Latin America and the Caribbean (LAC) is a vast and diverse region. Its economies exhibit a wide range of characteristics, with countries facing distinct challenges based on several factors including their economic structure, trade dynamics, reliance on commodities, and energy potential. While the countries of LAC face distinct challenges based on their unique circumstances, they also share many common trends, such as vulnerability to external economic shocks, the need to transition to a green economy, persistent inequality, and governance issues. To overcome these challenges and capitalise on new opportunities, co-ordinated efforts at the national, regional, and global levels will be essential to mobilise the needed resources.

Tackling LAC’s challenges demands co‑ordinated and effective policy planning as well as effective financing with the strategic integration of public and private actors. Given fiscal constraints, there is a pressing need for innovative and efficient financing mechanisms and partnerships among government, the private sector, and international actors. While public sector financing remains crucial for addressing social challenges, the creation of appropriate incentives and frameworks is essential to attract private-sector investment towards market-driven development objectives. Policy strategies must transcend sectoral boundaries to tackle interconnected social, economic, and environmental challenges. This collaborative approach aims to mobilise resources efficiently, enhance infrastructure resilience and foster inclusive growth.

These efforts must be undertaken at a time when economic activity in LAC has been subdued due to cyclical dynamics and pending structural challenges. Low productivity growth continues to affect long-term economic growth in the region, working as a significant drag on potential per capita growth rates. In 2023, average labour productivity in LAC amounted to 33% of that of the OECD, a figure that decreased from 40% in 1990. Much of the gap in labour productivity between LAC and high-income economies can be attributed to differences in total factor productivity. Low productivity growth in LAC is pervasive – it affects most sectors of the economy, especially those where the private sector plays a leading role, such as trade, manufacturing, and services.

Most LAC economies have reacted to their different economic contexts with adequate monetary and fiscal instruments, although the space for demand policies is limited. In terms of monetary policy, authorities in countries that have adopted an inflation-targeting regime have maintained a tight monetary stance to keep inflation expectations anchored. At the same time, high domestic interest rates have averted financial risks derived from higher international interest rates that could stimulate capital flight. In terms of fiscal policy, the region is undergoing a consolidation phase, as the fiscal space available in the region has decreased significantly since the COVID-19 pandemic. With higher debt stocks and higher interest rates, debt service as a proportion of tax revenues has increased considerably. Together with the need to improve primary fiscal results to reduce, or at least contain, debt-to-GDP ratios, this has resulted in the need to reduce primary spending in some LAC countries, thus subtracting from aggregate demand at a time of activity slowdown.

Long-standing poverty and informal employment remain significant socio-economic challenges in LAC. Although poverty 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. Multi-dimensional poverty – which includes non-monetary factors such as education, health, housing and sanitation conditions – persists in the region, and climate change further threatens the most vulnerable populations. Although employment rates have increased slightly, more than half of those employed in LAC remain in informal jobs, with low pay, limited social insurance, and heightened vulnerabilities for women and youth. Informal work is especially widespread in rural areas and sectors like agriculture and construction. Effective policies that incorporate multi-dimensional poverty indices and target informal work are essential for providing targeted social benefits, enhancing formal employment, and reducing inequality in the region.

This chapter examines the region’s low economic growth, highlighting structural challenges in light of the region’s subdued potential growth and low productivity performance. In addition, the chapter analyses the current monetary and fiscal policy space as well as the status of the region’s external accounts. It then turns to social conditions in LAC, with a focus on informality and the role that social security systems could play in reducing the region’s social vulnerabilities. Finally, it stresses the need to formulate a clear roadmap for development with a clear financing agenda and concludes with main policy messages.

The LAC region has been slowing economically since 2022. While this trend is the result of cyclical dynamics, long-term structural factors continue to persist in most LAC countries. It is amplified by the domestic macroeconomic policy mix in the majority of LAC countries, which face insufficient fiscal space and persistently high inflation rates.

A key structural challenge in LAC is low productivity growth. Low productivity growth is a key factor in the region’s poor economic performance and in its inability to catch up with developed economies. Average labour productivity per hour worked in the region amounted to 33% of the OECD average in 2023, and the gap has widened since 1990, when the LAC average stood at 40% (Figure 1.1). Low productivity growth in LAC is associated with several factors, including low levels of innovation and adoption of new technologies, low levels of investment in physical and human capital, high informality, and suboptimal allocation of resources (OECD et al., 2019[1]). Allocation of resources is suboptimal when established firms are favoured over innovative startups or when capital is channelled towards politically connected enterprises rather than those with higher growth potential (IDB, 2024[2]).

