewater and solid waste, reduce pollution and the use of harmful substances and help prevent environmental incidents (Rustico and Stanko, 2022[78]). While productive policies play a critical role, achieving sustainable growth through policy mixes that reduce environmental impacts and improve citizens' well-being necessitates a broader, systemic transformation across all areas of government (OECD et al., 2022[65]). Box 1.1 share examples of effective policy interventions in LAC.
Policy makers need to know which policies reduce emissions at scale to meet the goals of the Paris Agreement. A study led by the Potsdam Institute for Climate Impact Research (PIK) combines data from the OECD Climate Actions and Policies Measurement Framework with a machine learning approach to provide the first global ex-post evaluation that identifies policies and policy mixes that have led to significant emissions reductions or emissions breaks. Three key messages stand out: i) There is no one-size-fits-all approach. Effective policies and policy mixes vary significantly across country groups and sectors (Figure 1.26); ii) Policy mixes are more successful in reducing emissions than stand-alone policies. 70% of emissions breaks can be attributed to a mix of policies, whereas only 30% are caused by stand-alone measures; iii) The complexity of effective policy mixes differs significantly across sectors. Policy mixes are more complex in the buildings and transport sectors, which are characterised by heterogeneous households subject to barriers (e.g. asymmetric information) rather than profit-maximising firms.
Note: The figure presents the effectiveness of combinations of policy types. Each circle shows the share of successful interventions that involved a specific policy type or combination. The percentages indicate how often each policy setup contributed to success.
Source: Based on (Dilger and al, 2024[79]).
In LAC countries, market-based instruments such as carbon pricing or subsidies are particularly effective. Covering seven LAC countries, the study concludes that 8 of the 11 identified emissions breaks (73%) were associated with the adoption of market-based instruments. This is despite the fact that the region’s policy approach relies predominantly on non-market-based instruments such as standards, as shown in the Data Insight on Latin America. More work and data are needed to further assess the effectiveness of LAC’s unique policy approach and guide the region towards net-zero emissions.
Note: The diagram shows which combinations of policy types are effective. Each circle shows the share of successful interventions that involved a specific policy type or combination. The percentages indicate how often each policy setup contributed to success.
Source: Based on (Dilger and al, 2024[79]); CAPMF data available under https://oe.cd/dx/capmf.
Properly maximising socio‑economic opportunities while addressing any negative social consequences of production transformation requires policy coherence at the international level, as well: among developed and developing countries, the international community and other key stakeholders, notably the private sector. In the context of globalisation and international trade, operations and supply chains often span multiple regions and are subject to a variety of environmental regulations. Consequently, inconsistencies in regional environmental policies can contribute to carbon leakage and other adverse effects that local efforts often strive to prevent (OECD et al., 2024[80]; Wu, Ding and Cheng, 2024[81]) (Chapter 4).
Energy
The renewable energy sector in LAC stands out as a clear example of how natural resources can be leveraged to drive production transformation that is both sustainable and inclusive. Even if LAC relies on fossil fuels for key strategic sectors such as transport or industry, the region is notable for having a more sustainable energy production profile than the world as a whole. In 2023, 64% of LAC’s electricity generation came from renewable sources, more than double the global average of 30%. This energy mix relies heavily on hydropower (45%) but also shows significant progress in wind (9%) and solar (6%) energy. Non-renewable sources accounted for 36% of the region’s electricity generation, compared to 70% globally (Figure 1.27).
Note: Although the percentages in the third column (LAC Share of non-renewable sources) add to 35% when rounded, the actual total is 36%.
Source: Authors’ elaboration based on (OLADE, 2024[82]).
