Latin America and the Caribbean face a decisive opportunity to shift towards resilient, knowledge-intensive production structures that underpin inclusive and sustainable growth. With public resources under pressure, it is vital to target co-operation on the three enablers of production transformation: skills development, infrastructure and technology adoption. At the same time, deepening regional integration and forging robust cross-border value chains will elevate value added across the region and boost its competitiveness. Achieving this transformation requires strategic international partnerships that mobilise public and private finance, foster capacity building and redirect investment into strategic sectors including renewable energy, digital infrastructure, health technologies and sustainable agriculture.
Latin American Economic Outlook 2025
Abstract
Latin America and the Caribbean (LAC) faces an urgent need for production transformation to overcome structural limitations and reach sustainable development goals. The region’s current economic model, which is heavily reliant on low-value-added exports, will not allow for sustainable economic growth or for a green transition. A shift towards more diversified, knowledge-intensive and environmentally sustainable industries is essential. International co-operation should strategically support sectors with high potential for structural change.
This is a crucial moment for LAC to advance towards a new development model that places production transformation at the centre of inclusive and sustainable growth. After decades marked by recurrent external shocks, limited diversification and high levels of inequality, the region must reposition itself in a global economy marked by the Fourth Industrial Revolution by building more resilient, innovative, inclusive and sustainable production systems. Achieving this transformation requires more than domestic reforms. It demands strategic international partnerships that mobilise resources, promote collaboration, capacity building and peer learning and foster innovation and technology transfer in support of structural change.
The transition to a more sustainable, inclusive and knowledge-intensive production structure in LAC requires a significant reorientation of investment flows and strengthened international co-operation. In a context marked by overlapping global crises, rising geopolitical tensions and an urgent need for climate action, the mobilisation of international finance – both through foreign direct investment (FDI) and development co-operation – has become increasingly important to accelerate the transformation of productive sectors across the region. Strategic sectors such as renewable energy, digital infrastructure, health technologies and sustainable agriculture offer new opportunities for competitiveness and innovation, while also serving as key pillars for a just transition and long-term resilience.
However, aligning international finance with the development needs and production transformation priorities of LAC economies remains a challenge. FDI flows to the region have historically been concentrated in low-complexity sectors, such as the extractive industries, limiting their contribution to structural change. But this is drastically changing as a growing share of FDI investments target the digital sector, playing an important role in the digital transition within the region. Development co-operation, both bilateral and multilateral, has also begun to pivot towards supporting transformative agendas – especially in areas such as climate, digitalisation and regional integration – but financing gaps persist. The evolving landscape of international development co-operation, including new donors and instruments, creates both opportunities and complexities for countries in the region seeking to strengthen productive capacities.
The next wave of productive development policies in LAC must take into account regional partnerships. These policies must be built on a clear, shared vision by governments, international financial institutions and the private sector, working together to map out sector-by-sector strategies, create technology hubs and train local workforces. In this new phase, international co-operation needs to move from broad support to more focused partnerships that will drive the region’s sustainable, knowledge-based growth.
International partnerships and co‑operation remain a key instrument for fostering LAC’s production transformation, yet public resources are under growing pressure. Official development assistance (ODA) from major donors fell by 9% in 2024 and is projected to decline by a further 9-17% in 2025, marking the first back-to-back cuts on record (OECD, 2025[1]). This downturn in concessional funding heightens the urgency of mobilising alternative financing mechanisms, leveraging blended instruments and deepening public-private partnerships to sustain investment in the region’s production sectors. By combining these innovative approaches with targeted support from partners, LAC can navigate tightening budgets while accelerating structural change.
Current trends in development co-operation to foster economic transformation
Financial resources are crucial for transforming LAC’s production structure. Yet the region faces a persistent savings-investment gap, with domestic savings falling short of the resources needed. An estimated total of USD 2.2 trillion is required to close the infrastructure investment gap, with USD 99 billion annually needed to bridge the spending gap for meeting the Sustainable Development Goals (SDGs) (OECD et al., 2024[2]; CAF, 2024[3]). These financing gaps are significant structural challenges constraining the region’s development and economic growth, as well as the green transition.
FDI, which plays a key role in developing critical sectors at the heart of production transformation, is a vital source of capital for bridging the investment gap. Between 2014 and 2024, the LAC region received more than USD 1 trillion in greenfield FDI. Historically, many of these flows have gone to the extractive sectors, such as mining and quarrying (22% from 2003-2013), but greenfield FDI to this sector dropped sharply in the last decade, representing just 13% of total greenfield investments. Meanwhile, investments have increased to priority areas such as technology and knowledge-intensive sectors and renewable energy. Over the last two decades, the share of greenfield FDI to technology and knowledge-intensive sectors rose from 33% to 36%, largely driven by medium-high tech manufacturing in chemicals and motor vehicles, and increased in renewable energy by ten percentage points, to 16% of total greenfield investments (OECD, Forthcoming[4]). However, these regional averages mask important heterogeneities across LAC, with some countries experiencing more drastic shifts than others in FDI flows to sectors critical for production transformation (Chapter 3).
FDI serves as a means to diversify domestic production and exports, gain access to advanced technologies, boost competition and bolster national capacities (ECLAC, 2024[5]). A prime example is Costa Rica, where targeted FDI allowed for an upgrading of production from light manufacturing, such as food and beverages, to high-tech manufacturing in medical devices and pharmaceuticals (Box 4.1).
Costa Rica is a global manufacturing hub for medical devices. Home to more than 90 multinational medical technology (medtech) companies, it is Latin America’s second-largest medical device exporter and the eighth largest in the world. The country’s investment promotion agency, PROCOMER, has been a strategic force in attracting FDI in high-value-added sectors such as medtech. Major pull factors for companies investing in Costa Rica’s medtech sector include its highly skilled talent pool, large innovation abilities, political and economic stability, well-defined regulatory frameworks, high standards of intellectual property protection and the country’s geostrategic location, which allows for easy access to North and South America.
One of the strongest pull factors is the country’s pool of employees with specialised skills for medical device manufacturing. This talent pool was created thanks both to foreign firms, which provided initial training, and to strategic government programmes to build technical abilities within the sector. The presence of multinational medtech leaders has resulted in large knowledge transfers over the past two decades. In fruitful private-public partnerships between medtech companies and academia, medtech firms have helped shape curricula for future engineers and technicians within the industry and have donated technological equipment to universities to ensure that students are trained with the latest technologies. Costa Rica is the first and only country in LAC to have a specific law on dual vocational training that strengthens the development of skills linked to practical training in the productive sector and promotes skilled labour market integration.
FDI within this knowledge and technology intensive sector has been a catalyst for economic growth and job creation in Costa Rica. More than 55 000 new jobs have been created, most of them skills-intensive. Ten of the 90 multinational medtech companies conduct research and development (R&D) in Costa Rica, creating a thriving R&D environment within the country. Costa Rica’s targeted FDI strategy, which resulted in nearly USD 2.7 billion in greenfield investments within the medical device manufacturing industry between 2005 and 2024, has been vital to the country’s upgrading of production.
Source: (OECD, Forthcoming[4]).
Attracting greater flows of FDI could boost resilient, diversified growth and support regional value-chain development across the region. Over the last two decades, the largest sources of greenfield FDI have originated from the European Union (EU) and the United States (US) (Figure 4.1).
Source: (fDi Markets Database, 2025[6]).
International investment agreements (IIAs) – bilateral, regional and multilateral treaties related to foreign investment – can help to ensure not only that more FDI is attracted but also that it is aligned with broader development objectives. As of May 2025, more than 490 bilateral investment treaties and treaties with investment provisions were in force in LAC (UNCTAD, 2025[7]).
IIAs, which have traditionally focused on providing protection and incentives to foreign investors, are increasingly incorporating provisions related to sustainability. For instance, the EU-Chile Advanced Framework Agreement, signed in December 2023, emphasises sustainable investment in critical raw materials essential for the green transition, thereby supporting production transformation and value addition in Chile’s economy. The agreement also strengthens co‑operation on sustainability, aligning with principles of responsible business conduct (European Union, 2025[8]). Similarly, the EU-Mexico Modernised Global Agreement will promote the protection of climate and labour rights as well as will facilitate the supply of material vital for the digital and green transition. The negotiations on the agreement were concluded in 2025, and once ratified, it will ease the trade of agricultural products by reducing custom duties and protecting heritage products (European Commission, 2025[9]). A text analysis of 2 083 bilateral investment treaties and 374 treaties with investment provisions worldwide reveals that the number of sustainability references in IIAs has dramatically increased in the last decade, resulting in the emergence of a “new generation” of IIAs (Dotzauer, Biber-Freudenberger and Dietz, 2024[10]).
Provisions on sustainable investment in IIAs help leverage FDI to promote national development objectives. Sustainability provisions include references to the role FDI plays in sustainable development and “right to regulate” provisions, which give host countries the right to adopt measures that protect the environment and human and labour rights. Some provisions may also address tools to support sustainable development. For example, in some treaties, investors must be actively contributing to sustainable development in the host country for investments to be protected by the host government.
These new-generation IIAs are increasingly incorporating responsible business conduct by referencing corporate social responsibility standards or explicitly stating the conduct that businesses must follow in the implementation of their investment activities. For example, Brazil’s Co‑operation and Facilitation Investment Agreements address investor behaviour expectations, including human rights compliance, combatting corruption, good governance, and labour and environmental protection. Free trade agreements and economic partnership agreements involving the European Union have specific clauses under which signatories agree not to lower protection levels in environmental and labour laws for the purpose of attracting trade and investment (OECD, 2024[11]).
ODA can help bridge investment gaps, but its volume in the region remains limited, representing merely 1% of gross national income (GNI) across LAC. The region receives less ODA than other developing regions mainly because many LAC countries are classified as middle-income, limiting their eligibility for concessional financing. In comparison, ODA represents 2.6% of GNI in Eastern Europe and as much as 5.7% of GNI in Africa (OECD et al., 2024[2]). The largest ODA donors to LAC include EU countries and institutions (30.5%), multilateral institutions (29.0%), the United States (22.6%), South Korea (7.5%) and Canada (3.0%) (OECD, 2025[12]).
The shift in development co-operation from traditional aid models to mobilising finance from the private sector reflects the scale of financing required to achieve the SDGs and the growing recognition that public resources alone are insufficient. At the same time, donors are increasingly experiencing domestic fiscal pressures and intensified political and public scrutiny of development assistance. For these reasons, development partners are increasingly using ODA as a lever to de-risk investments, support blended finance mechanisms and attract private capital into sectors such as infrastructure and clean energy (OECD et al., 2024[2]; European Commission, 2023[13]). Blended finance is the use of public capital to increase private-sector investment in sustainable development. It works by de-risking investments that are otherwise considered too risky or not financially viable for private investors, especially in emerging markets. These public interventions aim to mitigate risks and scale-up or enhance returns, thereby encouraging private investors to fund projects aligned with SDGs in order to narrow the financing gap (OECD, 2023[14]).
Mobilised private finance for development has played a larger role than ODA in LAC in recent years, emerging as an important source of finance for production transformation (Figure 4.2). The production sectors involved include agriculture, forestry, fishing, energy, construction, industry, mineral resources and mining, water and sanitation, transport and storage, and tourism. Within these sectors, mobilised private finance for development amounted to more than USD 9.8 billion in 2023, representing 51% of total mobilised private finance for development. This is more than double the USD 4.1 billion received in ODA (29% of total ODA) or the USD 4.4 billion received in other official flows (OOF) (17% of total OOF).