Low labour productivity in LAC is mainly due to the low productive efficiency of the region’s economies. Poor productive efficiency can be attributed to decades of lacklustre growth in total factor productivity (TFP), a measure of how efficiently the economy uses its inputs (such as capital and labour) to produce goods and services. For instance, labour productivity in LAC is 70% relative to the United States on average. About 80% of the gap can be attributed to differences in TFP, which in LAC is about a third of that in the United States on average (differences in human capital account for most of the rest of the gap).1 TFP in LAC has been below TFP in OECD countries since 1950 (Figure 1.2). From 1950 to 1975, TFP grew on average at about 1.1% per year in LAC, less than half of the 2.4% observed in OECD countries, and the region’s performance has worsened since then. From 1975 to 2023, TFP decreased at an average annual rate of 0.08% in LAC, whereas in the OECD, it barely grew on average at 0.05%.

Capital per worker levels are also low in the region. On average, the level of capital per worker in LAC is about a quarter that of the United States. However, this difference is explained ultimately by the lower levels of TFP in LAC, as weak capital relative to workers is in part the result of the inefficient production structure of LAC economies. Thus, lower TFP has a direct negative effect on output and labour productivity as well as a compounded adverse effect through capital accumulation. As a result, capital stock relative to gross domestic product (GDP) in LAC, on average, is similar to the ratio observed in the United States.

The evolution of productivity in the region has been a significant drag on economic growth, especially since the 1980s (Figure 1.3). During the period 1950-70, TFP growth contributed about a quarter of the region’s real GDP growth, which averaged 5.3% per year. In the 1970s, however, TFP not only did not contribute to economic growth but actually held it back slightly. Since 1980, TFP has significantly hindered economic growth, particularly in the 1980s and again since 2011. As a result, over the period 1980-2023, GDP in LAC grew at an average rate of 2.1% annually, slightly lower than the 2.3% observed in OECD countries.

As a result of low productivity growth, potential per capita growth rates in LAC are low and not sufficient for convergence towards higher-income economies in the medium term. The region’s potential GDP per capita growth is estimated to be about 0.8% per year, independently of the estimation method and based on data from 1980 to 2023. In comparison, the potential GDP per capita growth of high-income economies is estimated at around 1.7% annually (Figure 1.4).

Low productivity growth in LAC affects most sectors of the economy (Figure 1.5). Labour productivity is lower than in the OECD on average in all sectors except the government and utilities. More specifically, the average relative sectoral productivity in LAC is 66% of that of the OECD. The labour productivity of key sectors such as trade, manufacturing, and other services – which employ a significant fraction of workers (23%, 10% and 11% respectively) – amounts to 33%, 39% and 42% of that of the OECD. Agriculture, which accounts for 15% of total employment, also presents a significant gap, with labour productivity of 55% relative to the OECD.

The productivity challenges faced by LAC over several decades have impeded growth and development. Among the key factors contributing to this situation are the economic institutions that shape the business environment. These institutional factors encompass critical aspects such as safeguarding property rights, upholding the rule of law, enforcing contracts, and maintaining state capacity. Regulatory frameworks and public policies also play a significant role. These factors collectively influence how firms operate. They impact productivity through i) resource allocation across firms and industries; ii) firm-level innovation; and iii) the entry and exit of firms. A well-functioning financial system is essential to ensure the effectiveness of these mechanisms and to invest in strategic sectors (CAF, 2018[6]; OECD et al., 2023[7]).

A key factor for low productivity growth is underdeveloped financial systems, which are essential in financing of the development agenda (Chapter 3). Financial markets can have important effects on productivity through several channels. First, access to financing plays a key role in firms’ decisions to innovate, expand and export. Second, lack of credit may also affect individuals’ occupational choices and prevent talented entrepreneurs from pursuing projects with high potential. Third, a well-functioning financial system is key for firms to better absorb real shocks, allowing the most vulnerable and productive firms to survive. In an economy with little access to credit, the firms that survive adverse shocks are not necessarily those that are more productive but rather those with fewer liquidity problems. The increase in productivity that could be obtained by eliminating credit frictions is between 18% and 24% and could reach up to 36%. Similarly, if countries in the region were to adopt the best financial practices, they could achieve productivity gains of 18% and output per capita gains of up to 88% (CAF, 2018[6]).

As in the rest of the world, inflation in the region is converging towards pre-pandemic levels. After topping 10% on average (excluding Argentina and Venezuela) in the middle of 2022, inflation has dropped since the second half of 2023 in most LAC countries, independent of their monetary policy regime (Figure 1.6). Commodity prices were the main driver of recent increases in headline and core inflation rates (IDB, 2024[2]; OECD et al., 2023[7]). Since the beginning of 2023, declines in inflation have been particularly evident in economies where central banks are independent and follow inflation-targeting regimes. However, within inflation-targeting regimes, some economies – such as Colombia and, to a lesser extent, Mexico – have struggled to reduce headline inflation and anchor inflation expectations, while in other countries, such as Brazil, Chile and Peru, the normalisation of both inflation and interest rates was achieved more rapidly from the second half of 2023.