Nevertheless, challenges remain in terms of how much primary energy is used in the economy. Energy intensity levels in LAC reveal substantial variation in the structure and efficiency of production and consumption. The regional average in 2021 – 3.99 megajoules (MJ) at 2017 GDP purchasing power parity – is close to the OECD’s (3.56 MJ). But there is wide heterogeneity across the region, varying from countries with a highly energy-intensive economy, like Trinidad and Tobago (18.7 MJ), to Panama (1.41 MJ) (Figure 1.28). In addition to deploying renewable energy, reducing energy intensity should remain a priority to advance sustainable production and remain aligned with global low-carbon standards, particularly in energy-intensive economies that face greater structural challenges.
Note: Energy intensity is expressed in megajoules (MJ) per 2017 purchasing power parity–adjusted (ppp) U.S. dollar of gross domestic product (GDP). This indicator reflects the ratio of total primary energy supply to gross domestic product measured at purchasing power parity. It shows how much primary energy is used to produce one unit of economic output. A lower ratio indicates that less energy is used to produce one unit of output.
Source: Authors’ elaboration based on (World Bank, 2025[58]; IEA, 2025[83]).
The decarbonisation of the energy matrix and the reduction of energy-intensive methods have a direct impact on nearly the entire production structure. The implementation of renewable energy sources helps to reduce the carbon intensity of the economy, including manufacturing, by lowering the amount of CO₂ emitted per unit of output. In LAC, the average carbon intensity of manufacturing decreased from 0.33 kilogrammes (kg) of CO₂ per USD in 2015 to 0.30 kg of CO₂/USD in 2022, indicating a slight reduction in emissions relative to manufacturing value added. However, the region remains above the OECD countries' average of 0.16 kg of CO₂ per USD in 2022. Trinidad and Tobago, historically one of the highest emitters per unit of value added, managed to reduce its indicator significantly, from 0.77 to 0.58 kg of CO₂/USD, as did Honduras and Panama (Figure 1.29). Notable examples of economies with cleaner energy matrices include Uruguay (0.13 kg of CO₂/USD), Costa Rica (0.12 kg of CO₂/USD) and Paraguay (0.03 kg of CO₂/USD), reflecting the benefits of a renewables-based energy strategy (Hall, 2023[84]; Abekhon, 2025[85]).
Note: Carbon dioxide (CO2) emissions from manufacturing industries per unit of manufacturing value added (MVA) are measured in kilogrammes (kg) of CO2 equivalent per unit of MVA in constant 2015 USD.
Source: Authors’ elaboration based on (UNIDO, 2025[86]).
Renewable energy gives LAC a structural advantage to attracting investment and advancing towards more just and sustainable production, offering both lower carbon intensity and greater relative energy independence (E+ Energy Transition Institute, 2025[87]). These are key factors for industries aiming to decarbonise their value chains and comply with emerging global sustainability standards. Under current policies, renewables are projected to supply around 80% of electricity generation by 2050 in the region (IEA, 2023[88]). Reducing energy losses during generation, transmission and distribution is also a crucial supply-side mitigation action.
Despite progress in innovative sources of energy, significant gaps persist in terms of access, especially in rural areas where more than 10% of households lack grid connection in several countries. Electrification based on distributed generation using renewables beyond hydroelectric energy offers an alternative path to close these gaps and ensure that the new production model is also just. While acknowledging the continued role that some fossil fuels may play, the development of sustainable alternatives – such as advanced or sustainable biofuels – is essential. Natural gas can serve as a potential transition fuel, but this shift must be cautious and consider social implications, ensuring that the energy transition is inclusive and supports communities affected by the changes in the energy landscape (CAF, 2024[69]).
Land use
Deforestation stands out as a critical issue and a priority for non-energy mitigation efforts, given its contribution to GHG emissions and biodiversity loss. LAC, which held 19.6% of global forest cover in 2022, faces one of the highest deforestation rates worldwide. The region has experienced a steady decline in forest cover over recent decades. Compared to 1990, forest cover had decreased in the region by 10.7% in 2010 and by 14.2% in 2022. Comparatively speaking, sub-Saharan Africa experienced an even sharper decline, with forest area shrinking by about 27.2% between 1990 and 2022, while in East Asia and the Pacific, forest area increased slightly relative to 1990, by 1.7% in 2010 and 3.6% in 2022. Europe and Central Asia also demonstrated steady growth, with forest cover expanding from 10.2 million square kilometres (km2) to 10.6 million km2 between 1990 and 2022, with an increase of 1.6% by 2010 and 2.2% by 2022. Within the European Union, forest cover increased relative to 1990 by 8.4% by 2010 and 10.2% by 2022. South Asia and the Middle East and North Africa have much less forested area. In the latter, forest covered only about 229 000 km2 in 2022, a 3.6% increase since 1990 (Figure 1.30, Panel A).