Note: ODA = official development assistance and OOF = other official flows. Production sectors include agriculture, construction, energy, fishing, forestry, industry, tourism, mineral resources and mining, water supply and sanitation, transport and storage, and others.
Source: (OECD, 2025[12]).
Assistance from development co-operation partners reflects this shift. Most notably, European partners have become an important leader in mobilising private finance. In 2017, the European Fund for Sustainable Development (EFSD+) was established to facilitate investments for sustainable development using blending mechanisms, guarantees and other financial instruments. In July 2023, the EU-LAC Global Gateway Investment Agenda (GGIA) was launched in the context of the IIII EU-Community of Latin American and Caribbean States (CELAC) Summit. It aims to mobilise at least EUR 45 billion by 2027 for initiatives that focus on addressing the region’s infrastructure needs, creating local added value and promoting growth, jobs and social cohesion (OECD et al., 2024[2]). In light of this development, EU ODA now aims to serve primarily as a catalytic instrument to boost transformational impact in the sectors and actions prioritised by the EU-LAC GGIA, where concessional funds are blended with private capital to promote sustainable investments in energy, transport infrastructure, digital connectivity, health and social cohesion projects. The GGIA is based on a 360-degree approach, placing beneficiaries in the centre of the design and promoting public private and civil society collaboration (European Commission, 2025[15]). It goes beyond mere financial support by creating an enabling environment following six core pillars (Figure 4.3).
Source: (European Commission, 2025[16]).
The EU-LAC GGIA targets transformative investment projects across LAC revolving around four key pillars: a fair green transition, inclusive digital transformation, human development, and health resilience and vaccines (European Commission, 2023[13]). Two notable initiatives are in green hydrogen markets and in local vaccine and pharmaceutical manufacturing (Box 4.2).
Beyond traditional bilateral and multilateral donors, regional development banks are increasingly central to mobilising resources for production transformation. Institutions such as the Inter-American Development Bank and the Development Bank of Latin America and the Caribbean (CAF) are expanding their use of mobilisation instruments including guarantees, syndicated loans and concessional co-financing to attract private investment into sectors critical for LAC’s production transformation, such as renewable energy, digital infrastructure and sustainable transport (CAF, 2025[17]; IDB, 2025[18]). These initiatives reflect a broader global trend in development co-operation, whereby concessional ODA is strategically employed to de-risk projects and catalyse additional private capital, notwithstanding that current levels of private sector participation remain below estimated requirements (OECD, 2025[19]). Within this context, CAF has reinforced its role as a regional financial catalyst, in line with joint commitments under the MDB (Multilateral Development Bank) Task Force on Mobilization, mobilising USD 780 million for LAC in 2023 (MDB Task Force on Mobilization, 2023[20]). Building on this framework, regional development banks complement the role of traditional donors by providing structured platforms and deploying financial instruments that facilitate private sector engagement in sectors critical for production transformation, thereby contributing to the development of more resilient production systems and supporting conditions that may enable long-term sectoral structural improvements.
Renewable hydrogen markets
LAC countries are increasingly embracing renewable energy solutions to drive the region’s green transition. Under the GGIA’s green transition pillar, support for green hydrogen (GH2) aims to accelerate decarbonisation, generate green jobs and unlock new business opportunities. The EFSD+, one of the main tools for mobilising investments under Global Gateway, provides financing for blending and guarantees for the renewable energy transition. Most of the 17 Guarantee Agreements covering the LAC region are now signed or close to signature. Renewable hydrogen can be promoted through the European Development Finance Institutions (EDFI) Renewable Energy Transition (RET) Guarantee Agreement, signed in May 2025 and open for investments until November 2027 (European Commission, 2025[21]). The project aims to address the gap related to energy access in LAC, as well as in sub-Saharan Africa, Asia and the Pacific. Globally, it offers a total guarantee of up to EUR 332 million in those regions for sustainable direct and indirect debt and equity investments into renewable energy sub-sectors, such as wind, solar, hydro, biomass and geothermal, and the green hydrogen value chain. It supports private enterprises through the construction and implementation phases of the investments.
There are already various examples of EU-LAC partnerships focusing on renewable hydrogen within the framework of the Global Gateway Investment Agenda. In Chile, for instance, the Global Gateway Renewable Hydrogen Fund was established to promote renewable hydrogen markets and foster local supply chains to create renewable energy for both local use and exportation. The goal is to produce 150% of the existing global hydrogen market and 15% of future demand in 2050. In addition to creating an enabling environment for GH2 production and providing technical assistance, this initiative aims to facilitate private-sector investment through blending and/or investment de-risking mechanisms (European Commission, 2023[13]). Similar projects supporting renewable hydrogen are being carried out in Argentina, Brazil, Colombia, Paraguay and Uruguay. In the Caribbean, the European Union and Barbados have taken an important step with the launch of the Renewstable Barbados project, which uses solar power as well as green hydrogen to address weaknesses in the island’s infrastructure, and further collaborations are being explored to move towards a sustainable energy future (European Commission, 2025[22]).
Vaccine and pharmaceutical manufacturing
GGIA is also supporting vaccine and pharmaceutical manufacturing in LAC through the GGIA EU-LAC Initiative for Regional Health Resilience, building on the EU-LAC Partnership on Health Resilience and Equitable Access to Health Products presented jointly in 2022. GIGA provides support for regulatory frameworks, technology transfers, and research and innovation. A key pillar of the initiative is to promote private-sector engagement and facilitate access to finance. The regional pharma working group met in March 2025 to discuss private-sector engagement, and next steps are being discussed jointly with LAC representatives. Via the EFSD+, instruments like guarantees and blending are made available to de-risk and encourage investment in pharmaceutical manufacturing primarily across LAC. Overall, actions are expected to be focused on, but not limited to, key countries such as Barbados, Colombia, Cuba, Guyana and Mexico for local production and regulatory reforms, as well as Argentina, Brazil and Chile for regional integration and capacity-building.
Source: (European Commission, 2023[13]).
Similarly, the United States established the Development Finance Corporation in 2018, increasing the importance of private finance in US development co-operation. However, US development policy is set to undergo significant realignment following a government decision in early 2025 to freeze foreign assistance. Policy makers will likely reassess the geographic and sectoral allocation of ODA, scaling back support in lower‐priority regions while safeguarding critical humanitarian and security programmes (Better World Campaign, 2025[23]). This freeze has put pressure on country teams to redesign initiatives for greater cost‐effectiveness and to deepen partnerships with the US Development Finance Corporation, which can mobilise private capital in lieu of direct grants (International Rescue Committee, 2025[24]). A sharper focus on leveraging blended finance and guarantee mechanisms is expected to help sustain investment in production sectors despite tighter federal budgets.
The United States and the European Union target their development assistance to LAC towards renewable energy, industry, agriculture, transport and storage, and water and sanitation. Over the last decade, more than 46% of US ODA to the production sectors has been directed towards agriculture, 21% towards the energy sector and 16% towards water supply and sanitation. A large share of ODA from EU countries and institutions goes to energy (29%), followed by transportation and storage (20%), water supply and sanitation (20%) and agriculture (19%) (OECD, 2025[25]). The sectoral distribution is different with OOF that do not meet ODA criteria, such as loans for commercial purposes, transactions for development purposes that have a grant element of less than 25% and bilateral transactions that primarily facilitate exports (OECD, 2025[25]). The majority of OOF from the United States is directed towards the energy sector (73%), followed by 14% towards transportation and storage, while 39% of OOF from EU countries and institutions is allocated to energy and 36% goes to industry (OECD, 2025[25]). Looking at development assistance from all official donors within the production sectors, private finance for development is mainly financing industry (41%), transport and storage (26%) and energy (22%) (Figure 4.4). OOF and ODA mainly finance transportation and storage (24% of OOF and 33% of ODA), the energy sector (30% of OOF and 24% of ODA), as well as water and sanitation (20% of OOF and 17% of ODA).
Note: Other includes trade policies and regulations.
Source: (OECD, 2025[12]).
There is a growing emphasis on funds allocated to contribute to sustainable production transformation, with a large amount going to renewable energy. This is crucial since transitioning to a low-carbon economy requires the mobilisation of significant financial resources. LAC requires annual estimated investments of USD 75-92 billion for climate mitigation and USD 14‑17 billion for climate adaptation (IMF, 2024[26]).
ODA continues to be a catalyst for financing sustainable production transformation in LAC. Between 2014 and 2023, almost USD 24 billion in ODA was channelled to LAC’s energy sector, with one-third of these funds supporting renewable energy (OECD, 2025[12]). The energy sector now accounts for 24% of ODA directed to the productive sectors, up from merely 3% in the early 2000s, and the share of ODA to the agricultural sector has decreased significantly (Figure 4.5). Supporting investment in renewable energy and innovative agriculture will be essential to reducing emissions. In 2019, LAC accounted for 13% of total greenhouse gas (GHG) emissions in electricity generation and 25.3% of total GHG emissions in agricultural activities (OECD et al., 2022[27]).
Note: Other includes trade policies and regulations. The figure is representative of the sectors selected as part of the production sectors for this report. Sectors correspond to the sectors in the OECD CRS database.
Source: (OECD, 2025[12]).
LAC is one of the most vulnerable regions in the world with respect to climate change, and innovation in green energy and agriculture will be essential in mitigating climate shocks and protecting the region’s economies. LAC is home to 13 of the world’s 50 countries identified as most affected by climate change. The region’s vulnerability is reflected in the extreme weather events that LAC has endured. From 1970 to 2022, 17% of the world’s climate-related extreme weather events occurred in the region, with severe social and economic consequences. If global temperatures increase by 2.5°C, this could cause an estimated loss of 1.5% to 5% of the region’s gross domestic product (GDP) by 2050 (OECD et al., 2022[27]). For this reason, investment in sustainable production transformation is crucial to LAC’s economic growth.
Between 2014 and 2023, ODA within the energy sector was largely focused on supporting renewable energy generation (Figure 4.6). During that period, 52% of total energy-related ODA (USD 7.9 billion) was allocated to renewable sources, including hydro, solar, wind, marine, geothermal and biofuel energy; 21% (USD 3.2 billion) went to energy distribution infrastructure, and nearly 17% (USD 2.5 billion) supported energy policy development and administrative management. This concentration of funding reflects the capital-intensive nature of the energy sector, where substantial investment in infrastructure is required. In contrast, only USD 10 million of ODA was allocated to energy research over the past two decades, revealing a significant gap in support for innovation and technological advancement (OECD, 2025[12]).
Source: (OECD, 2025[12]).
International development assistance plays a crucial role in helping countries achieve their development and industrial goals. However, its effectiveness depends largely on how well it aligns with national development priorities. Alignment reinforces domestic efforts, enhances impact and ownership, builds mutual accountability and ultimately ensures long-term sustainability. The importance of aligning development assistance with national priorities was formally recognised in the Rome Declaration on Harmonisation (2003) and reinforced in subsequent high-level agreements such as the Accra Agenda for Action (2008) and the Busan Global Partnership for Effective Development Co‑operation (2011), as well as during meetings of the Global Partnership for Effective Development Co-operation (GPEDC), which have been held every two years since 2014. These global forums underscore that financial aid alone is insufficient and that effective development co-operation requires that donor practices prioritise alignment and partnership to support sustainable outcomes.