Monetary policy has been fundamental in taming headline inflation and keeping inflation expectations in check. To control both headline inflation and inflation expectations, central banks in some LAC countries, such as Brazil, Colombia, Mexico and Peru, started tightening their monetary policies even before advanced economies. As inflation pressures diminished in these countries, central banks in the region also started to ease monetary conditions.

Monetary authorities should continue to be cautious. With local conditions putting pressure on inflation expectations in some countries (such as Brazil and Mexico), central banks in the region should be cautious and avoid easing monetary conditions too fast. This will prevent a significant reduction in interest rate gaps and therefore avoid capital flight and currency depreciation.

Short-term capital flows to LAC have continued to show resilience in the face of high interest rates in global financial markets. The region saw net short-term capital inflows of USD 42.9 billion in 2023 and USD 24.8 billion in the first semester of 2024, maintaining a positive flow in almost every month (Figure 1.7).

Positive portfolio inflows since 2023 can be partly explained by the region’s interest rate hikes to address high inflation. This has created wide interest-rate gaps with the United States and other advanced economies. Interest rates in most LAC countries remain at higher levels than those of advanced economies, especially in Brazil and Mexico. These interest-rate gaps have made the region more attractive to investors, benefiting both equity and bond markets. In the case of equity markets, the price of financial assets in the region outperformed the group of 24 emerging economies measured by Morgan Stanley Capital International (MSCI), with a combined revaluation of close to 3.0%, compared to a 4.4% drop in the bloc of emerging economies, according to the MSCI Stock Price Index for the third quarter of 2023. In the case of the bond market, Latin America experienced a favourable year, adding net capital inflows of USD 44 billion in 2023.

In addition to these portfolio inflows, the region received historical inflows of foreign direct investment (FDI) in 2022, with a slight drop in 2023. Inflows reached record figures of USD 205.59 billion in 2022 but dropped 9.9% in 2023 down to USD 184.3 billion in 2023 (2.8% of GDP) on the back of a decline in global FDI inflows. The region remains one of the world’s most attractive in terms of FDI (OECD et al., 2023[7]; ECLAC, 2024[9]). In 2022 and 2023, FDI inflows to the region accounted for more than 14% of total world FDI (Figure 1.8). Amid high FDI inflows, the focus should remain on quality. Quality FDI refers to investments that can contribute to increasing productivity, innovation, wages and skills development and to attaining decarbonisation goals (OECD et al., 2022[10]; OECD, 2019[11]; OECD et al., 2023[7]). To foster quality FDI, there is a need for stronger regulatory frameworks and well-defined investment strategies to ensure that FDI flows can be better oriented towards development goals (Chapter 4).

Short-term and structural factors drove the increase in FDI towards LAC. As Russia’s war of aggression against Ukraine, which began in February 2022, induced a forced reconfiguration of value chains on the European continent, the remoteness of the conflict made the Latin American region a reliable destination. A large part of the investment was directed towards the energy sector, with a growing weight on renewables (OECD, 2023[13]). FDI to the region also benefited from the withholding of profits by many transnational corporations in 2022. This was especially the case in Argentina, where the country's subsidiaries decided to reinvest the profits generated during the year rather than transfer them to the parent company. FDI to the region was also boosted by the development of nearshoring, which has expanded since 2020, especially in Mexico (OECD, 2024[14]).

After a significant fiscal stimulus in 2020-21, the region started a process of fiscal consolidation. The increase in fiscal revenues in 2022, coupled with a decrease in public spending after the fiscal stimuli adopted during the pandemic in 2020, resulted in narrowed fiscal deficits, which fell from -6.9% of GDP in 2020 to -2.2% in 2022 for the region. Similarly, the primary balance achieved a surplus of 0.3% of GDP in 2022, compared to -4.0% in 2020 (Figure 1.9) (ECLAC, 2024[15]).

Fiscal revenues in 2022 increased in most LAC countries thanks to high commodity prices and better-than-expected economic growth in some countries. More specifically, tax-to-GDP ratios increased in more than three-quarters of LAC countries between 2021 and 2022, with the average tax-to-GDP ratio for the region rising by 0.3 percentage points to 21.5%, still slightly below its pre-pandemic level of 21.6% (Figure 1.10). The increase in the regional average was driven by corporate income tax amid higher profits by oil companies, although this was partially offset by a decline in revenue from excise taxes, due both to lower demand and to the adoption of a range of policy measures by countries to mitigate the impact of energy and food inflation on households and firms (OECD et al., 2024[16]) (Chapter 2).