Within LAC, the largest absolute declines in forest area between 2010 and 2020 occurred in Brazil (‑173 847 km², -2.1%), Paraguay (‑40 266 km², -10.0%), and Bolivia (‑26 696 km², -2.5%). In relative terms, Paraguay (-10%) and Nicaragua (-8%) experienced the steepest proportional declines as a share of total forest area. In contrast, net gains in forest cover were achieved in Costa Rica (+3.85%), Cuba (+3.69%), and Chile (+2.33%), reflecting comparatively stronger reforestation or conservation policies (Figure 1.30, Panel B). A major obstacle in some countries is lack of capacity to effectively implement anti-deforestation laws. For example, estimates suggest that more than 96% of deforestation within the Amazon region is illegal – despite the fact that specific regulations targeting critical ecosystems exist, such as Brazil's Forest Code governing activities in the legally defined Amazon, alongside similar laws for wetlands and glaciers (OECD et al., 2022[65]).
Note: Forest area is land under natural or planted stands of trees of at least five meters in situ. In Panel B, forest area is expressed in square kilometres (km²). Values on the left-hand side (LHS) axis refer to absolute area, and values on the right-hand side (RHS) axis refer to percentage of total land area from 2010 to 2022.
Source: Authors’ elaboration based on (World Bank, 2025[58]).
The high contribution of agriculture and land use to GHG emissions and deforestation reflects intensive land utilisation. However, there is potential to alleviate the environmental implications of intensive land use by significantly boosting agricultural productivity. Studies indicate that planning for land use, adopting best practices, utilising technology and making informed crop choices could increase production per hectare fivefold (Adamopoulos and Restuccia, 2021[89]).
Conservation efforts are directly addressed through land-use planning tools like protected areas and other effective area-based conservation measures (OECMs). Protected areas and OECMs can serve as tools to prevent the expansion of polluting and illicit activities. They are highly relevant given the role in conservation and protection measures of ethnic communities (e.g. in Colombia), privately owned reserves (e.g. in Costa Rica) and community forests (e.g. in Mexico). Protected areas range from strict reserves to multiple-use zones that allow sustainable economic activities by local communities, creating incentives for conservation. Protected areas in LAC expanded significantly between 2016 and 2021, increasing from 16.3% to 22.9% of the total territorial area (Figure 1.31). This reflects not just strong regional conservation initiatives but also efforts to achieve the Convention on Biological Diversity’s Aichi Target 11 calling for the protection of at least 17% of terrestrial and inland water areas by 2020.
In other world regions, protected areas expanded between 2016 and 2022: from 17.9% to 19.0% in East Asia and from 14.2% to 14.7% in sub-Saharan Africa. LAC has notably surpassed the global average, but it remains below the 2030 target of 30% of both land and marine areas. This target – known as Target 3 of the Kunming-Montreal Global Biodiversity Framework – includes both protected areas and OECMs; it emphasises not only quantitative coverage but also effectiveness, equitable governance and respect for the rights of Indigenous peoples and local communities (UNEP, 2024[90]). Another important instrument is payments for ecosystem services, a field where LAC is a pioneer, hosting roughly half of the world’s known programmes. These schemes compensate participants for undertaking specific conservation actions, typically funded by state or international sources (OECD et al., 2022[65]).