A case study of Brazil, Colombia and Mexico – three of the top four recipients of global ODA in LAC – can help to assess how well international aid supports national objectives for production transformation. A common thread in the development strategies of these countries is a focus on expanding renewable energy and increasing investment in R&D to boost innovation, productivity and value addition in goods and services. While ODA has strongly supported the renewable energy goals of these countries, there is a noticeable gap in funding for R&D, which is an essential enabler of sustainable development (Box 4.3).
Brazil
Brazil’s Multi-Year Plan 2024-27 is built around three strategic pillars, one of which – Economic Development and Social-Environmental and Climate Sustainability – is directly tied to production transformation. Objectives in this pillar include increasing competitiveness and productivity, value addition of goods and services, environmental sustainability, scientific technological development and innovation, infrastructure and logistics, and insertion in the green and digital economy (Ministry of Planning and Budget, 2023[28]). Brazil has set ambitious targets to support this transformation. It aims to increase the share of clean and renewable energy to 53% by 2027, up from 47% in 2022, and to increase R&D investment to 1.5% of GDP, compared to 1.14% in 2022, the baseline year. From 2014 to 2023, Brazil’s energy sector received or 20% of the country’s total ODA. Of this, 67% was directed to renewables and 28% to energy distribution, reflecting strong alignment between previous ODA disbursements and Brazil’s current goals. However, ODA to R&D has been declining in recent years.
Colombia
Production transformation, internationalisation and climate action form one of the five pillars of Colombia’s National Development Plan 2022-2026. Key objectives under this pillar include increasing investment in R&D, augmenting the share of non-mining energy goods and services in total exports, expanding electricity generation from non-conventional renewable energy sources and reducing carbon emissions from the transport sector (Departamento Nacional de Planeación, 2023[29]). Colombia aims for a nearly eightfold increase in electricity generation from non-conventional renewable energy sources. However, from 2014 to 2023, less than 3% of ODA was directed to Colombia’s energy sector. Of the USD 444 million received, 32% supported renewable energy generation and infrastructure, while 65% went to energy policy and administrative management, highlighting the need to increase commitments for renewables. In terms of R&D, Colombia plans to double its spending, from 0.3% to 0.5% of GDP. ODA for R&D has been minimal, representing less than 0.01% of ODA received from 2014 to 2023.
Mexico
Two of the four axes of Mexico’s National Development Plan 2025-2030 – “moral economy and work” and “sustainable development” – place a strong emphasis on the country’s productive sectors. These axes highlight areas critical to driving production transformation, such as prosperity and connectivity, and sustainable energy. The prosperity and connectivity sub-pillar focuses on increasing the value added of exports; improving productivity, competitiveness and innovation; and expanding infrastructure and logistics. The sustainable energy sub-pillar calls for significant new investments in power transmission and generation alongside an ambitious goal for Mexico’s energy to come from clean sources by 2030 (Diario Oficial de la Federacion, 2025[30]). A mixed picture emerges when evaluating the alignment of past ODA disbursements with the national development plan’s priorities in terms of production transformation – particularly innovation, transportation infrastructure and renewable energy. From 2014 to 2023, ODA to R&D in Mexico was only 0.3% of total ODA received over this period. The transportation sector, despite being critical for connectivity and competitiveness, received less than 0.01% of total ODA. In contrast, of the 24% of total ODA that has gone to the energy sector, more than 50% went top renewable energy generation, while almost 24% supported energy conservation and efficiency; 20% energy policy and administrative management, and 7% went to energy distribution (OECD, 2025[12]).
Alignment from the private sector is also crucial. After explicit recognition in the Busan Partnership in 2011 of the importance of the private sector for development, the Kampala Principles were established during the GPEDC Senior-Level Meeting in 2019. These principles promote ownership of private-sector engagement and ensure the alignment of private-sector engagement with national sustainable development objectives. The five principles are i) inclusive country ownership; ii) results and targeted impact; iii) inclusive partnership; iv) transparency and accountability; and v) leaving no one behind (GPEDC, 2025[31]). These principles recognise the key and ever-growing role that private actors hold in meeting development goals.
Over the last decade, total private finance mobilised by official development finance interventions globally has increased more than fourfold, from USD 16 billion in 2012 to USD 67 billion in 2023. This growth has been largely driven by MDBs (OECD, 2025[32]). However, despite these efforts, the funds mobilised remain insufficient to meet development needs, and substantial additional efforts are required to fully leverage the potential of private capital. In this context, catalytic technical assistance has emerged as an under-recognised central instrument. It expands on traditional technical assistance by focusing on systematic change to the landscape on which private investment occurs. Examples include institutional capacity building or strengthening regulations. Catalytic technical assistance’s effects are future-oriented and difficult to quantify yet are essential as foundations for mobilising private finance aimed at sustainable development (Callum and Raitery, 2025[33]).
International conferences on financing for development have offered an important platform for addressing complex development financing challenges. The Third International Conference on Financing for Development (FfD3), held in Addis Ababa in 2015, adopted the Addis Ababa Action Agenda (AAAA). This agenda asserts the importance of all sources of finance, including from the private sector, to meet development goals and emphasises the importance of blended finance mechanisms (UN, 2015[34]). This year, the Fourth International Conference for Financing for Development in Seville established the SCALED platform to scale up blended finance. The creation of this platform was led by a coalition of countries (Canada, Denmark, France, Germany, South Africa and the United Kingdom) and financial institutions in the aim of establishing effective and scalable blended finance instruments and funds to address development challenges (UN, 2025[35]). CAF, in collaboration with the European Commission and the Inter-American Development Bank (IDB), has closely monitored progress since the III EU–CELAC Summit, held in Brussels in July 2023, and the inaugural meeting of Ministers of Economy and Finance in Santiago de Compostela in September 2023.
Partners such as the People’s Republic of China’s Belt and Road Initiative (BRI), launched in 2013, have shown a new type of development co-operation focusing on leveraging investments for trade networks and infrastructure. Chinese co-operation with LAC within the production sectors is primarily focused on industry, mining and construction, and energy, while more traditional sectors such as agriculture receive limited support. Chinese co-operation is primarily carried out through the China Development Bank and the Export-Import Bank of China. Chinese flows have been volatile, peaking at more than USD 14 billion in 2015 before declining to just USD 3 billion in 2021 (Figure 4.7). Between 2005 and 2020, nearly 45% of China’s loans to the region were directed to Venezuela, amounting to almost USD 60 billion, with debt repayments arranged through oil exports. However, oil production in Venezuela dropped drastically in 2010 and again in 2016, and China’s investment in the region has declined. Brazil and Ecuador, which are also major oil producers, have received Chinese loans amounting to USD 31 billion and USD 18 billion, respectively, since 2007. China also financed approximately USD 17 billion in large infrastructure projects in Argentina, including railways and metro lines (IEA, 2023[36]).
Source: (Aiddata, 2023[37]).
As noted above, the key sectors for production transformation in LAC are the pharmaceutical and life sciences industry, the medical devices manufacturing industry, advanced manufacturing and renewable energy (ECLAC, 2024[38]).
Note: Technical co‑operation includes in-kind technical co‑operation expert costs, travel-related costs, services, materials, equipment and supplies, and other technical co‑operation. Training refers to training offered in the donor country. Other includes projects; contributions to specific purpose programmes and funds managed by implementing partners (excluding self-benefit); budget support; and core support to non-governmental organisations, other private bodies, public-private partnerships and research institutes.
Source: (IFT, 2025[39]).
Developing these industries will require significant capacity building. In terms of how total official support for sustainable development is allocated, technical, R&D and training support remain very limited (Figure 4.8). This misalignment suggests a need for a strategic shift in how official support is allocated and how partnerships are designed. It is important for partners and international financial institutions to increase official support for technical co-operation and R&D in order to boost productivity and innovation, two essential factors for propelling production transformation.
Investment in the skills of the working population is essential for transitioning to high-value-added activities and overcoming the middle-income trap. Currently, LAC lags behind OECD countries in terms of employment in high-value-added sectors that require high and medium-high R&D capacity. In Chile, Ecuador and Peru, the share of employment in these sectors is less than 1%, and in Mexico, it is just under 2%, while the OECD average is 3%. In these four countries, when looking at the level of skills required by occupations, only 20% of the labour force is employed in skilled occupations on average, compared to 36% on average in OECD countries. An insufficient level of skills development is an important constraint on scaling up investment in R&D. The low skills level is often cited as a business constraint by employers (OECD, 2023[40]). More than 37% of employers surveyed in LAC mention the skills gap as a primary obstacle to raising employment and boosting productivity. The skills gap constraint was cited by 68% of employers in Brazil, 40% in Costa Rica and 38% in both Mexico and Panama (Flórez and Jayaram, 2016[41]).
Channelling international co-operation to key production transformation enablers
Three key enablers are essential for driving production transformation in LAC: skills development, technology adoption and infrastructure development. These pillars are critical for boosting productivity, increasing domestic value added and enabling deeper integration into global value chains. Skills development equips the workforce with the competencies needed for higher-value tasks and sectoral upgrading. Technology adoption fosters innovation and supports the shift towards more knowledge-intensive production. Infrastructure development, particularly in transport, energy and digital networks, facilitates market access and the efficient movement of goods, services and ideas. Prioritising international co‑operation with these three key enablers will ensure that external funding is channelled effectively towards sectors with the highest potential to accelerate transformation and competitiveness across the region.
International support for skills can unlock LAC’s production potential
Skills development is the first key enabler for production transformation. LAC faces persistent challenges related to low productivity. Over the last two decades, output per hour worked in the region has remained stagnant at USD 20 (purchasing power parity), while labour productivity increased in Eastern Asia by nearly 300% and in Eastern Europe by almost 160% (ILO, 2025[42]). A fundamental factor behind the region’s stagnant labour productivity is the underdevelopment of human capital.
In 1990, LAC’s labour productivity was equivalent to 46% of the average productivity of OECD countries, while in 2023 this proportion decreased to 37%. Compared to the United States, the decline has been even more pronounced, falling from 36% to 27% over the same period. The evolution of relative productivity with respect to the group of emerging and developing countries has been even more dramatic: if in 1990 LAC’s labour productivity was 2.7 times higher than that of this group, by 2023 it barely reached 1.2 times higher (CAF, 2025[43]).
While access to education has expanded across LAC, the quality and relevance of learning outcomes have not kept pace. The higher educational attainment of children compared to their parents is not reflected in relative upward mobility in terms of educational levels or opportunities in the labour market. This may suggest that the region’s economic structure is not effectively absorbing or rewarding these higher educational levels or that the educational progress achieved has not been truly sufficient (CAF, 2022[44]). As a result, significant skill mismatches persist, hindering the region’s ability to foster innovation and upgrade its production structure (ECLAC, 2024[38]). As countries transition from low-productivity sectors to more sophisticated industries, a skilled workforce becomes critical for adopting new technologies, fostering innovation and meeting the evolving demands of emerging sectors.
Building a skilled workforce is key not only for productivity gains but also for attracting quality investments and integrating local firms into global value chains. In LAC, the potential of human capital has not been fully realised, largely due to the low technological complexity and sophistication of the region’s production structures (ECLAC, 2024[38]). Only 32% of manufacturing value added produced in LAC is in medium- and high-tech goods. This is well below the upper-middle-income country average of 45% (UNCTAD, 2024[45]).