Maintaining a restrictive fiscal stance is proving difficult for several reasons. First, growth is slowing in the region after the initial pandemic recovery, putting pressure on living standards and increasing social and political pressure on governments to spend more. Second, the financing of the fiscal stimulus packages adopted during the pandemic included the reallocation of resources from other expenditure lines towards subsidies and transfers. As the pandemic recedes, there is growing pressure to compensate for the spending losses in the areas neglected over 2020-21. Third, electoral events in several countries in the region are generating pressure to increase short-term spending. Fourth, inflationary pressures forced monetary authorities to increase interest rates, resulting in higher debt service. This is particularly the case in highly indebted countries, including some Caribbean countries, not only where debt is higher but where fiscal fragilities are associated with shorter-term debt profiles. These countries therefore have higher sensitivity to changes in short-term debt and are vulnerable to interactions between higher global interest rates and country risks. Finally, high volatility commodity prices are affecting fiscal revenues in major hydrocarbon and mining producers in LAC. Hydrocarbon-related revenues among major producers in the region increased to 4.4% of GDP on average in 2022, up from 2.6% in 2021, but are estimated to have dropped to 3.9% in 2023. Similarly, average revenues from mining increased from 0.7% of GDP in 2021 to 0.8% in 2022 but fell in 2023 to an estimated 0.5% of GDP as mineral prices trended down (OECD et al., 2024[16]).

Credible fiscal frameworks are essential for fiscal sustainability and to protect investments (Chapter 2). They can help to enhance fiscal discipline and reduce risk premiums on sovereign debt by establishing clear rules (e.g. fiscal rules) and guidelines for government spending, revenue collection and borrowing. Robust fiscal frameworks can improve investor confidence, thereby lowering the cost of borrowing for governments. They can also help to protect public investments during episodes of fiscal consolidation, as governments find it easier to cut spending on investment (Ardanaz and Izquierdo, 2022[17]). This not only has impacts on long‑term growth but can also affect economic recovery (Arreaza et al., 2022[18]; OECD et al., 2023[7]).

As a result of macroeconomic dynamics and ongoing fiscal consolidation efforts, the debt-to-GDP ratio has begun to converge towards pre-pandemic levels. However, debt dynamics should continue to be closely monitored. In 2022, central government debt in the region accounted for 51.5% of GDP, down from 56.3% in 2020 (ECLAC, 2024[15]). This decrease is fundamentally a consequence of GDP returning to pre-pandemic levels in most countries of the region and of the reduction of primary deficits. Rolling back the extraordinary pandemic expenditure packages has been more difficult but has had some degree of success. Social and political frictions have made it challenging to completely dismantle the extraordinary spending programmes in a timely manner. In addition, the primary balance remains above the level needed to stabilise debt, and the cost of debt is greater than GDP growth (Figure 1.11). With interest rates higher than economic growth, the cost of servicing the debt is growing faster than the economy.

Public debt dynamics in the region display strong heterogeneity. In countries that had strong fiscal consolidation programmes even before the pandemic hit, like Barbados, Ecuador and Jamaica, debt-to-GDP ratios have resumed their downward trend after an initial increase. In other countries, such as Chile, Colombia, Paraguay, and Peru, despite their considerable heterogeneity in terms of public debt ratios and credit ratings, the debt-to-GDP ratio has stabilised. In still other economies, like Brazil, the debt-to-GDP ratio could stabilise at a higher level, which could lead to fiscal fragilities. In other countries (Argentina and, to a lesser extent, Mexico), there is no clear evidence yet that debt is on a stabilising trajectory (IMF, 2024[19]).

Poverty remains high in LAC countries although it has declined since the beginning of this century. In 2024, people living in poverty accounted for 26.8% of the region’s total population (Figure 1.12). Two decades earlier, in 2001, the rate was 44.1%. Despite the overall reduction in poverty, the COVID-19 pandemic has had a lasting negative effect on people’s welfare. Poverty and extreme poverty have remained above pre-pandemic levels in more than half of LAC countries. On average, the situation improved slightly in 2023 compared to 2020, when the poverty rate hit 32.8%. However, extreme poverty has remained persistently high since 2001. In 2024, one person out of ten (10.4%) lived in extreme poverty, compared to 12.2% in 2002 (ECLAC, 2024[20]).

Inflation has had a negative impact on the living conditions of people living in LAC, especially the most vulnerable people. Indeed, the cumulative effect of inflation episodes impacts greatly on the most vulnerable households, particularly those with low income or headed by older people (Caisi et al., 2023[22]). In 2023, the general price level across the region was 13.1% higher than in 2021, while for people living in extreme poverty, the price of the basket of goods normally consumed was 20% higher (Figure 1.13, Panel A). The gap in inflation rates reached a peak of 4.4 percentage points in 2022, was still at 4.1 percentage points in the first half of 2023 (OECD et al., 2023[7]) and on average was 2.9 percentage points in 2023 (Figure 1.13, Panel B). It was still particularly high in Argentina (8.5 percentage points), Colombia (3.3), Guatemala (4.5) and Peru (4.2). The decrease in relative inflation since mid-2023 for people living under the national extreme poverty line is partly due to a decline in commodity prices, which began increasing when Russia’s war of aggression against Ukraine pushed up prices of food and energy (OECD, 2023[23]; Rogoff, 2023[24]). This added further constraints to the pandemic-induced disruptions in global value chains (Arriola et al., 2020[25]; OECD et al., 2023[7]). Those pressures have recently eased (ECB, 2023[26]; Giordano and Michalczewsky, 2024[27]).

