The Latin America and Caribbean (LAC) region requires additional financial resources to tackle its significant socio-economic challenges and fulfil the development agendas. For instance, the spending gap for the main development priorities is currently estimated to average USD 99 billion per year (UNCTAD, 2023[1]). Mobilising the needed resources will require a co-ordinated strategy that includes the public and private sectors as well as innovative financing mechanisms and close co-ordination with international partners.

Low productivity growth continues to affect long-term economic growth in the region. Economic activity in LAC has slowed since 2023 due to cyclical dynamics and ongoing long-term structural challenges. In 2023, average labour productivity in LAC amounted to 33% of that of the OECD, below the 40% of 1990 (Figure 1). Low productivity growth affects most sectors of the economy, and much of the gap in labour productivity with advanced economies can be attributed to differences in total factor productivity.

The current context leaves little space for monetary and fiscal policies to support economic growth. Many LAC economies have maintained a tight monetary stance to keep inflation expectations anchored. As in the rest of the world, inflation in the region is converging towards the levels prior to the COVID-19 pandemic; after topping in the middle of 2022, inflation started to decrease in the second half of 2023 in most LAC countries. Monetary policy has been fundamental in taming headline inflation and keeping its expectations in check. Going forward, monetary authorities should continue to be cautious.

The economies of the region are undergoing a fiscal consolidation phase, as LAC’s fiscal space has decreased significantly since the pandemic. As a result of macroeconomic dynamics and the ongoing fiscal consolidation efforts, the ratio of debt to gross domestic product (GDP) has begun to converge toward pre-pandemic levels. However, debt dynamics and fiscal accounts should continue to be closely monitored, and a credible fiscal framework should play a fundamental role.

The socio-economic conditions are also complex, with persistent poverty and inflation. Although it has declined in recent decades, poverty remains high in LAC, accounting for 26.8% of the region's total population in 2024, while extreme poverty has remained relatively stable, affecting one in ten people in the region (ECLAC, 2024[3]). High and persistent inflation has aggravated the living conditions of Latin Americans and Caribbeans, especially the most vulnerable.1

Informal employment is widespread in the region’s labour markets. In 2022, more than half of the workers in LAC were in informal employment (55.7%), a slight improvement over 2010, when 59.4% of people employed were informal. Informality affects both men (55.9%) and women (55.4%), but in countries where overall informality is particularly high, women are much more likely than men to hold an informal job (ILO, 2024[5]). Informality affects the living standards not only of workers but also of the dependents living in the same household. Across LAC in recent years, 64.9% of people lived in households where at least one of the principal earners held an informal job, 42.5% in households depending entirely on informal employment and 22.4% in mixed households with earners holding formal and informal jobs. People living in households where all earners were formal workers represented 25.1% of the population, although heterogeneity is high across the region (Figure 2).

The mobilisation of public and private financing is essential to close development gaps in LAC. Persistent inequalities, vulnerability to climate change, and recent socio-economic disruptions demand a co-ordinated investment strategy focused on priority sectors aligned with productive development policies (ECLAC, 2024[6]). National Development Plans (NDPs) provide frameworks for effective resource allocation, supporting high-impact sectors critical for the region’s resilience and fostering synergies between the public and private sectors. In this context, the social contract serves as a foundation for mobilising public and private resources by fostering inclusive and participatory governance that builds trust, strengthens fiscal systems, and aligns the interests of diverse stakeholders with long-term sustainable development goals (OECD et al., 2021[7]). The private sector’s involvement, through innovative financing models, introduces scalability, innovation, and competitiveness, while supporting national development agendas. Despite existing fiscal constraints, aligning both public and private resources with sustainable development goals allows for transformative economic change in priority sectors, enabling structural shifts essential for the region’s solid and long-term growth.

Optimising budget allocation and increasing spending efficiency can free up additional resources. To finance their development agendas, governments must reallocate and implement strategic budgets that prioritise key sectors. For example, oil remains the most subsidised fossil fuel in LAC, sometimes benefiting high-income households and carbon-intensive industries. Improved budget design and co-ordinated budget implementation, together with data availability, can ensure that each development priority is adequately funded, at both the national and local levels.