Note: The figure shows the share of marine protected areas as a percentage of each country's Exclusive Economic Zone (EEZ) and terrestrial protected areas as a percentage of total land area, both for 2024. Marine protection data exclude areas beyond national jurisdiction (the high seas), which represent 64% of global oceans, of which only 0.72% are currently protected. The LAC and OECD averages are calculated by dividing the total sum of protected areas across countries in the region by the region’s total EEZ or land area, respectively.
Source: Authors’ elaboration based on (OCDE, 2025[91]).
Water
Water is a critical resource that supports the operation of nearly all industrial and manufacturing activities, agriculture, hydropower and human consumption. Total freshwater withdrawal increased in LAC by 58.5% between 2000 and 2021. This rise was driven primarily by a sharp 87.9% increase in agricultural water use, nearly doubling over the period. Industrial water withdrawal also grew, though at a slower pace, rising by 51.7% (Figure 1.32). However, compared to other developing regions, LAC faces an opportunity to further develop water-intensive sectors while improving sustainability strategies for water abstraction (the withdrawal of water from natural resources). In 2021, LAC withdrew only 2.7% of its internal renewable water resources, the lowest level among all global regions. Comparatively, water withdrawals exceeded 50% of total internal resources in South Asia, while in the Middle East and North Africa, the levels exceeded total internal resources (127%) in 2021. Within the LAC region, the distribution of water use is uneven. For example, Mexico withdrew approximately 45% of its internal resources in 2022, facing significant challenges in water availability (World Bank, 2022[92]; FAO, 2025[93]).
Note: Water withdrawal by sector is expressed in 10^9 m3/year (1 000 million cubic metres per year).
Source: Authors’ elaboration based on (FAO, 2025[94]).
The rising levels of freshwater withdrawal in LAC highlight the consequences of expanding production sectors without a systemic approach that integrates environmental and social considerations into development strategies. Water resources in the region are under growing pressure due to climate change, agricultural expansion, population growth, climate variability and industrial development. The rise in water-intensive crops like soybeans and sugarcane, alongside increased food demand, has significantly increased water use (FAO et al., 2025[95]). Climate variability has also played a major role, as the increasing frequency and severity of droughts has led to greater reliance on artificial irrigation in countries such as Brazil and Mexico (Juárez-Lucas, Perez and Cohen, 2024[96]).
Even if the regional average shows a steady level of water stress between 2015 and 2022, many countries are surpassing the sustainability threshold. Water stress refers to the level of pressure on freshwater resources, calculated as the proportion of total freshwater withdrawn relative to the available renewable freshwater resources. Values exceeding 25% indicate significant pressure on and potential unsustainability of water use. In 2022, countries such as Barbados (87.5%), Mexico (44.9%) and the Dominican Republic (39.6%) had water stress levels significantly above the sustainability threshold (Figure 1.33, Panel A). These values reflect structural pressure on renewable water resources in contexts of high demand and limited availability. However, the regional average for water stress remains stable and low, below the OECD average (21.0%) but with large internal disparities. Although the aggregate water stress level value for LAC remains around 5.7%, the stress levels of Bolivia (0.2%), Panama (0.9%) and Belize (1.3%) contrast sharply with the most exposed countries.
Note: Panel A shows the level of water stress, calculated as the proportion of total freshwater withdrawn to available renewable freshwater resources (%). Values above 25% indicate significant pressure on water resources. Panel B displays water use efficiency, expressed as the economic value added (in constant USD) generated per cubic meter (m3) of freshwater withdrawn. Higher values reflect more efficient use of water resources.
Source: Authors’ elaboration based on (FAO, 2025[94]).