Despite progress, reducing poverty remains a major social concern in LAC and needs to be considered in all its dimensions. Lack of sufficient income correlates with other dimensions that are key for people’s welfare, such as education, health, housing, and sanitation. Measurements of income and multi-dimensional poverty in the LAC region have advanced significantly in recent decades thanks to the availability of microdata from national household surveys carried over by government bodies and national statistical offices (Gasparini, Santos and Tornarolli, 2021[28]; OPHI and UNDP, 2023[29]). However, income poverty as measured through household surveys is not necessarily perfectly correlated with multi-dimensionally poverty (Alkire and Shen, 2017[30]; Tran, Klasen and Alkire, 2015[31]). United Nations (UN) initiatives to address the global challenge of ending poverty and material deprivation in all forms include the 2030 Agenda for Sustainable Development, adopted in 2015, and the UN Sustainable Development Goals (SDGs). Efforts to measure multi-dimensional poverty attempt to set out clear priorities for addressing these goals (Box 1.1).

Multi-dimensional poverty as measured by the global MPI varies greatly across LAC countries. In 2022, multi-dimensional poverty was below 20% in six LAC countries, while it was particularly high in El Salvador (33.4%), Mexico (36.3%), Ecuador (38.1%) and Honduras (66.9%) (ECLAC, 2024[45]). According to estimates of the UN Development Programme, around 33 million people in LAC, or nearly 6% of the regional population, experienced acute multi-dimensional poverty in 2023 (OPHI and UNDP, 2023[29]). Among the dimensions of poverty, living conditions, including housing and basic services, contribute the most to acute poverty in the region (38.9%), followed by health (33.5%) and education (27.6%) (ECLAC, 2024[45]). Meanwhile, the consequences of climate change have a greater impact on the most vulnerable groups. Globally, between 32 million and 132 million people risk falling into poverty due to climate change by 2030 under most scenarios (Jafino et al., 2020[46]).

Multi-dimensional poverty indices are an important tool for helping policy makers to better understand and tackle monetary poverty and other forms of deprivation. In Colombia, a simplified version of the national MPI was constructed using granular data from the census to identify critically deprived areas of the country. The information was used to prioritise certain regions and municipalities for better targeting of social benefits (DANE, 2020[47]). In Chile, the MPI has been used as a policy tool to complement existing poverty statistics and to design, monitor and evaluate public policy for attaining the SDGs (Gobierno del Chile, 2017[48]). In many cases, having people who are poor directly participate in validating the structure for the national MPI can provide the most straightforward focus on the dimensions and severity of multi-dimensional poverty. This process has been undertaken by some LAC countries, including El Salvador and Panama (OPHI/University of Oxford/UNDP, 2019[44]).

Some LAC countries have deepened the policy scope of MPIs. For instance, Costa Rica and Mexico have adopted and officially incorporated the MPI into their budget allocation processes, aligning resources with the results of the national MPI. Allocations may be adjusted to tackle deprivations more effectively, even using the same amount of aggregate budget resources. This kind of analysis allows governments to accelerate the reductions of multi-dimensional poverty by redistributing resources according to the needs of each region or of vulnerable groups (MPPN, 2017[49]; OPHI/University of Oxford/UNDP, 2019[44]). MPIs can also complement existing information with environmental indicators as a specific domain of multi-dimensional poverty. Much material deprivation is linked to natural disasters such as earthquakes, landslides, floods and storms (OECD et al., 2022[10]). Multitopic household surveys have the potential to identify which poor and vulnerable groups are the victims of specific deprivations related to the environment and natural resources. Chile, the Dominican Republic, El Salvador, and Panama have modified their household surveys to include a module on the risks of natural disasters and environmental pollution (OPHI/University of Oxford/UNDP, 2019[44]).

Employment opportunities have stagnated in the LAC region in the last decade (ECLAC, 2024[43]). In 2022, the region’s employment rate for people aged 15-64 stood at 65.1%, just slightly above the 2012 level of 64.4% and below the 2022 OECD average of 69.3% (which saw a substantial increase of 4.4 percentage points compared to ten years earlier).