Tax revenues in LAC are currently insufficient to meet its development objectives. Tax revenues allow governments to fund essential public services, infrastructure and social welfare programmes. However, in 2022, LAC's tax revenues amounted to just 21.5% of GDP, ranging from 10.6% in Guyana to 33.3% of GDP in Brazil, below the OECD average of 34.0% (OECD et al., 2024[8]). The region's tax structure does little to mitigate inequality, as it remains heavily dependent on indirect taxes, which accounted for 48% of total taxes in 2022 (32% in the OECD), with value-added tax a prominent amount. Personal income tax and social security contributions accounted for only 26.7% of LAC's total tax revenues in 2022, compared to 48.4% in OECD countries. Conversely, corporate income tax contributed more in LAC (16% of total taxes) than in OECD countries (12%) (Figure 3) (OECD et al., 2024[8]).

LAC has an array of tax policy options that would help increase revenues and positively impact development agendas. Expanding recurrent taxes on immovable property, which averaged 0.4% of GDP in LAC in 2022 compared to 1% in OECD countries, can raise revenues and promote wealth redistribution. Simplifying the tax process, ensuring efficient administration, and promoting fairness are crucial for improving tax collection and progressivity. Health taxes on tobacco, alcohol, and sugary drinks can generate funds while reducing health risks and their long-term costs. Environmentally related taxes in LAC, averaging 0.9% of GDP compared to 1.8% in OECD countries, rely heavily on fuel taxes and energy subsidies. Expanding carbon taxes, carbon emissions trading systems and carbon credits could generate revenues and reduce emissions, provided protections for vulnerable populations are addressed. Additionally, reassessing high effective corporate tax rates and optimising incentives to pay taxes can help support investment and entrepreneurship. Currently, the effective average tax rate for a given investment project is 23.9%, compared to 21.9% in OECD countries and 17.1% in 25 emerging economies (Hanappi et al., 2023[9]).

Improving public debt management can help free up revenues for development purposes. In 2021, public debt levels across central governments in the region varied widely, ranging from 23% to 140% of GDP with heterogeneous aspects of debt composition, including the currency of issuance, legislative frameworks and maturity profiles. In some cases, debt in domestic currency represented 66% to 95% of total debt, while in others, non-domestic currency issuances made up 70% to 90% of the total. Rising debt levels together with high interest rates have had an impact on debt service costs, constraining the fiscal space for development-oriented investments. In 2022, the debt service-to-tax revenue ratio in the region reached 12.2%, up from 9.8% in 2012 and above the OECD average of 4.8% (Figure 4). Over the past decade, interest payments on debt have surpassed core government expenditures in several countries, with debt service exceeding the spending on education and reaching two times that on healthcare and capital investment.

Financial markets are critical for economic growth and development. They provide individuals and businesses with access to essential services, such as loans, savings and insurance, and enable them to increase investment in physical and human capital and to smooth consumption.

Financial systems in LAC are lagging behind, as they lack access, depth and efficiency. Financial depth in LAC is low, with domestic credit to the private sector reaching 50% of GDP in 2022, lagging behind other regions where it exceeds 80% (Figure 5, Panel A). Similarly, bank deposits as a percentage of GDP stood at 55.1% for LAC in 2021, compared to 99.3% for OECD countries (Figure 5, Panel B). Although access to financial services has improved, with account ownership rising from 29.6% in 2011 to 57.2% in 2021, it remains below the OECD average of 93.7%. Efficiency in the banking sector is limited, as it exhibits a net interest margin of 5.0%, above the OECD average of 1.7%. While this indicates profitability, it also signals costly credit due to various factors that vary between countries, such as high market concentration, high risks, and inadequate regulatory frameworks.