This lack of sophistication in production is partly a reflection of low expenditure on R&D in LAC, where average spending on R&D has hovered between 0.5% and 0.6% of GDP for more than two decades (2000‑2022). Over the same period, average expenditure on R&D increased from 0.6% to 2.0% of GDP in upper-middle-income countries and from 1.0% to 2.7% in Eastern Asia (World Bank Group, 2025[46]). Underinvestment in R&D is reflected in the region’s low levels of innovation. In 2020, only slightly more than 50 000 patent applications were filed in LAC, of which only 8 000 originated from LAC residents, while the rest were from non-residents (World Bank Group, 2025[46]).
Note: ODA = official development assistance and EU = European Union. Skills training and education includes teacher training; vocational training; advanced technical and managerial training; medical education and training; education and training in water supply and sanitation; transport and storage; information communications technology, telecommunications and media; energy; agriculture; forestry; fisheries; the environment; and multisector education and training.
Source: (OECD, 2025[12]).
Despite the relatively small share of international assistance for skills and training in overall ODA to LAC, the assistance received has been highly concentrated and strategically significant. Between 2014 and 2023, donors channelled nearly USD 1.9 billion to LAC in support of skills and training initiatives across diverse sectors, such as information and communications technology (ICT), energy, agriculture, water and sanitation, and environmental services. The largest donors in absolute terms were European Union Members and institutions, which provided close to USD 850 million over the period, followed by the United Kingdom, Canada, Switzerland and the World Bank (Figure 4.9, Panel A). This reflects a sustained European commitment to human capital development in the region, particularly through vocational training, education in ICT and technical fields, and teacher training. However, ODA allocation to skills education and training represents less than 0.05% of total ODA to the region for most donors. The only exception is Australia: assistance directed to skills education and training accounts for almost 50% of its aid flows to LAC (Figure 4.9, Panel B). These statistics highlight the importance of aligning ODA with LAC's needs for workforce modernisation, especially in a context of rising demand for green and digital skills. At the same time, the concentration of aid flows among a few donors signals the need for diversification and stronger regional ownership of skills strategies.
Targeted support is relevant for many LAC countries. In Colombia, for instance, building sector-specific capabilities is key to fostering inclusive and sustainable transformation. To respond to this need, the Norwegian Agency for Development Co-operation is currently investing nearly USD 1.4 million to strengthen skills in Colombia’s coffee value chain, the country’s largest agricultural activity. The initiative focuses on overcoming key bottlenecks in the production and handling of coffee by providing vocational training aimed at improving quality and expanding market access. Such efforts exemplify how international co-operation can directly enhance productivity and competitiveness in strategic sectors while promoting local development (IFT, 2025[39]). Development co-operation for skills in non-primary sectors should also be strengthened to help Colombia attract more FDI in these priority areas of activity – such as information technology, tourism and health, which along with agriculture value chains are prioritised in Colombia’s 2022-30 Internationalisation Plan and Reindustrialisation Policy (DNP, 2023[47]).
LAC is the region most affected globally by firms struggling with inadequate skills. LAC firms are 13 times more likely to face performance problems due to skills deficits than firms in East Asia. Sectors identified with the largest skills gaps include advanced manufacturing, such as the motor vehicles industry, where the probability of enterprises facing skill-performance problems is up to 160% greater than in other manufacturing industries. Advanced manufacturing has been identified as a critical sector for production transformation in LAC. The lack of skills in this highly knowledge-intensive industry creates challenges for LAC countries to diversify into the production of more sophisticated goods (Melguizo and Perea, 2016[48]).
A good example of the skills mismatch is Chile. Many sectors urgently need workers with the digital, technical and managerial capabilities to move up the value chain, yet training programmes remain insufficiently aligned to these needs. In mining, Chile’s largest export sector, roles are proliferating in automation, remote operations and data analytics, but vocational and university courses still focus on extraction and geology rather than on mechatronics, the Internet of Things (IoT) or data science. Likewise, in agri-food, the drive towards functional, high-value products requires expertise in biotechnology, food chemistry and quality-assurance systems, yet most training remains anchored in traditional agronomy and processing methods (OECD/UN, 2018[49]).
Overall, in LAC, four out of five companies in the manufacturing sector report skills-gap challenges (World Economic Forum, 2018[50]). Co-operation in helping to bridge the skills gaps in advanced manufacturing is essential for a structural transformation to more technology-intensive sectors.
Until recently, formal educational qualifications served as the primary, if not unique, indicator of an individual's skills and potential in the labour market. However, as industries evolve and the nature of work changes, traditional education credentials may not be sufficient to fully convey an individual’s skills. Many graduates need to complement their formal education with additional credentials, work experience and practical demonstrations of their abilities to remain competitive. Similarly, individuals who have acquired valuable expertise through work experience, online learning or non-formal training may not have traditional degrees but possess skills that are just as relevant and in demand (OECD, 2025[51]).
High rates of informality and low labour productivity contribute to making this a pressing issue in LAC. International development co-operation often seeks to address this mismatch. Recent initiatives by the Organisation of American States (OAS) include the Youth Academy, which provided training and certifications in transformative technologies to 38 000 registered participants. Another OAS initiative, Prospecta Americas, enabled 7 LAC countries to launch a thematic Centre of Excellence in areas such as artificial intelligence, robotics, blockchain, nanomaterials, ocean technologies and biotech, benefitting over 25 000 researchers and experts from the scientific community of the Americas. Another example of localised interventions includes CAF providing USD 150 million for the Specialised Higher Technical Institute in Panama, aimed at aligning vocational training with labour market needs (CAF, 2019[52]). Similarly, CAF granted USD 150 million to Ecuador to modernise its education system, a project expected to benefit approximately 3 million students and nearly 52 000 teachers (CAF, 2023[53]).
Renewable energy is also a key sector for structural transformation in LAC. While there is high demand for green skills, supply is lacking within the region, with universities offering few degrees in clean energy. Fewer than 10% of degrees granted in 2019 in the energy sector were in renewable energy, with the remaining degrees (over 90%) awarded in fossil fuels. International donors have put a heavy focus on financing the energy transition, providing finance for green energy technologies and grid expansion, but little focus has been given to education in renewable energy. It is essential to increase funding for renewable energy education, which is significantly underfinanced (World Economic Forum, 2024[54]). It is estimated that jobs in renewable energy in LAC will increase from 57 million in 2020 to 134 million by 2050. To meet the increased demand, substantial efforts will be required for training programmes and job reskilling due to the high qualifications required to manage and operate renewable energy technologies (Hwang and Diez, 2024[55]).
The German Co-operation Agency (GIZ) has put a strong emphasis on developing green skills in Brazil. Between 2016 and 2021, approximately 800 teachers and more than 7 800 qualified technicians were trained to support the dissemination of solar and wind energy as well as energy efficiency in the construction and industry sectors. GIZ also worked with the government and technical and vocational education and training (TVET) networks to help modernise TVET programmes and adapt them to company needs. Initiatives like these are essential to respond to skills shortages in the labour market and improve Brazil’s TVET system, which ranked 96th out of 141 countries in the 2019 Global Competitiveness Index (GIZ, 2022[56]).
Skills development is a cross-cutting priority for partners like the European Union. The European Commission, which is embedded in bilateral ODA as well as regional programmes, recently launched the Inclusive Societies Initiative to strengthen social cohesion through targeted training and capacity building. The initiative unites the European Union and six Member States – France, Germany, Italy, Luxembourg, Spain and Sweden – with GIZ and other agencies (European Commission, 2025[16]). The LAC Energy Transition Academy 2024, supported by CAF and organised by Uno.Cinco, OLADE and the University of Chile, has established itself as a regional reference platform for strengthening technical capacities and fostering networks in the field of a just and sustainable energy transition. CAF’s involvement in this initiative is aligned with its strategic objective of promoting institutional and human capital development to advance towards a sustainable, inclusive and resilient energy system in LAC (OLADE, 2025[57]).
Similarly, the OAS Development Cooperation Fund established the Program on Climate Action for the years 2024-2027, aimed at 15 LAC countries. Within four project themes – the circular economy, climate and environmental education, the development of climate-smart skills, and climate change impact on women and underserved communities – the initiative will primarily focus on skills and capacity development to contribute to an inclusive and transparent green transition (OAS, 2025[58]; Cancillería de Colombia, 2025[59]). Other local projects led and executed by the OAS include the Cross-border Circular Economy Initiative in the Border Integration Zone Colombia-Peru, funded by the IDB; the Quality Infrastructure’s Contribution to the Transformation Towards a Circular Economy in LAC, funded by the German National Metrology Institute; and Fostering Water Security in the Trifinio Region (GEF, 2018[60]). All these initiatives contribute to strengthening both local and institutional capacity to enable sustainable, inclusive and innovation-driven change. Green skills for climate-smart agricultural adaptation are also crucial, given the devastating effects of climate change on farming. In Guyana, where the agricultural sector accounts for 20% of GDP, the negative effects of climate change are a significant threat to the country’s economy. More than 90% of the Guyanese population lives in coastal regions, where the land is fertile but rising sea levels heighten the risk to farmers of flooding. There has been strong international co‑operation to build technical capacity for climate-smart agriculture by the IDB, GIZ and the United Nations Food and Agriculture Organization (FAO), among others (ILO, 2019[61]).
The private sector is also a critical actor in building workforce skills. In Colombia, Costa Rica and the Dominican Republic, foreign firms are more likely than domestic firms to offer employee training, from on‑the-job training to certified programmes. In Colombia, a French renewable energy company has established formal partnerships with local universities, such as Universidad Javeriana and Universidad del Rosario, to offer certified training programmes to its employees. In Costa Rica, medtech companies have contributed to the creation of a highly skilled talent pool (Box 4.1). This demonstrates how foreign companies can play a pivotal role in skills development. Overall, USD 2 billion in greenfield FDI went to education and training in LAC between 2014 and 2024. This includes the creation of technical institutes, vocational schools and international training centres, all essential for upgrading skills and aligning them with labour market demand (OECD, Forthcoming[4]). The majority of these investments in education and training have been attracted by Mexico (42%), Colombia (31%) and Brazil (8%). The investments mainly originate from the European Union (32%) and LAC (22%) (OECD, Forthcoming[4]).
Technology adoption can accelerate LAC’s transition to a knowledge-based production model
The second key enabler for production transformation is technology adoption. LAC economies face persistent productivity gaps, high levels of informality, uneven quality of infrastructure and limited diversification into higher-value-added sectors. In this context, the acquisition and diffusion of new technologies will enable countries to increase their productivity, foster innovation and transition towards more complex and competitive economic activities – essential elements for production transformation in LAC. Digital technologies such as automation, artificial intelligence and data analytics are reshaping global production structures and creating new avenues for growth. For LAC countries, investing in technological capabilities is important not only for catching up with global technological frontiers but also for generating local solutions.
Technology serves as a key lever for achieving inclusive and sustainable development and for preparing for the green and digital transitions. South Korea provides a strong example of the transformative impact of sustained investment in technology and innovation, particularly through R&D. The country’s rapid economic growth, often referred to as part of the Asian Miracle, has been closely linked to its innovation-driven development strategy, with R&D being a key driver of productivity growth across Korean industries (Lee, 2016[62]).