Sustainable water management must go beyond consumption metrics, focusing instead on achieving maximum efficiency in water use across productive sectors. Water use efficiency refers to the economic output generated per unit of freshwater withdrawn, typically measured as the value added (in constant USD) per cubic meter (m3) of water used. Higher values indicate a more productive and sustainable use of limited water resources. While the OECD average shows a higher percentage of water stress than the LAC region, the OECD's water efficiency in 2022 reached USD 138.5/m³, well above the LAC average of USD 13.7/m³ (Figure 1.33, Panel B). This highlights a structural gap in water protection and productivity in LAC. In 2022, high-efficiency performers in the region included Antigua and Barbuda (USD 117.2/m³) and Panama (USD 54.9/m³). In contrast, countries like Mexico and the Dominican Republic face a double vulnerability: high levels of water stress (44.9% and 39.6%, respectively) combined with low efficiency levels (USD 13.3/m³ and USD 9.7/m³), reflecting more complex sustainability challenges. When designing sustainable water management, it is essential to consider that there is often a spatial mismatch between water supply and demand within many LAC countries, with water-abundant regions far from population centres or productive hubs.
A systemic approach to water management can both improve production strategies and increase well-being (FAO, 2023[97]). Improving the development and modernisation of water infrastructure can prove particularly useful for LAC. In several countries of the region, aging and inefficient infrastructure contributes to water losses of up to 60%, undermining the efficiency of water extraction and increasing the energy costs associated with water transport (CAF, 2018[98]). Additionally, surface water storage in the region remains limited, representing only 7% of renewable water resources, compared to 24% in the United States and 29% in China. This highlights the need for strategic investment in water storage capacity (World Bank, 2022[92]). Inadequate water infrastructure directly affects the well-being of citizens, limiting access to reliable and safe water services. When designing a systemic approach for water management, governments are encouraged to base the design at the river basin level, where water governance can better align with ecological and hydrological realities.
In LAC, around 161 million people – one out of four residents – lack safely managed drinking water services, and around 431 million (seven out of ten) lack safely managed sanitation services (ECLAC, 2022[99]). In 2022, access to safe drinking water remained uneven, with a notable rural-urban divide (Figure 1.34). In countries where a large proportion of the population is urban, like Brazil (89%), Colombia (81%) and Honduras (78%), urban areas reported relatively high access to safe drinking water in 2022, while rural populations lagged. For instance, only 23% of Peru’s rural population had access to safe drinking water, compared to 60% in urban areas. Similar disparities were observed in Suriname (41% rural vs. 63% urban) and Colombia (40% vs. 81%). Costa Rica stood out as the only country where rural access (81%) slightly exceeded urban access (80%) (World Bank, 2025[58]).
Note: Percentage of the population with access to safely managed drinking water from improved sources, which are available at the household, accessible when needed and free from faecal and priority chemical contamination. Improved water sources include piped water, boreholes, tube wells, protected dug wells, protected springs and packaged or delivered water.
Source: Authors’ elaboration based on (World Bank, 2025[58]).
The LAC region has the opportunity to advance productive policies that both safeguard water reserves and enhance equitable access to water. The adoption of new technologies alone is insufficient if these innovations continue to place excessive demands on water and other natural resources. Effective production strategies must prioritise not only technological advancement but also the efficient and sustainable use of critical inputs such as water. Given its horizontality, systemic thinking can be applied to water management.
LAC countries face persistent productivity challenges that limit their ability to achieve inclusive and sustainable development. Structural bottlenecks, including weak innovation systems and limited technology adoption, have stifled productivity growth, hindered economic diversification and left economies dependent on a narrow range of exports and trading partners. Yet the region possesses significant untapped potential: abundant natural resources, favourable demographics, and emerging innovation ecosystems provide a strong foundation for diversifying trade, enhancing resilience and reorienting production models in the face of geopolitical uncertainty.
Seizing this potential requires a profound, systemic production transformation that is both sustainable and inclusive. LAC must adopt strategies that boost productivity, align with environmental goals and generate formal jobs. This entails rethinking economic, social and environmental priorities together, promoting strategic low-carbon, high-skill sectors and investing in technologies and policies that enhance resilience, equity and long-term development. By embedding sustainability and inclusion at the core of production, the region can unlock lasting growth and stronger societal outcomes.
Macroeconomic context
LAC growth is slowing and converging towards its potential, reflecting global trends and domestic policy responses.