Inclusion is a fundamental aspect of a well-developed financial market; however, despite progress, significant gaps in financial inclusion persist in LAC. The region’s countries have made considerable progress in increasing access to financing, but the financial system excludes some vulnerable groups. For instance, households with informally employed members typically have worse access to financial products (Figure 6). The gap between formal and informal households varies considerably across countries. In Mexico, the disparity is the largest, with only 2.3% of informal households having access to homeownership loans, compared to 14.9% of formal households. In Chile, 6.4% of informal households have 6.4% access to homeownership loans, while formal households reach 15.6%. In countries with smaller gaps, such as the Dominican Republic, access remains very limited for formal, informal and mixed households.

To enhance financial inclusion, digital innovation and financial literacy can provide ways forward. Digital innovation is reshaping financial inclusion in LAC by overcoming traditional banking barriers, offering non-traditional solutions and expanding access. Between 2014 and 2021, the proportion of individuals aged 15 and older who made or received a digital payment rose from 35.9% to an average of 49% in LAC. Additionally, 69% of digital banks’ clients in the region consist of previously unbanked and underbanked individuals and small and medium-sized enterprises, illustrating the sector’s capacity to effectively reach underserved populations. Improving financial inclusion depends on advancing financial literacy. Financial literacy empowers informed decision-making and helps prevent pitfalls like over-indebtedness (OECD, 2023[12]). Financial literacy remains limited in LAC, with significant gender disparities. On average, 27% of men and only 18% of women understand what interest rates mean in nine selected countries, while 50% of men and 44% of women understand what inflation means.

Capital markets, composed of equity and debt markets, offer firms and governments access to diverse funding sources. Equity and corporate domestic bond markets allow for the rise of long-term capital, provide saving opportunities for households, and support capital formation, investment diversification and risk management.

In LAC, equity markets are reduced, lack liquidity and remain concentrated. In 2022, on average, market capitalisation in the region stood at 35.9% of GDP compared to 64.7% for OECD countries. Moreover, the stock turnover ratio indicates low levels of market liquidity, averaging 24% compared to 53.8% in OECD countries. In the region, the activity of equity markets is concentrated in both offerings and ownership and consists mostly of secondary public offerings. The Herfindahl-Hirschman Index for market capitalisation shows significant heterogeneity across the region in terms of concentration (Figure 7, Panel A). Most LAC markets are more concentrated than those of Korea, the exceptions being Brazil and Chile, which are among the least concentrated in the region; however, all LAC markets still have higher concentration levels than the New York Stock Exchange. Company ownership in LAC is considered highly concentrated, with the top 1% of shareholders owning, on average, 46% of a company’s total holdings, while in other regions it averages 31% (Figure 7, Panel B).

LAC’s equity markets have shrunk in the last two decades due to a negative trend of net listings as companies migrate to advanced markets, and access to medium-sized and small companies is limited. Regional financial integration can reverse these trends by increasing efficiency, lowering transaction costs for investors, improving liquidity conditions and reducing risks. Regional integration of securities markets is being pursued in LAC through the regional holding company nuam exchange which aims at the full integration of the stock exchanges of Colombia, Lima and Santiago.

In LAC, private bond market issuances remain largely underdeveloped despite their progress in recent years. In 2023, the outstanding amount of corporate bonds in the region accounted for around 2% of the global total. Market activity remains mainly concentrated in the public sector (81% of LAC’s local issuances between 2015 and 2023) and largely in Brazil and Mexico. For the non-financial corporate sector, there is space to improve currency composition. Between 2015 and 2023, on average in LAC, 58% of the amount issued by non-financial firms was denominated in foreign currencies (Figure 8, Panel A), which could expose them to exchange rate risk. However, firms in LAC also issue bonds with a profile of longer maturities compared to those in emerging markets. Between 2015 and 2023, on average, firms issued bonds with a maturity of 9.3 years, compared to a 5.2-year maturity in emerging markets (Figure 8, Panel B).