Women and youth are extremely vulnerable in the region’s labour market. In 2022, the gender gap in employment rates was 24.8 percentage points across LAC countries, varying from 38.3 percentage points in Honduras to 11.7 percentage points in Uruguay. Women’s relative opportunities in the labour market have shown little progress over the last ten years: the gender gap has shrunk by just 3.5 percentage points since 2012. Young people aged 15-24 face a low likelihood of being employed. In 2022, the youth employment rate was 39.6%. These vulnerabilities are cumulative in LAC labour markets. Young women have an extremely low likelihood of being employed, with just three out of ten holding a job in 2022.

In addition, low-quality jobs and informality are widespread in the region’s labour markets. In 2022, more than half of the workers in LAC were informal (55.7%) (ILO, 2024[50]).2 This is only a slight improvement over 2010, when 59.4% of people employed were informal. The informality rate is particularly high in Bolivia (83.7%), Ecuador (68.5%), Guatemala (79.6%), Paraguay (67.9%) and Peru (74.4%). In contrast, effective fiscal policies have helped to cut informality rates almost in half in Chile and Uruguay (see Chapter 2 for more details). As of 2022, the rate stood at 27.4% in Chile and 22.1% in Uruguay.

Both men and women are exposed to informal work in the LAC region. In 2022, the share of informal workers within each gender group was 55.9% for men and 55.4% for women. However, in countries where informality is particularly high, women are much more likely than men to hold an informal job. The gender gap in the informality rate is substantial in Bolivia (5.0 percentage points), Ecuador (4.6 percentage points), Guatemala (4.8 percentage points), Paraguay (3 percentage points) and Peru (5.7 percentage points), countries where around seven workers out of ten are informal. Furthermore, the incidence of informal work is higher in sectors like agriculture (78.0%) and construction (75.8%), while it is lower in manufacturing (47.8%) and services (49.6%). Informality is higher in rural areas (71.4%) than in urban areas (50.5%).

Measuring informality at the household level is useful for understanding the labour market features of each country. The informal or formal status of working members within a household has important implications for dependent members. The formal employment status of at least one household member may increase the household’s access to social insurance schemes, which often cover the contributor’s spouse and/or children, as in the case of health insurance. For this reason, households with only informal workers face different vulnerabilities than mixed households. Adding the household dimension to the analysis of informality helps policy makers to identify the recipients of social assistance programmes and to design targeted public policies to address the vulnerabilities and negative consequences of informality on individuals and their households.

Across LAC in the years leading up to 2022, 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 (Figure 1.14). However, heterogeneity is high across the region. The share of people living in completely informal households is substantial in countries like Honduras (73.9%), Bolivia (70.8%), Nicaragua (64.2%) and Peru (60.6%), while the share living in completely formal households is high in Uruguay (65.4%), the Bahamas (62.0%), Chile (59.2%) and Costa Rica (56.6%).

As a driver of low pay for individuals and of low income for households, informal work negatively impacts living conditions. In LAC during the 2020s, 65.5% of people in the lowest quintile of household income distribution lived in completely informal households, 13.9% in mixed households and 20.6% in formal ones. In the top income quintile, in contrast, those shares were respectively 22.2%, 24.1% and 53.7% (OECD, 2024[51]).

In other words, labour informality is associated with poverty in the LAC region (Figure 1.15). During the 2020s, 28.2% of informal workers were living under the national poverty line on average, while just 10.5% of formal workers were poor. The share of informal workers living beneath the poverty line was extremely high in Honduras (62.4), Argentina (58.5%) and Mexico (44.8%). Notably, across LAC countries, total poverty rates for workers are almost perfectly correlated with the gap in poverty between informal and formal workers.

Beyond its direct impact on workers, informal work has deep negative consequences on household members. In LAC during the 2020s, 44.8% of children under the age of 5 depended entirely on the income of informal households. The same is true for older people: 48.7% of people over the age of 65 depended on completely informal households (OECD, 2024[51]). This means that almost half of the region’s most vulnerable people may not have any effective social coverage, such as contributory pensions or health insurance. Targeting social assistance to this type of family must be a priority for LAC governments.

The use of information and communication technologies (ICTs) in formalisation policies can become a key tool for reducing informality in LAC (Chapter 3). Recent studies have highlighted how ICTs have helped in formalising small firms, through better traceability of informal activities, productivity enhancement due to digital applications, or better access to financial instruments for small firms or the self-employed due to financial technologies (fintech) (ILO, 2022[52]; Filipetto et al., 2022[53]). Fostering digital transformation in the region could therefore help in decreasing informality.

LAC economies are still profoundly unequal, although less so than in recent decades, due in part to high growth during the commodity price boom (Balakrishnan et al., 2021[54]). Measures of inequalities in household disposable income, such as the Gini index, show little variation since 2017, after significant declines since the start of the 2000s (Figure 1.16). In 2022, the Gini coefficient in LAC was 0.45. Countries with the highest Gini coefficients (indicating greater inequality) were Brazil and Colombia, above 0.50. The lowest Gini coefficients were registered in Argentina, the Dominican Republic and Uruguay, with indices between 0.38 and 0.40. At the global level, the region exhibited higher relative inequalities around 2015 than Africa (0.42), Asia (0.36) and Europe (0.31) (World Bank, 2024[55]).