Governments in less advanced economies can accelerate growth by promoting investment and encouraging the adoption of existing technologies. Policies for technological adoption could involve supporting digitalisation among small and medium-sized enterprises (SMEs), strengthening public-private technology extension services and connectivity and incentivising technology adoption through targeted policies. As countries advance, the policy focus should shift to building innovation ecosystems, for example, by supporting R&D through grants and tax incentives and improving university-industry linkages (Acemologu, Aghion and Zilibotti, 2006[63]). For instance, the Brazilian Agency for Industrial Research and Innovation (EMBRAPII) facilitates technology transfers between research institutions and enterprises to increase the competitiveness of Brazilian firms (Braga de Andrade, 2020[64]). Colombia’s path forward calls for greater adoption of new technologies and a well-developed and financed R&D agenda (OECD/UN/UNIDO, 2019[65]).
Enhancing international co-operation for technology transfer and innovation is critical to fostering mutually beneficial solutions and creating virtuous cycles of learning and capability building. In order for countries in LAC to transition towards more knowledge-intensive and competitive production structures, a strong focus on technology adoption and building robust R&D networks is required. In this context, the EU-LAC Digital Alliance, launched in 2023 with a budget of EUR 172 million, represents a pivotal initiative for accelerating human-centred digital transformation across the region and translating the Global Gateway Strategy into reality within the digital field. The EU-LAC Digital Alliance also serves as framework for all bi-regional digital co-operation initiatives, thanks to the Joint Declaration on a Digital Alliance adopted by heads of state and government of both regions during the III EU-CELAC Summit in Brussels in July 2023 (European Commission, 2023[66]). By convening a broad coalition of stakeholders, including governments, the private sector, academic and research institutions, and civil society, the alliance enhances policy dialogue and supports efforts in connectivity (both satellite and cables), digital innovation, entrepreneurship and space technologies (European Commission, 2025[67]).
Among its flagship activities, the EU-LAC Digital Alliance is advancing the implementation of a regional Copernicus strategy that extends the EU Earth Observation programme to LAC, with regional Copernicus LAC data centres in Chile and Panama. This strategy includes supporting disaster risk management and environmental monitoring. The data centres will serve as hubs for receiving and processing satellite data. Through the Building the Europe Link to Latin America (BELLA 2.0) initiative, fibre-optic cable will be expanded to improve digital connectivity and collaboration among research and education communities in LAC and the European Union, including on high-performance computing and artificial intelligence. Meanwhile, the EU-LAC Digital Accelerator will help to accelerate at least 40 joint ventures for bi-regional innovation and digital transformation (European Commission, 2025[67]).
The Digital Alliance is currently working on setting up an EU-LAC Supercomputing Network for AI based on access to cutting-edge technologies enabled by the European High-Performance Computing (HPC) infrastructure and expertise of the EuroHPC Joint Undertaking (JU), which is crucial for scientific discoveries and for the strengthening of the HPC community in the region. Lastly, the Digital Alliance is also aiming to create a bi-regional initiative to enhance cybersecurity co-operation through mutual assistance, incident response and knowledge sharing called EU-LAC SHIELD, which will involve both public and private stakeholders of both regions. Other initiatives by the European Union to promote R&D in LAC include the Joint Initiative for Research and Innovation, facilitating the academic collaboration and exchange of knowledge between the regions, as well as the global Horizon Europe, which provides funding for research and innovation (European Commission, 2025[68]; European Council, 2025[69]).
Re-tooling micro, small and medium-sized enterprises through innovation and technology, advancing innovative reskilling for the tourism sector and regional economies and fostering scientific and technological innovation are crucial to strengthening resilience. The Programme on Inclusive Resilience for an Effective Recovery, developed through the OAS Development Cooperation Fund, seeks to equip SMEs with these tools, enabling them to build the capacities needed to withstand future shocks (AICD, 2020[70]).
Addressing the full digital value chain requires integrating i) hard infrastructure (national fibre optic backbones, state-of-the-art data centres, Tier III and IV facilities and strategic submarine cables connecting LAC internally and with other continents); ii) enabling services (interoperability platforms, e-government systems, digital identity solutions and cloud-based public service platforms); iii) human capital development (large-scale digital skills programmes, training in artificial intelligence and data analytics, and targeted capacity-building for SMEs); and iv) innovative financing (blended finance instruments, venture capital for tech start-ups and funds for green and digital infrastructure). CAF has made digital transformation a core strategic priority, integrating these four pillars and mobilising USD 2.78 billion between 2019 and 2024 for operations with connectivity and digital transformation components through 41 credit operations and USD 17 million in 85 technical co-operation initiatives, directly benefitting 16 countries (CAF, 2025[71]).
The IDB and CAF are key actors in supporting technological innovation in LAC. The IDB Lab, the innovation and venture capital arm of the IDB Group, leverages financing, knowledge and connections to support early-stage entrepreneurship and foster innovation. It has an active portfolio of 453 operations totalling USD 595 million. In the first three quarters of 2024, 37 projects were financed, for USD 61 million (IDB Lab, 2024[72]) (Table 4.1).
The private sector also plays a role in enhancing R&D. For example, agri-businesses in Brazil have been heavily investing in R&D. Major companies involved include the American and Swiss seed companies Corteva and Syngenta, the American tractor manufacturer John Deere and the Norwegian fertiliser producer Yara. Furthermore, Germany’s Bosch and Sweden’s Husqvarna have chosen Brazil as a global hub for the development of agricultural machinery. Brazil’s ability to attract R&D in the agricultural sector can be attributed to the fact that its farmers are open to innovation and its researchers are highly creative, making the country a global hub for agricultural technology development (Konchinski, 2025[77]). However, LAC is still highly dependent on public financing for R&D, leaving room for growth in private sources of financing, including companies, higher education institutions, foreign funds and private non-profit organisations (OECD et al., 2024[2]).
Foreign firms beyond the agricultural sector are also investing in R&D within LAC. This is relevant for growth because R&D activities are strongly associated with higher-quality employment and economic upgrading. R&D activities from foreign-owned firms often result in spillovers to non-R&D-active firms in areas such as productivity, contributing to industrial transformation and regional development (Spithoven and Merlevede, 2023[78]). Foreign firms, defined as firms with at least 10% foreign ownership, are generally more likely to spend on R&D than domestic firms in the region (Figure 4.10). Nonetheless, FDI directed towards R&D activities in LAC remains limited. Between 2003 and 2024, only 1.5% of greenfield FDI, or just USD 30 billion, was directed to R&D activities. The United States and the European Union are the largest sources for FDI related to R&D, with 46% and 26% of total investments, respectively, from 2014 to 2024 (OECD, Forthcoming[4]).
Are foreign firms more likely to spend on R&D? (yes>0; no<0)
Note: The indicators show the relative gap between the average outcomes of foreign and domestic firms. Positive values indicate that foreign firms outperform domestic firms, while negative values suggest the opposite. Reference years vary across countries, ranging from 2010 to 2023. Diamonds represent coefficients while confidence intervals are represented by bars and arrows.
Source: Authors’ elaboration based on (OECD, Forthcoming[4]).
FDI has also served as a crucial lever in developing the digital sector in LAC. Between 2003 and 2024, more than USD 260 billion in greenfield FDI was invested in digital sectors, representing 13% of total greenfield investments in the region (Figure 4.11). Half of these flows targeted telecommunications between 2003 and 2013. But in the subsequent decade, these investments shifted to target mainly digital services, such as computer programming, data processing and hosting, and information services. This reflects digital advancements in the region, with the increasing emergence of sophisticated and service-based solutions contributing to digital transformation and a shift to service-based and knowledge-intensive activities (OECD, Forthcoming[4]). In parallel, FDI has also created many jobs within the digital sector, particularly in digital services. Over the period 2014-2024, nearly 600 000 jobs in digital sectors were generated, up nearly 25% from the previous decade (OECD, Forthcoming[4]).
Note: Information and communications technology (ICT) goods include electronics, computer equipment, etc.; electric components include batteries, electrical equipment, wiring devices, etc.; digital sectors include computer programming, data processing and hosting, information services, and other digital services; and telecommunications include wired and wireless telecommunications and satellite activities.
Source: (OECD, Forthcoming[4]).
Better co‑ordination is essential for upgrading regional infrastructure
Infrastructure development is the third critical enabler for production transformation in LAC. Reliable transportation, energy and digital infrastructure reduce transaction costs, improve access to markets and facilitate the movement of goods, services and knowledge. These are essential elements for upgrading productive capacities and for integrating into global value chains. Unreliable infrastructure systems limit the productivity of businesses, and costly infrastructure services increase production costs and undermine business competitiveness (Thacker et al., 2019[79]). Infrastructure is also an important component of sustainable development. Yet the region continues to face significant infrastructure gaps that limit productivity and growth potential.
This infrastructure gap is impacting the competitiveness of the region’s economies. An analysis of LAC’s six largest economies – Argentina, Brazil, Chile, Colombia, Mexico and Peru – investigated the top five competitors for each country’s top five exports. Results revealed that Chile was the only country with infrastructure that could compete with its trading rivals (Suarez-Aleman, Serebrisky and Perelman, 2019[80]). LAC requires an estimated USD 2.2 trillion to finance the infrastructure gap, with 59% of the funds needed for new infrastructure and 41% for maintaining existing infrastructure. This investment corresponds to 3.12% of the region’s projected GDP every year until 2030. Infrastructure for transportation, electricity and telecommunications alone requires USD 577 billion, USD 971.1 billion and USD 293.7 billion, respectively (IDB, 2021[81]).
The development of new trade relationships is dependent on the adequacy of the available transport infrastructure. Poor land connectivity between countries sharing borders can represent a significant barrier to regional trade, particularly for productive integration and the establishment of regional value chains. Transportation faces widespread problems in the region, mainly in its land component, hindering the development of new trade relationships. South America faces intraregional export transport costs that are 15% higher than those of the European Union, providing further evidence of the role transport costs play as a determinant of the low level of intraregional trade. However, at the extraregional level, no significant cost differences are observed between South America and the European Union. This suggests that the poor performance of transport infrastructure mainly affects intraregional trade, where land transport plays a predominant role (CAF, 2021[82]).
In this context, international partners have stepped in to support infrastructure development. China is a prominent player through the BRI, to which 22 LAC countries are signatories (Roy, 2025[83]). Between 2005 and 2022, China carried out 228 infrastructure projects in LAC, generating more than 721 000 jobs, with a total expenditure of USD 104.2 billion. Of these infrastructure projects, 90 were in transportation, 77 in energy (48 in renewable energy), 13 in telecommunications and 12 in other areas. From 2020 to 2022 alone, China financed 90 projects, 57 of them in transportation (Peters, 2023[84]).
Improving connectivity through infrastructure is essential for the region’s insertion into global value chains. China’s largest infrastructure investment in LAC is the Chancay megaport in Peru, inaugurated in November 2024. Building this port cost more than USD 3.6 billion. It serves as a major gateway between South America and Asia, with China being South America’s largest trading partner (Dahl, 2024[85]). The port is expected to generate USD 4.5 billion annually and create 8 000 jobs (Global Times, 2024[86]). Within the first three months of the port’s operations, more than USD 290 million worth of goods were processed. The port will serve as an important hub in LAC and increase regional economic and trade co-operation, as well as accelerating integration within the region (Global Times, 2025[87]). CAF is currently providing technical assistance to the Peruvian government to develop a comprehensive vision for the development phases of the Chancay-Callao hub, prioritise key infrastructure projects and enabling actions, as well as propose a governance model that facilitates the execution of strategic projects and investments to strengthen national productive chains and regional integration (CAF, 2025[88]). China has also funded major green energy projects, such as the largest solar plant in Latin America, located in Jujuy, Argentina; the Puta Sierra wind farm in Coquimbo, Chile; and the biggest hydroelectric plant in Ecuador (Roy, 2025[83]). While such initiatives provide much-needed financing, concerns over financing clauses, project transparency, environmental impacts and governance have also emerged, with 35% of China’s Belt and Road Initiative projects globally facing implementation issues (Dahl, 2024[85]).
