Latin American Economic Outlook 2025

Executive summary

The countries of Latin America and the Caribbean (LAC) face longstanding productivity challenges that constrain their ability to achieve stronger, more inclusive and sustainable development. Production transformation leveraging the region’s abundant natural resources, demographic strengths and emerging innovation ecosystems can provide a solid foundation for designing and financing a model that enhances productivity while promoting inclusiveness and sustainability.

LAC must transform its production structure to meet the current challenges

The region’s macroeconomic context is characterised by decelerating GDP growth in LAC, in line with global developments, with per capita GDP growth stabilising around its potential. Between 1991 and 2024, labour productivity in the region grew by only 0.9% per year on average, well below the 1.2% annual rate observed in OECD countries. In this context, many countries struggle to mobilise sufficient domestic resources. These conditions limit LAC countries’ capacity to promote and finance the transformation of strategic sectors and the diversification of their economies – transformations that are essential for achieving higher productivity growth. Social conditions remain relatively weak, marked by high informality, persistent vulnerabilities and insufficient social protection, which also contribute to low levels of productivity. In 2023, 55.1% of LAC’s workers were informal, and only 2.1% had jobs with high and medium-high technological intensity, below the OECD average of 7.7%. Moreover, the current production model is placing growing pressure on the environment, with greenhouse gas emissions in LAC increasing across all sectors between 1990 and 2022, and climate-related natural disasters doubling over the past 25 years.

In this context, LAC countries need to transform their production structures to raise productivity and inclusion while meeting environmental goals. A systemic approach that recognises the interdependence of these challenges can foster coherent policies towards those objectives. Production transformation, the green transition and greater social inclusion are mutually reinforcing: advancing one dimension drives progress in the others.

Productive development policies in LAC need stronger implementation

Well-designed productive development policies (PDPs) can boost productivity and diversification. In most LAC countries, however, implementation has been a challenge. Across the 33 countries in the region, 197 ministerial entities are involved in PDPs, with two-thirds of countries engaging five or six different ministries. Yet the presence of multisectoral ministries rarely translates into effective co‑ordination or a unified strategic vision. LAC countries also face financing challenges: between 2021 and 2022, they allocated less than 0.5% of GDP to PDPs on average, far below the OECD average of 3%.

Looking ahead, PDPs should engage more effectively with the private sector and civil society, while reinforcing co‑ordination across government agencies. This means aligning horizontal policies that shape the entire economy – such as research and development (R&D), public procurement, tax incentives and entrepreneurship support – with vertical policies targeting strategic sectors like renewable energy, sustainable agriculture, digital industries and the care economy. Stronger co‑operation with local governments is also essential. Among the 74 co‑ordination bodies identified in 15 countries, most remain consultative rather than executive or deliberative, and only 28% operate across multiple levels of government, limiting territorial and subnational engagement.

Financing production transformation requires mobilising public and private resources

Mobilising public and private resources is essential. LAC faces a sustainable development financing gap estimated at an average of USD 99 billion per year through 2030. Yet public spending is heavily concentrated on current expenditure rather than capital investment, constraining long-term growth. Tax revenues, at 21.3% of GDP in 2023, remain well below the OECD average (34%) and depend largely on value-added tax (VAT) (28.5% of total revenue) and corporate taxes (18.7%). Tax expenditures absorb significant resources – averaging 4.0% of GDP across 18 countries, with corporate income tax incentives alone at 0.9%. Reforming the design of these incentives can enhance their efficiency and effectiveness, and increase their impact on development and production transformation. It will also be necessary to strengthen tax progressivity, redesign VAT to reduce regressivity, and bolster tax morale to foster compliance. National development finance institutions (DFIs), working in close co‑ordination with multilateral development banks (MDBs) and bilateral DFIs, can play an important role in promoting investment aligned with PDPs. MDBs and bilateral DFIs can help by lowering borrowing costs, facilitating co-ordination with productive development policy strategies, providing technical expertise, and supporting sector-specific project pipelines to scale up investment.

Strengthening capital markets and attracting quality foreign direct investment (FDI) is equally critical. LAC’s equity markets remain shallow, with an average market capitalisation of 37.4% of GDP in 2024, compared to 64.4% in the OECD. However, new financing avenues are expanding. The share of green, social, sustainability, sustainability-linked and blue bonds in international issuance rose to 27.2% in 2024, up from 9.3% in 2020, with cumulative issuance reaching USD 164.4 billion. FDI inflows are also high, equivalent to 2.8% of GDP in 2024. Attracting FDI to renewable energy, digital infrastructure and medium- to high-tech industries can boost production capacity, diversify exports, promote technology transfer, create quality jobs and accelerate the greening of energy systems across the region.

Reorienting international flows can boost production transformation

With global public resources under strain, it is essential to align international financing and co‑operation around three key enablers of production transformation in the region: skills development, technology adoption and infrastructure upgrading. Skills-related assistance forms a small portion of overall official development assistance (ODA), yet it has been oriented towards strategic sectors, with nearly USD 1.9 billion directed to LAC between 2014 and 2023 across sectors like information and communications technology, energy and environmental services. Technology and innovation require stronger international collaboration to foster knowledge-intensive production and build robust R&D networks. Upgrading regional infrastructure – especially in energy, transport and digital connectivity – is equally crucial for reducing transaction costs and boosting competitiveness. A shift from fragmented national strategies to integrated regional systems, such as a unified electricity market, would help LAC to leverage its strengths and accelerate its transition to a low-carbon, interconnected future.