The structural decrease in inequality in the region over the last two decades was primarily driven by a significant decrease in unequal income outcomes in selected countries where inequality was particularly high. For instance, income inequality as expressed by the Gini coefficient was extremely high in the early 2000s in Bolivia (0.61), the Dominican Republic (0.50) and El Salvador (0.51). By 2022 the coefficient had shrunk respectively to 0.42, 0.38 and 0.40. This positive trend was partly linked to the commodity boom experienced in those countries (Balakrishnan et al., 2021[54]). However, inequality has been more persistent in some LAC countries, remaining above the LAC average in both 2002 and 2022. This was the case in Brazil (0.57 in 2002 and 0.51 in 2022), Panama (0.57 and 0.50) and Paraguay (0.58 and 0.47).

Informal work is a main driver of wage inequality. On average during the 2020s, formal employees in LAC earned an hourly wage two times larger than the wage earned by informal employees, contributing to the high dispersion of market labour income. The ratio is larger than the average in El Salvador (4.4 times), Honduras (2.5) and Peru (2.4). It is considerably smaller in Barbados (1.7), Chile (1.3), and Brazil and Colombia (1.6).

Enhancing social inclusion in LAC requires not just strengthened financing but also better policy design of social protection systems. In a context of limited resources, it is crucial to support the design of social protection policies that are both effective and efficient. This section focuses on the design of retirement pensions, health insurance, unemployment benefits and active labour market policies in LAC. It begins with a description of social spending levels in the region and an examination of the differences between contributory and non-contributory social protection systems.

In 2022, central government social spending relative to GDP in Latin America decreased for a second straight year, following substantial growth in 2020 with the emergency response to the COVID-19 pandemic (Chapter 2). In 2022, central government social spending stood at 11.5% of GDP, 2.2 percentage points lower than in 2020, yet slightly higher than the 2019 level (0.3 percentage points) (ECLAC, 2023[56]). Using the OECD Social Expenditure Database (SOCX), a classification of social expenditures, LAC countries for which data are available spent 12.6% of GDP on social protection on average in 2018, compared to 19.7% of GDP across the OECD (ECLAC, 2023[57]; OECD, 2023[58]). The efficient use of public resources is essential to promote citizens’ well-being while minimising the recourse to direct taxation of workers (see Chapter 2) (Nuñez and Lasso, 2023[59]; Izquierdo, Pessino and Vuletin, 2018[60]; AFD, 2024[61]; OECD et al., 2019[1]; Cecchini, 2020[62]).

The main components of social protection systems can be classified into two major areas: i) contributory social protection, traditionally known as “social security” or “social insurance”; and ii) non-contributory social protection, or “social assistance”. Contributory social protection aims to provide workers and their dependents with adequate insurance to protect them throughout important life events that impact their material means, such as retirement, unemployment, illness, disability and parenthood. Access to contributory social protection requires paying social security contributions, which are deducted from wages or other labour income generated in the labour market. Non-contributory social protection consists of transfers, subsidies and public services targeting the most vulnerable people and households, such as those living in poverty (either monetary or multi-dimensional). Those benefits are generally not funded by social security contributions but rather through the general budget, using resources from direct or indirect taxation (Cecchini, 2020[62]; ILO, 2021[63]; OECD, 2019[64]). Although basic social protection for both informal and formal workers would require additional fiscal revenues, it should be put in place. The incentives for formal job creation would be strengthened if such basic social protection was financed through general tax revenues instead of social security contributions, which tend to increase the cost of formalisation. Linking benefits and providing social protection rights may also make formal employment more attractive to workers (Arnold et al., 2024[65]).

An effective mix of well-targeted public finance programmes to increase the coverage of social protection schemes, along with well-designed and implemented policy interventions in LAC labour markets, can foster social inclusion and tackle current gaps in the protection of vulnerable groups that are closely linked with informal jobs. In this context, designing a single affiliation system for the different social security systems, including health and pensions, should contribute to enhancing social inclusion through job formalisation (OECD, 2024[66]).

While most pension systems like minimum contributory pensions fall under the contributory component of social protection systems, some programmes, such as social non-contributory pensions, are cash transfer programmes (Arenas De Mesa, 2019[67]; Arenas de Mesa, Robles and Vila, 2024[68]; OECD, 2024[66]; Arenas De Mesa and Robles, 2024[69]). The purpose of these non-contributory pensions is to even out consumption over the life cycle, to provide income following invalidity or the death of a breadwinner, and to alleviate poverty in old age.