To fully bridge the region’s infrastructure gap, it is crucial to move beyond isolated national efforts and adopt a more integrated regional approach. Building on initiatives such as the Initiative for the Integration of South American Regional Infrastructure (IIRSA) and the South American Council of Infrastructure and Planning (COSIPLAN), Brazil initiated a discussion calling for a renewed approach to infrastructure that prioritises regional connectivity, productive integration and environmental sustainability. It advocates for infrastructure as a strategic tool for structural transformation, emphasising cross-border co-ordination, regional planning and financing mechanisms tailored to South America’s development needs (FUNAG, 2023[89]).
Moving towards regional infrastructure projects is especially urgent in the case of electricity. LAC’s electricity demand has grown steadily over the past three decades, driven by structural economic changes, rapid urbanisation and rising living standards (IEA, 2023[36]). The region has the potential to increase regional electricity production by improving institutional and regulatory mechanisms. Overall, a shift from isolated national strategies to a unified regional electricity market would allow LAC to fully harness its comparative advantages, lower transition costs and accelerate the shift towards a low-carbon and interconnected energy future (Box 4.4).
Production of electricity in LAC still depends largely on non-renewable sources even as demand rises. Fifty-seven per cent of electricity in the region is generated from renewable sources, a figure significantly higher than the global average of 36% (CAF, 2024[90]). The situation varies among countries; some, such as Costa Rica, Paraguay and Uruguay, stand out for having a high share of renewables in their electricity generation mix. While industry remains the largest electricity-consuming sector, demand from buildings and commercial and public services has risen significantly, reflecting the expansion of the services sector. Electricity consumption in agriculture and transport is also increasing, indicating broader electrification trends across economic activities. Meeting this growing and diversified demand requires a resilient and sustainable electricity mix. Yet electricity generation remains heavily concentrated in fossil fuels, particularly gas and coal, which represent nearly half of the region’s total output. Hydropower continues to be a cornerstone of the energy system, but its reliability is increasingly challenged by climate variability (IEA, 2023[36]; EMBER, 2024[91]).
The region has a unique opportunity to build a sustainable and competitive electricity system by scaling up renewable energy. Abundant natural resources, including solar energy, wind corridors and untapped hydro reserves, position LAC as a global leader in clean energy development (OECD et al., 2022[27]). Realising this potential requires more than investment, however: it demands regulatory certainty and robust regional co-operation to modernise grid infrastructure and foster energy innovation. Despite the existence of physical interconnections and the efforts of regional institutions, electricity integration across LAC remains limited and fragmented. Cross-border electricity trade is still marginal, constrained by siloed national markets and bilateral agreements that fall short of enabling a broader, more co‑ordinated system (OLADE, 2024[92]).
The core barriers to integration are institutional and regulatory. Divergent legal frameworks, unaligned operational standards and the absence of a regional regulatory authority hinder effective co‑ordination. As a result, infrastructure that could enable electricity sharing is often underutilised. This fragmented landscape prevents the region from optimising its electricity generation mix, balancing renewable sources more efficiently and reducing system-wide emissions and costs. Despite the efforts made by multilateral integration organisations, in practice, the process of electrical integration in the region has mainly materialised from a bilateral perspective (OLADE, 2024[92]). Establishing a regional framework with common rules on pricing, dispatch and risk management, supported by dedicated infrastructure funding and a regional co‑ordinating body, could transform electricity systems into engines of regional integration.
Drawing on successful models from other regions, political commitment and structured dialogue will be essential to building trust and enabling long-term co-operation. The European Union’s Internal Energy Market is the most advanced model of regional electricity integration. It is built on a foundation of shared legal and regulatory frameworks, co‑ordinated network planning and market coupling mechanisms that enable real-time electricity trading across borders (European Union, 2025[93]). The European Union and its Member States are currently promoting an initiative to support regional electricity integration in LAC, in co-operation with national governments, international financing institutions and private companies. The North American electricity market, particularly between Canada, parts of Mexico and the United States, offers another instructive example. Here, cross-border trade is facilitated by interconnection agreements and co‑ordinated operations between national and regional transmission operators, such as the North American Electric Reliability Corporation. While regulatory harmonisation is less developed than in the European Union, the North American experience illustrates the benefits of pragmatic co‑operation built around technical standards and mutual reliability concerns (Pontenagel, 2025[94]).
Regional integration initiatives – such as the Southern Common Market (MERCOSUR), the Pacific Alliance, the Central American Integration System (SICA) and the Caribbean Community and Common Market (CARICOM) – have fostered progress in regulatory co-operation and trade facilitation. However, their contribution to production transformation and the development of cross-border value chains remains uneven. The institutional architecture of integration in LAC has expanded significantly over time, with overlapping memberships and growing coverage beyond trade to include investment, labour and political co‑ordination. However, economic outcomes have not kept pace with institutional ambitions.
Regional production integration can help to attract investments
LAC’s history of regional integration spans more than six decades. Initial attempts, such as the Central American Common Market (CACM) and the Latin American Free Trade Area (LAFTA), laid the groundwork for arrangements such as the Latin American Integration Association (ALADI), the Andean Community (CAN) and CARICOM. The 1990s marked a turning point with the emergence of “new regionalism”, leading to deeper integration processes including MERCOSUR and the Pacific Alliance (IDB, 2018[95]). More recently, broader frameworks – such as the Union of South American Nations (UNASUR) and the CELAC – have emerged, signalling a shift towards political co‑ordination, though with varying degrees of effectiveness and continuity (Table 4.3).
Despite the dense institutional landscape, intraregional trade has stagnated. LAC remains one of the least integrated regions globally in terms of intraregional trade. Between 1995 and 2023, the share of intraregional exports in total exports hovered at 15-20%, well below levels observed in Asia or Europe (Figure 4.12). After a moderate increase in the early 2000s, LAC’s intraregional exports have flattened and even declined slightly in the past decade. This performance contrasts with other regions, such as Asia and Europe, that have maintained or strengthened intraregional trade over time.
Source: (UNCTAD, 2024[45]).
Central America stands out as an exception to this trend. Between 2003 and 2023, members of CACM and SICA recorded consistent growth in intrabloc trade, suggesting that greater regulatory convergence, proximity and productive complementarities have reinforced regional exchange (Figure 4.13). In contrast, blocs such as CAN and MERCOSUR have shown more volatile or declining intrabloc trade, revealing the challenges of maintaining integration momentum amid political and economic asymmetries. The Pacific Alliance, despite its focus on open regionalism and services, still accounts for a very limited share of intrabloc exports.
Note: MCCA = Central American Common Market, SICA = Central American Integration System, ALADI = Latin American Integration Association, CARICOM = Caribbean Community and Common Market, MERCOSUR = Southern Common Market and CAN = Andean Community.
Source: (UN Comtrade, 2025[97]).
Trade concentration also reinforces vulnerability, especially in volatile times. Many of LAC’s regional blocs continue to rely on a few extraregional partners. For example, the United States receives 43% of exports from ALADI, 45%from SICA and more than 60% from the Pacific Alliance, although mostly driven by Mexico (UN Comtrade, 2025[97]). MERCOSUR shows a somewhat more diversified profile, with a significant share of its exports directed towards Canada, China and the European Union, yet more than half of its exports go to countries outside the bloc’s main partners. This high dependence on a narrow group of markets limits the region’s resilience to external shocks and constrains its potential to develop stronger regional value chains.
The export composition of major LAC regional integration blocs varies considerably, with structural differences in trade specialisation and limited diversification across most blocs (Figure 4.14). MERCOSUR and CAN show a high concentration in agriculture and minerals, with agriculture alone representing nearly half of MERCOSUR’s exports. CAN stands out for its substantial share of minerals, indicating continued dependence on the extractive sectors. SICA has a more diversified export profile, with notable contributions from textiles, vehicles and electronics, suggesting a stronger engagement in light manufacturing and assembly-based trade, particularly linked to global value chains. The export composition of the Pacific Alliance and ALADI is relatively balanced, while CARICOM remains the least diversified bloc. However, CARICOM is the regional bloc with the largest share of chemical exports, a category of high production sophistication requiring high R&D intensity.
Share of total exports
Note: The figure excludes unspecified exports. It uses the product classification Harmonised System HS92 four-digit level.
Source: Authors’ elaboration based on (UN Comtrade, 2025[97]), (Harvard University, 2024[98]) and (OEC, 2025[99]).
Deepening trade integration in LAC is essential to unlock the region’s economic potential and foster production transformation. Regional markets offer a strategic space for firms to scale production, diversify exports and integrate into value chains with lower entry barriers than global markets. Yet weak intraregional infrastructure – unfinished highways, congested ports and uneven digital connectivity – remains a critical obstacle that limits cross-border linkages and raises transaction costs (ECLAC, 2023[100]). Trade integration supports the development of regional value chains by enhancing the connectivity between firms and industries across borders, facilitating knowledge spillovers and promoting investment in logistics, infrastructure and services. For SMEs in particular, access to regional markets can be a stepping stone towards internationalisation and technological upgrading. Building on the existing institutional landscape, CAF promotes the Comprehensive Border Management Program (PROGIF), a multisectoral initiative aimed at enhancing cross-border connectivity in LAC, reducing trade times and costs and unlocking the productive potential of border areas. The programme integrates interventions in infrastructure, customs and sanitary operations, regulatory harmonisation, and territorial development, complemented by actions to improve access to basic services and strengthen local SMEs. It also fosters co-ordination among public and private stakeholders and the use of diagnostic and planning tools to develop more efficient, inclusive and competitive border corridors (CAF, 2025[101]).
Moreover, a more integrated regional trade space strengthens resilience against external shocks by reducing overdependence on a few extraregional partners and enabling greater flexibility in times of instability. Regional trade integration can also foster policy convergence in areas such as competition, standards and sustainability, generating a more predictable and attractive environment for investment. Beyond boosting the economy, regional integration can serve as a platform to promote common priorities – including decarbonisation, digitalisation and industrial innovation – through co‑ordinated strategies and joint initiatives. In a context of global uncertainty and shifting geopolitical dynamics, advancing trade integration in LAC is a necessity for building more inclusive, competitive and sustainable economies.
Regional integration in LAC is also a critical lever for enhancing the region’s attractiveness to investment. Fragmented markets, inconsistent regulations and limited connectivity have long constrained the ability of firms to scale operations and manage supply chains efficiently across borders (ECLAC, 2024[102]). By reducing trade barriers, harmonising standards and investing in shared infrastructure, regional integration can create a larger, more predictable and more competitive investment environment. Integrated markets offer economies of scale, lower transaction costs and greater certainty – key factors for investors seeking stable, long-term returns. Moreover, in the context of global efforts to build resilient and sustainable supply chains, LAC can position itself as a strategic production hub, particularly in sectors such as clean energy, agri-food and pharmaceuticals. Co‑ordinated regional strategies signal political commitment and policy coherence, elements that are increasingly valued by international investors navigating complex geopolitical and climate-related risks.