LAC companies can also access private markets by privately selling stock, with venture capital (VC) being the most commonly used financing option in the region. Venture capital represents a key opportunity for companies that face difficulties in accessing equity and bond markets. However, recent VC dynamics in LAC have slowed down. In 2016, VC funding reached USD 1.1 billion across 249 deals, and in 2021, it peaked at USD 25.1 billion across 859 deals, driven by post-COVID incentives and high demand. By 2023, however, VC funding had declined to USD 5.4 billion, falling below pre-pandemic levels (Figure 9). Compared to other global regions, most of the VC funding in LAC is directed towards mobile apps and fintech, while the region lags in sectors like manufacturing and e-commerce.

Development finance institutions (DFIs), mostly represented by national and subnational public development banks, are crucial in providing innovative financial services, technical and digital support, and expanded access for firms to financial markets. A 2023 analysis of 38 national and subnational public DFIs in 13 LAC countries underscores their key role in financing micro, small and medium-sized enterprises (MSMEs). Of 473 financial instruments mapped, 42% target both MSMEs and large companies, 39% focus solely on MSMEs, 7% target public institutions, and 4% are for large companies. DFIs offer MSMEs a range of financial instruments that address various needs, including day-to-day operations (34%) and investment financing (45%) (Figure 10, Panel A). DFIs also help MSMEs contribute to green, digital and gender goals. Nevertheless, currently only 19% of the instruments address at least one of the three cross-cutting challenges: 51% support the green transition, 29% target gender equality, and 20% focus on digital transformation and innovation (Figure 10, Panel B).

In the face of a changing context for international financing, LAC countries could benefit from sharing an agenda for development priorities and their financing. International financing is evolving as it adapts to a multiplicity of global challenges as well as to the rise of new actors, with emerging economies and non-traditional creditors playing more important roles in financing for development. Both the Paris Pact for People and the Planet (4P) and the Fourth International Conference on Financing for Development in 2025 constitute key opportunities to assess the strategic priorities of LAC. A shared agenda on addressing the challenges of today’s international financing context − such as access to liquidity, risk perceptions and access to concessional finance, as well as the fragmentation and co-ordination of development providers − is needed for the region to realise its development opportunities and increase financial flows for sustainable development.

LAC countries need to seize the opportunities available in private-sector finance to unlock different international financial flows. Private investors are the single most important external creditor for LAC governments, and their share has grown over time (ECLAC, 2023[17]) (Figure 11). In addition, the region is well positioned for mobilising greater private-sector finance through official development interventions. In 2022, LAC had the highest level of private mobilised finance for development of any region, with an overall amount of USD 21.2 billion, a 16-fold increase over the 2012 level (OECD Data Explorer, 2024[18]). While the levels of official development assistance have been reduced, the challenges facing the LAC region have increased, stressing the need for other financial flows to be better integrated through a sustainable development framework.

Development co-operation can help reduce barriers to international financial flows as well as perceived risks. Development co-operation can allow access to “de‑risking instruments” that aim to share risks among multilateral, public and private actors, such as blended finance or guarantees offered at concessional or competitive terms to unlock private finance (OECD et al., 2023[21]). LAC development partners such as the European Union (EU) are pursuing initiatives that drive the mobilisation of financing through the use of such tools. With the Global Gateway Strategy, the EU has put forward a holistic approach to international partnerships with integrated financing structures that bring together investment, trade and co-operation actors. The EU-LAC Global Gateway Investment Agenda promotes a 360-degree approach, mobilising quality investments that create local added value and promote growth, jobs and social cohesion.

Remittances and philanthropy are other international financial flows that benefit LAC. Given the region’s high outward migration level, remittances constitute a significant and relatively stable source of finance for LAC (IMF, 2017[22]). However, there is a disparity in remittances inflows, as the majority are concentrated in a few LAC countries, with the top six recipients with regard to the size of countries – El Salvador, Guatemala, Haiti, Honduras, Jamaica and Nicaragua – receiving significantly higher amounts than the rest (World Bank, 2024[23]). Philanthropic flows provide LAC with substantive funding for sectors often overlooked by the private sector. There are largely two groups of countries that benefit from the bulk of the international philanthropic financing: i) Brazil, Colombia, El Salvador and Mexico, which each received USD 90-100 million per year from philanthropic foundations; and ii) Ecuador, Guatemala, Haiti and Peru, which each received USD 10-20 million per year (OECD, 2023[24]). Philanthropic foundations can also play a role in boosting collaboration across providers of international co-operation, given their unique convening power as a non-state actor and their focused mission objectives.