Fiscal space to support productive and social investments is limited. Weak revenue mobilisation and rising debt-servicing costs constrain fiscal space, underscoring the urgency of stronger public finances.
Inflation is lower in LAC, as policy rates trend downward, but uncertainty lies ahead. Credible monetary frameworks help bring inflation close to targets, though global volatility keeps uncertainty elevated.
Structural economic challenges
Sluggish productivity limits potential growth and convergence with advanced economies.
Export baskets remain concentrated in commodities and low-tech goods, curbing productivity gains and resilience to shocks.
Limited intraregional trade may constrain export diversification.
While LAC’s traditional exports reveal comparative advantages, tech-intensive sectors offer a path to production transformation.
Structural economic challenges in LAC require a holistic response. A comprehensive productive development agenda is needed to tackle fiscal, productivity and external vulnerabilities.
Social context
Policies should be designed to foster the production transformation and channel private and public investment towards high-tech and digital-intensive sectors for creating well-paid formal jobs.
Labour market policies should aim at generating an inclusive labour market, increasing decent labour opportunities.
Simplified tax regimes have had good results in terms of tax compliance and business formalisation, in some countries of the region. The introduction of such schemes may be considered, drawing from effective policy experiences.
In a context of persistent extreme monetary poverty and social inequalities, social protection schemes should move towards universality.
General taxation can be a tool for the extension of social protection systems, as indirect taxes are already high in the region, and informality hinders the use of social security contributions.
Conditional cash transfers must be developed and designed to respond more efficiently to income shocks, as they could partially substitute for or complement contributory social insurance schemes.
Countries with limited fiscal space may consider a policy mix for informal workers using different entry points in social protection systems, depending on the specific employment status of informal workers.
Environmental context
Production transformation should give equal weight to environmental sustainability, social inclusion and productivity. This systemic vision must be embedded across all strategic sectors.
Domestic efforts should move beyond targeting emissions in key supply chains and adopt a systemic, country-specific approach to development that integrates environmental performance. Policy mixes – tailored to each sector and context – are more effective than stand-alone measures, accounting for 70% of emissions reductions, particularly in complex areas like buildings and transport.
Ensuring international policy coherence – across developed and developing countries, the private sector and other stakeholders – can maximise the environmental efforts of production transformation.
Recent improvements in LAC highlight the opportunity to promote land protection. Boost forest conservation and agricultural productivity through stronger reforestation policies, effective land-use planning, technology adoption, and payments for ecosystem services, addressing implementation gaps in anti-deforestation laws.
Prioritising the reduction of energy intensity and losses while expanding renewables to advance sustainable production and meet low-carbon standards can help ensure equitable access, particularly in rural areas.
Designing water management at the river-basin level and modernising infrastructure can reduce losses, improve efficiency and ensure safe, reliable access across LAC.
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← 1. These figures are calculated using data from the Groningen Growth and Development Center (GGDC) for the following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Mexico and Peru (Hamilton and J. de Vries, 2025[100]).
← 2. The Multidimensional Poverty Index for Latin America has been recently developed by the Economic Commission for Latin America and the Caribbean (ECLAC). It is structured in four major dimensions – dwelling, health, education, and employment and pensions – with 12 specific indicators (3 for each dimension) measuring the well-being conditions of people living in LAC households. It currently covers the following 17 LAC countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru and Uruguay.
← 3. The data refer to 2023 for Argentina, Brazil, Colombia, Costa Rica, El Salvador, Paraguay and Peru; to 2022 for Bolivia, Chile, Guatemala, Mexico and Suriname; to 2019 for Honduras, Jamaica and Uruguay; and to 2018 for the Dominican Republic.
← 4. The data refer to the following countries: Argentina, Chile, Colombia, Costa Rica, Mexico, Paraguay and Peru.
← 5. The figures refer to an unweighted average of income shares for the following countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Honduras, Mexico, Panama, Paraguay, Peru and Uruguay.