Regional trade as a facilitator of diversification and integration
Efforts to enhance trade facilitation in LAC are gaining traction and represent a critical lever to support broader regional integration. However, the transformative potential of these reforms remains constrained by the region’s underlying structural challenges, particularly the limited diversification of its productive base. While improvements in trade facilitation help to reduce trade costs and streamline cross-border operations, their full impact on competitiveness and regional integration is hindered by persistent gaps in productive capabilities, technological absorption and sectoral upgrading. These challenges are compounded by growing uncertainty and volatility in the global economy, including geopolitical tensions, trade disruptions and the tightening of financial conditions, which reinforce the urgency for LAC to build more diversified and innovation-driven production and trade systems.
Improving diversification of the region’s basket of exports is essential for growth
Initiatives intended to deepen regional integration in LAC have made limited progress due to the region’s poorly diversified productive base. LAC’s basket of exports is highly concentrated in low value-added sectors, including commodities and low-skilled manufacturing (Figure 4.15). South America stands out for its heavy dependence on commodities, which account for more than 60% of total exports – similar to levels in Africa and far exceeding any other region. The share of exports of medium-skilled, highly skilled and technology-intensive manufactured products is far higher in regions like Southeast Asia, Asia more broadly and the OECD, underlining their stronger integration into complex global value chains and higher levels of industrial sophistication. The Caribbean, while less commodity-dependent than South America, shows limited participation in highly skilled manufacturing and maintains a significant share of low-skilled exports. Central America demonstrates a more diversified structure than the rest of LAC, with a notable presence of medium-skilled and highly skilled manufacturing, although it still lags far behind OECD countries.
The fact that countries in LAC have made limited moves beyond resource-based exports and low-technology manufacturing is a structural constraint that hinders technological upgrading, value addition and more robust participation in dynamic segments of global trade. Productivity remains stagnant due to a dual economy in which a small number of large, technologically advanced firms – often operating in natural resource sectors or oriented to global markets – coexist with a majority of small firms with low productivity, limited technological capabilities, and weak access to skills and finance (OECD et al., 2021[103]). This fragmented structure constrains formal employment, depresses wages and demand and limits incentives for innovation, ultimately reinforcing a cycle of low productivity and volatile growth. The region’s international insertion, driven by a few large exporters, offers limited space for broader industrial transformation or participation in high-value segments of global value chains.
Source: (UNCTAD, 2024[45]).
A more effective integration process could help to overcome these challenges. Integration mechanisms can boost export diversification and insertion in value chains by facilitating economies of scale, enabling the regionalisation of supply chains and supporting investment in shared infrastructure and innovation systems. The Capricorn Bioceanic Corridor is an example of how a cross-country infrastructure initiative enhances connectivity across South America. The corridor links the Atlantic and Pacific oceans through a multimodal transport network. It traverses Brazil, Paraguay, Argentina and Chile, integrating road, rail and port facilities to facilitate trade and economic integration. This improved connectivity is expected to reduce freight transport costs by 30-40% and shipping times by up to 15 days, fostering new value chains in mining and agro-industry (OECD, 2025[104]). Another example is the Paraguay-Paraná Waterway, a strategic fluvial corridor essential for the transport of goods across Argentina, Bolivia, Brazil, Paraguay and Uruguay, where CAF has provided technical and financial support to improve navigability and enhance port infrastructure (CAF, 2002[105]). These initiatives aim to reduce transport times and costs, improve safety and facilitate trade flows.
Strengthening trade within the region and fostering more balanced integration, both geographically and sectorally, will be essential to support regional production transformation that is more resilient, inclusive and able to provide competitive links to global markets. Other regions, such as Southeast Asia, offer valuable lessons regarding export diversification (Box 4.5).
Regional integration in East Asia and Southeast Asia has played a transformative role in reshaping trade structures and driving export diversification over the last three decades. Through institutional mechanisms such as the Free Trade Area of the Association of Southeast Asian Nations (ASEAN), the ASEAN Economic Community and, more recently, the Regional Comprehensive Economic Partnership (RCEP), the regions have progressively reduced barriers to trade, harmonised rules and standards, and created an enabling environment for cross-border investment and industrial collaboration.
These regional frameworks have led to the emergence of deeply integrated production networks, particularly in high-growth sectors such as electronics, machinery, automotive parts and, increasingly, digital services. Countries such as Malaysia, Thailand and Viet Nam have successfully inserted themselves into regional value chains, becoming strategic nodes for the assembly and export of intermediate and final goods. This specialisation has not only increased export volumes but also catalysed a shift in the composition of exports towards higher-value-added and more technologically sophisticated products.
In parallel, the expansion of intraregional trade has reduced ASEAN’s reliance on traditional markets in Europe and North America. Trade within Asia now accounts for more than 50% of total ASEAN trade, underpinned by improvements in logistics, regulatory harmonisation and the standardisation of rules of origin under RCEP. This bears witness to the role of regional supply chains, infrastructure connectivity and shared production standards. RCEP is expected to consolidate these gains by streamlining rules of origin and expanding market access across its 15 Member countries, which collectively represent nearly 30% of global GDP.
The ASEAN case highlights that regional integration, when aligned with domestic industrial strategies and long-term investment in capabilities, can be a powerful driver of export diversification and structural transformation. However, the experience also underscores the importance of complementary policies. Countries that have invested in skills development, trade facilitation and innovation capacity – such as Korea, Singapore and, more recently, Viet Nam – have been better positioned to benefit from integration. Conversely, economies with lower institutional capacity or with infrastructure bottlenecks have struggled to diversify meaningfully or climb up the value chain.
Source: (ADB, 2025[106]).
Reversing the trend of low diversification and reliance on commodities requires productive policies with a regional dimension. Such policies involve strategic interventions aimed at shaping the structure of the economy by promoting targeted sectors, facilitating technological change and addressing market failures that inhibit production transformation (Bonvillian, 2024[107]). Incorporating a regional dimension into productive policies allows the promotion of productive linkages, technological upgrading and investment in sustainability. A good example is the regional biotechnology platform BIOTECSUR, a co‑operative initiative between the European Union and MERCOSUR that promotes collaborative research, supports the creation of public-private linkages and encourages the harmonisation of regulatory frameworks to facilitate the commercialisation of biotechnology products. By advancing regional integration in a knowledge-intensive sector, BIOTECSUR exemplifies how pragmatic co-operation can foster regional capabilities in frontier sectors and support more inclusive and sustainable development (IDB, 2023[108]). Another example is the GGIA EU-LAC Initiative for Regional Health Resilience, which works towards improving the exchange of scientific knowledge and of policy and regulatory expertise between actors in Europe and LAC while de-risking investment (through the European Fund for Sustainable Development+) and providing catalytic finance to encourage R&D on vaccine production (European Commission, 2022[109]).
Co‑ordinated actions such as shared technical standards, joint infrastructure, regional financing mechanisms, and common frameworks for trade, investment and skills development are essential for boosting productivity and production in key industries (ECLAC, 2024[38]). It is also worth considering the common training framework (a common set of minimum knowledge, skills and competences needed to practice a specific profession). Individuals that hold a qualification that meets the framework’s conditions can get it automatically recognised in participating countries. This is the case within the European Union (European Commission, 2025[110]). Within LAC, all 16 Member States of CARICOM participate in the Caribbean Vocational Qualification (CVQ) framework, approved by the Community of Caribbean Ministers of Education in 2010. The CVQ defines common competency standards and five qualification levels and guarantees that a CVQ issued in one Member State is recognised across countries (CARICOM, 2020[111]). Similarly, the Pacific Alliance also reached two strategic milestones in the last four years in the certification of professional competencies: i) the first system of homologation of skills validation certificates with potential to favouring labour mobility in the region, and ii) a catalogue of green skills jointly built by the countries to accelerate the development of green job profiles for the clean energy industry, construction, water and sanitation, among others.
Facilitation measures and non-tariff barriers can reduce trade costs
Trade facilitation includes policy measures aimed at minimising the cost, time and uncertainty associated with engaging in international trade. These measures intend to address bottlenecks impeding export and import activities both at the border and behind the border. The OECD Trade Facilitation Indicators (TFIs) are a set of measures that streamline and simplify the technical and legal procedures for intermediate or final products to be traded internationally (Moïsé and Sorescu, 2013[112]). These indicators cover information availability; harmonisation and simplification of documents; automated processes and risk management; streamlining of border procedures; and good governance and impartiality. Other instruments include CAF’s Trade Facilitation Tool (HFC), designed to identify trade bottlenecks and propose solutions aligned with countries’ commitments under the World Trade Organization Trade Facilitation Agreement (TFA). The tool can be applied at different territorial levels and supports countries in enhancing their competitiveness.
LAC countries have made notable progress in trade facilitation over the last decade. Between 2012 and 2024, they have particularly improved in areas requiring institutional co‑ordination and document simplification (Figure 4.16). The categories “border agency co-operation” and “formalities – documents” experienced the highest percentages of improvements, reflecting significant efforts to reduce duplication and harmonise procedures. More limited progress is observed in areas linked to legal and procedural safeguards, such as “governance and impartiality” and “information availability”. Brazil, Chile, Colombia, Costa Rica, Mexico and Peru exhibit the highest average performances across TFIs, indicating relatively advanced implementation of trade facilitation reforms.
Percentage change by TFI area (2012-2024) and average TFI by country
Note: TFI = Trade Facilitation Indicator.
Source: Authors’ elaboration based on (OECD, 2025[113]) and (OECD, 2025[114]).
Despite this progress, non-tariff barriers (NTBs) represent a major impediment for intraregional trade. These measures encompass barriers that limit trade flows, such as sanitary and phytosanitary standards, technical barriers to trade and quantitative restrictions. NTBs create inefficiencies, raise costs and hinder market access for producers and exporters in the region (Dolabella and Duran Lima, 2021[115]). Trade authorities in LAC countries frequently cite NTBs as a key constraint on export growth. Unlike tariffs, which are more transparent and easier to address, NTBs are often less visible and vary greatly from one market to another. LAC countries would benefit significantly more from reductions in NTBs than from further tariff reductions, and this could significantly boost intraregional trade (IMF, 2017[116]).
NTBs impose an estimated additional trade cost of 3.9% on intraregional trade in LAC, with average additional costs of 7.1% on primary products, 3.9% on light manufacturing and 3.9% on heavy manufacturing. Sectors that face the highest additional trade costs due to NTBs are agriculture, hunting and fishing (8.4%); processed foods, beverages and tobacco (5.6%); and petrochemicals (4.4%). Brazil and Mexico impose the highest NTBs on imports, with an average of 8.2% and 6.3%, respectively. Bolivia is the country most affected (14.3%, particularly in the chemical and petrochemical sector), followed by Trinidad and Tobago (9.6%), Uruguay (5.6%), Venezuela (5.4%), Honduras (4.9%) and Argentina (4.8%) (Dolabella and Duran Lima, 2021[115]).
Trade agreements that incorporate provisions to reduce NTBs therefore hold considerable potential to boost intraregional trade and economic welfare. For example, NTBs often require exporters to comply with duplicative or inconsistent regulations across different markets, which increases costs and administrative burdens. An example is Chile, where exporters ranging from avocado producers to salmon farmers must navigate separate and cumbersome food-safety processes for every export market (The Economist, 2024[117]). This fragmentation creates substantial inefficiencies and prevents exporters from fully exploiting regional opportunities. To address these challenges, initiatives have been taken in the region to reduce NTBs. Chile, Mexico and Peru signed the Trans-Pacific Partnership in 2015. This trade agreement includes provisions on harmonising technical standards, simplifying regulatory procedures and increasing co‑operation on sanitary and phytosanitary measures (World Bank Group, 2016[118]). More regional initiatives are required to ease NTBs.