Green, social, sustainability and sustainability-linked (GSSS) bonds continue to be an attractive financing mechanism, and international co-operation will be key in scaling up such debt securities for financing the sustainable development agenda. GSSS bonds increased from 9.3% of total LAC bond issuance in international markets in 2020 to almost 35% in 2023 (ECLAC, 2024[25]). The gradual shift from conventional bonds towards sustainable debt securities indicates a growing investor appetite for sustainable projects. Between 2014 and 2023, the GSSS international bond market in LAC reached a cumulative value of USD 131 billion (Figure 12, Panel A). In 2023, sovereign issuances accounted for the largest share of GSSS issuances at 74%, followed by corporate issuances at 18%, and supranational and quasi-sovereign issuances at 9% (Figure 12, Panel B). To scale up GSSS bonds in the region and overcome barriers hindering market development, international financial co-operation is crucial. This includes the establishment of harmonised frameworks and reliable monitoring and supervision mechanisms to prevent greenwashing and SDG washing (OECD, 2024[26]).

Scaling up other debt tools such as catastrophe bonds, debt-for-nature swaps and natural disaster clauses will also be essential to mobilise resources. Catastrophe bonds can increase external borrowing by enhancing governments' borrowing capacity and transferring financial risk to investors. Examples from Jamaica and Mexico show a market appetite for these instruments among highly exposed countries. For biodiverse and highly indebted countries, nature or climate or nature swaps can also be effective, particularly as complements to debt restructurings. Debt-for-nature swaps have been employed in the region, with new proposals emerging, particularly among Caribbean countries that have low credit ratings and limited market access (OECD/IDB, 2024[27]). Natural disaster clauses can allow countries in LAC to capitalise interest and defer principal payments on bonds after major natural disasters, linking repayment capacity to risk exposure. These clauses align debt servicing obligations with a country's ability to recover from disasters.

Countries in LAC are focusing on improving sustainable finance frameworks by harmonising standards and expanding definitions of sustainable finance. Interoperable standards and common taxonomies are necessary for regulating, monitoring and verifying the issuance of GSSS bonds and other sustainable financial instruments. While overarching principles and guidelines provide valuable advice, it is essential for issuers of GSSS bonds at the national level to establish clearer, more binding standards and taxonomies. By December 2023, 14 LAC countries had launched nearly 180 initiatives, aimed at developing their sustainable finance frameworks. Green and sustainable taxonomies have increasingly been adopted in the region since 2022, with publications in Argentina, Chile, Colombia, the Dominican Republic, Mexico and Panama and ongoing development in Brazil, Costa Rica and Peru. The interoperability and harmonisation of frameworks across the region are crucial, as each taxonomy determines environmental priorities based on its unique context.

[25] ECLAC (2024), Capital flows to Latin America and the Caribbean: 2023 year-in-review and early 2024 developments, United Nations Economic Commission for Latin America and the Caribbean, Santiago, https://repositorio.cepal.org/server/api/core/bitstreams/ce02481f-b84e-409d-8ccd-30ae1c14efb1/content.

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[24] OECD (2023), “Creditor Reporting System: Private philanthropy for development (Edition 2023)”, OECD International Development Statistics (database), https://doi.org/10.1787/dd620077-en (accessed on 28 November 2024).

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[2] The Conference Board (2024), Total Economy Database, The Conference Board, https://www.conference-board.org/data/economydatabase.

[1] UNCTAD (2023), The Costs of Achieving the SDGs, United Nations Conference on Trade and Development, Geneva, https://unctad.org/sdg-costing/about.

[23] World Bank (2024), World Bank Indicators: Personal Remittances, Received (% of GDP) - Latin America & Caribbean, World Bank, Washington, DC, https://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS?end=2022&locations=ZJ&start=2003.

[11] World Bank (2024), World Development Indicators (Database), World Bank, Washington, DC.