The global trade landscape is being reshaped by ongoing trade tensions coupled with a broader trend of protectionist policies. The traditional model of open trade and deep integration into global value chains – once central to the development paths of advanced economies and emerging markets in Southeast Asia – is becoming a less reliable engine for growth (OECD, 2025[119]). In this new context, where major economies are increasingly prioritising domestic production and strategic autonomy, LAC countries can no longer depend solely on export-led strategies anchored in preferential access to large markets. Instead, they must actively diversify trade and co-operation partnerships, while also prioritising domestic and regional strategies – so-called “new generation” industrial policies – that promote inclusive and sustainable growth, including through regional integration, investment in productive capacities and support for sectors with higher-value-added potential.
Productive development policies are re-emerging as a central tool for achieving long-term development goals and navigating the green and digital transitions (Chapter 2). This “new generation” of policies is distinct from 20th century policies in both form and function. Rather than prioritising import substitution or horizontal market corrections, productive development policies are increasingly mission-oriented, sustainability-driven and reliant on public-private collaboration (WEF/UNIDO, 2024[120]). They reflect a pragmatic understanding that states must play an active role in shaping markets, fostering innovation and ensuring that industrial capabilities align with broader social objectives, such as decarbonisation, inclusion and resilience. The Draghi report, which outlines a vision of the future of European competitiveness, goes in this direction (Draghi, 2024[121]). This evolution is shaped by lessons from past failures and successes. The 20th century experience of industrial policies in East Asia, particularly South Korea and Chinese Taipei, demonstrated that selective, well-co‑ordinated interventions, when embedded in robust institutions and accountability mechanisms, could nurture globally competitive industries (Rodrik, Juhasz and Lane, 2024[122]).
The new generation of productive development policies is aimed at decoupling growth from environmental degradation. This shift is essential, as industry accounts for nearly 40% of global energy consumption and more than 30% of global GHG emissions (WEF, 2022[123]). In practice, this means prioritising sectors with green potential, such as renewable energy, circular manufacturing or electric mobility, and aligning industrial strategies with climate targets and national development priorities. Moreover, global production is undergoing a spatial reconfiguration, where sustainability (powershoring), resilience (nearshoring) and diversification are prioritised alongside efficiency (CAF, 2022[124]; Green Initiative, 2025[125]; JLL, 2024[126]).
International support is critical for the promotion of sustainable industrial policies that will help countries to meet their climate targets. The majority of Nationally Determined Contributions (NDCs) include industry in their scope, and almost two-thirds now include detailed industry transition measures, showing progress in the coverage of industry transition (UNIDO, 2023[127]). They also increasingly reference partnerships for green industrial policies, particularly in the context of implementing climate commitments and achieving emission reduction targets. For instance, NDCs commonly emphasise partnerships to advance climate-aligned industrial transformation through sectoral collaboration.
Many NDCs highlight cross-sectoral partnerships to decarbonise industries through technology transfer, capacity building and financial co-operation. Such partnerships could involve, for example, energy, agriculture and manufacturing. Chile’s NDC, updated in 2020, is a good example, as it includes references to partnerships in promoting a green hydrogen economy, clearly connecting climate goals with new industrial sectors (NDC Partnership, 2020[128]). Likewise, Colombia’s NDC, updated in 2020, calls for international support for sustainable mobility and clean energy industrial initiatives, linking climate action to production transformation (NDC Partnership, 2020[129]). However, explicit plans facilitating support to green productive development policies are rare and not systematically detailed, impeding partners and investors from making more effective investment decisions. New productive development policies that appear in national development plans, green growth strategies or sectorial plans would benefit from enhanced partnerships if they were more systematically embedded in NDCs (OECD/IEA, 2024[130]).
This context creates a window of opportunity for LAC countries to position themselves as competitive, sustainable and trusted production partners. A few guiding principles, based on lessons from past industrial policies, can help to increase the likelihood of success of productive development policies. Key features include focusing on technology adoption, increasing competition, avoiding trade-restricting measures, and promoting transparency and monitoring (Ohnsorge, Raiser and Leiyu Xie, 2024[131]). For instance, promoting sustainable practices in the critical raw materials sector across LAC is among the top priorities for partners like the European Union. In partnership with the IBD, this initiative aims to enhance environmental, social and governance standards in the extraction and processing of essential minerals, aligning with global sustainability goals and supporting the region's socio-economic development. By fostering responsible production methods, the initiative seeks to ensure that the growth of the raw materials sector contributes to inclusive and sustainable progress in the region (IDB, 2024[132]).
A new generation of productive development policies in LAC requires a strategic emphasis on regional co‑operation, with six building blocks supporting integration and transformation (Figure 4.17).
Source: Authors’ elaboration based on (ECLAC, 2024[38]), (Ohnsorge, Raiser and Leiyu Xie, 2024[131]) and (Lebdioui, 2022[133]).
First, integrated regional supply chains are central to this effort. Regional integration can enhance competitiveness and support the transition to cleaner and more stable production structures. By fostering cross-border production networks, countries in the region can take advantage of economies of scale, reduce input costs and improve resilience in the face of global disruptions. The region could take advantage of initiatives already advanced, such as institutions for regional electricity production (OLADE, 2024[92]).
Second, skills development and research collaboration – the development of shared training systems, regional certification schemes and collaborative R&D initiatives – can narrow capability gaps across countries and accelerate innovation, particularly in emerging green and digital sectors (CAF, 2024[90]).
Third, facilitating the adoption of digital and low-carbon technologies is of critical importance. The integration of digital technologies in industrial production requires a clear understanding of data's central role in both the digital and the green economy, alongside the development of policies that strengthen the entire data value chain, from data collection to analysis and application. These trends call for the alignment of productive policy with national digital strategies, especially in developing countries, where governments can support firms that are latecomers to the digital revolution (OECD et al., 2024[134]). Regional co‑operation can promote access to shared infrastructure, facilitate the dissemination of technologies and support the development of regional platforms that reduce duplication and transaction costs. Regional initiatives, such as the e-LAC Digital Agenda for Latin America and the Caribbean, and bi-regional partnerships like the EU-LAC Digital Alliance already provide steps in this direction (ECLAC, 2024[135]; European Commission, 2025[67]).
Fourth, the protection and sustainable use of shared environmental resources must also be at the core of regional strategies. Cross-border biodiversity assets such as the Amazon basin, mangrove ecosystems and marine corridors require co‑ordinated conservation frameworks. The Eastern Tropical Pacific Marine Corridor, involving Colombia, Costa Rica, Ecuador and Panama, provides an example of how biodiversity protection and economic development can be pursued in parallel through regional collaboration (Lebdioui, 2022[133]). LAC countries could strengthen their productive development policies by formulating shared agendas on issues of common interest, such as the sustainable exploitation and processing of natural resources and the strengthening of value chains that can take advantage of the scale that the regional market would allow (ECLAC, 2024[38]).
Fifth, regulatory harmonisation supports the development of regional markets. Common environmental, technical and labour standards reduce barriers to trade and investment, enhance policy coherence and build trust among stakeholders.
Finally, rules-based international trade agreements promote transparency, stability and predictability in regional and global markets. When aligned with industrial and environmental objectives, trade agreements can reinforce national policy agendas, facilitate access to new technologies and encourage the cross-border flow of knowledge and capital (Ohnsorge, Raiser and Leiyu Xie, 2024[131]). In the region, various organisations and agreements, including CARICOM, MERCOSUR, Pacific Alliance and SICA, as well as bilateral agreements, such as those between the European Union and Chile, Mexico, Central America or Andean countries, have been reducing barriers and promoting international trade, showcasing the success of existing partnerships (European Commission, 2025[136]).
LAC stands at a critical moment where the convergence of production transformation, green and digital transitions and regional integration can redefine its development trajectory. The new generation of productive development policies that is emerging is mission driven, sustainability oriented, inclusive and anchored in public-private collaboration. These strategies reflect a pragmatic shift away from traditional industrial policy approaches, aiming instead to foster sectors aligned with global climate goals and technological frontiers. However, the success of these policies hinges on the region’s ability to co‑ordinate at scale, strengthen institutional frameworks and embed industrial strategies within broader international partnerships and financing ecosystems.
FDI, ODA and international co-operation remain critical to advancing the three key enablers of production transformation in LAC: skills development, technology adoption and infrastructure development. Although FDI has increasingly targeted the service and renewable energy sectors, its potential to support regional value chains and technology spillovers remains underexploited. ODA flows, though limited relative to the region’s needs, have played an important role in financing skills development, particularly vocational and digital training, and in strengthening institutional capacity for infrastructure planning and governance. However, support is often fragmented and insufficiently aligned with national or regional productive development priorities. Enhanced co-operation is essential to close co‑ordination gaps, scale up blended finance instruments and foster sectoral partnerships that accelerate the diffusion of advanced technologies and green infrastructure. Leveraging FDI and ODA in a more strategic and coherent manner can help to bridge structural gaps and ensure that investment flows contribute meaningfully to long-term transformation.
Regional integration has emerged as both a challenge and a strategic lever. Despite decades of trade agreements, intraregional trade in LAC remains among the lowest globally due to weak infrastructure, similar export structures and underdeveloped regional value chains. Yet promising areas for integration exist, particularly in electricity, agro-industrial transformation and health-related manufacturing. The renewed interest in cross-border energy systems, regional electricity integration and powershoring – relocating industries to countries with cleaner and more stable energy sources – signals growing alignment between competitiveness and sustainability. Strengthening regional co-operation mechanisms and regulatory harmonisation is essential to unlock these opportunities and reduce the cost of doing business across borders.
Promoting partnerships and international co-operation in key enablers of production transformation
Strengthen international co-operation flows to strategic production transformation sectors in LAC. These flows remain limited despite the growing relevance of FDI and private-sector mobilisation. Efforts towards private-sector mobilisation should be fostered mainly in sectors that promote inclusive and sustainable productive development policies.
Deepen and align international and regional partnerships with key actors, especially in priority sectors for production transformation, including manufacturing, renewable energy and digital services.
Scale up support for critical enablers of production transformation, particularly skills development, technology adoption and infrastructure, which remain underrepresented in current co-operation efforts and can encourage further private-sector investment in LAC.
Ensure that international co-operation and FDI mobilisation explicitly integrate support for enablers of transformation to reinforce long-term impacts and good governance arrangements.
Support investment climate and FDI attraction, a critical enabler of R&D and digital-sector growth, which are important drivers of production transformation.
Prioritise FDI and private-sector mobilisation through processes that reflect the development strategies of LAC countries, while considering common interests with international partners.
Fostering regional integration and global value chain insertion
Promote deeper regional and global value chain integration as a key pathway to productive upgrading in LAC and a source of new partnership opportunities. Focus on key strategic sectors promoting regional integration, such as regional infrastructure.
Leverage regional trade agreements more strategically, ensuring that they incorporate and advance key sectors with the potential of decent job creation in the long term.
Improve the coherence and alignment of regional and international partnerships with national and regional priorities aimed at achieving inclusive and sustainable development.
Explore options for building platforms that can discuss support by partners for a new generation of productive development policies in LAC, at the national and regional levels.
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