Pension systems can be categorised according to the financial management of the resources, the rules on the granting of benefits and the distribution mechanism (Cecchini, 2020[62]; Uthoff, 2016[70]). The main differences concern financial management modalities. Pension systems can be categorised as i) pay-as-you-go (PAYG) systems, in which the economically active contribute to the system to pay for the pensions of those who have already retired; or ii) funded systems, where pension contributions are deposited in an investment savings account established for each affiliated worker for their personal use upon retirement.

Pension systems in LAC have undergone major structural reforms since the 1980s. This has generally consisted of transforming the institutional design of PAYG systems through the introduction of fully funded schemes. In general, structural reforms resulted in lengthy transition periods during which at least two pension systems, the old and the new, coexisted, like in the case of the Chilean reform of 1981. Since then, nine LAC countries (Argentina, Bolivia, Costa Rica, the Dominican Republic, El Salvador, Mexico, Panama, Peru and Uruguay) have added a fully funded regime to their systems, either to be as the main pillar or to complement the traditional PAYG system (ECLAC, 2018[71]; Cecchini, 2020[62]; OECD, 2023[72]). Colombia has recently passed new legislation, aiming at increasing coverage, by means of targeted subsidies to workers not reaching the minimum contributory time requirements, especially women (Ministerio del Trabajo, 2024[73]).

LAC countries have also undertaken parametric reforms aimed at changing the framework of PAYG systems, even if these reforms have also been applied to fully funded systems. Between 2008 and 2017, 11 Latin American countries – Brazil, Costa Rica, Cuba, Ecuador, Guatemala, Haiti, Honduras, Nicaragua, Paraguay, Uruguay, and Venezuela – adjusted their public PAYG systems, while 4 countries – Colombia, Chile, El Salvador and Peru – adjusted their fully funded systems (ECLAC, 2018[71]).

In this context, exclusively fully funded pension systems have started to attract criticism in the region. Economists argue that concentrating the efforts of the pension system exclusively on individual capacity to save seems not feasible, especially in the context of long-lasting labour informality (Arnold et al., 2024[65]; Uthoff, 2016[70]; Sojo, 2017[74]). Contributions to the region’s pension systems dropped during the pandemic. Only 44.3% of the economically active population contributed in 2020, with a slight recovery in 2021 (45.7%), and coverage of the active population in 2021 was particularly low for those living in low-income families (7.1%) and in rural areas (21.8%) and for young people aged 15 to 19 (16%) (Robles and Holz, 2024[75]; Arenas de Mesa, Robles and Vila, 2024[68]; Arenas De Mesa and Robles, 2024[69]).

The high level of informality in the LAC labour market, the large proportion of unstable jobs in the formal sector with low contribution capacity and the rise of other non-standard jobs, like those linked to digital platforms, pose challenges in terms of boosting the low coverage rate of the region’s pension systems, especially in fully funded systems (Robles and Holz, 2024[75]; ECLAC, 2018[71]). Current systems have already switched to a mix in which non-contributory social pensions complement the contributory system: the coverage of non-contributory pension systems for persons 65 years or over rose from 3.4% in 2000 to 26.7% in 2021 (ECLAC, 2018[71]; Robles and Holz, 2024[75]). Various studies have focused on the effects of non-contributory pensions on poverty reduction and inequality in LAC countries. Results are mixed, but some statistical evidence supports the hypothesis that poverty and extreme poverty are mitigated for people receiving social pensions without posing risks to financial sustainability (Arenas de Mesa, Robles and Vila, 2024[68]; Arenas De Mesa and Robles, 2024[69]).3

LAC also presents large gaps in terms of access to healthcare, with the region facing the challenge of moving towards more comprehensive care systems and policies (OECD, 2023[76]). Nonetheless, total spending on health has been increasing. From 2010 to 2017, the average annual growth rate in real per capita health expenditures was above 3% for most countries in the region (Rao et al., 2022[77]).

Public spending on health varies greatly across LAC. Government health expenditure stands at around 5% of GDP for countries like Argentina, Costa Rica, Nicaragua, Suriname, and Uruguay but is around 3% of GDP for others like Colombia, Grenada, Guatemala, Honduras, Mexico and Venezuela. This compares to health expenditure levels in OECD countries of 8-11% of GDP. Individuals and households still finance a large proportion of total health spending. Average out-of-pocket expenditure in the region reached 30.3% of total health spending around 2020, equivalent to 2.2% of regional GDP, with the figure exceeding 30% in 14 of 33 LAC countries (Robles and Holz, 2024[75]). High out-of-pocket spending shows that access to universal healthcare is still unavailable for a significant portion of people in the region at a time when the risks of disease and natural disasters are impacting health expenditures, as shown by new epidemiological threats like the COVID-19 crisis (Marinho, Dahuabe and Arenas de Mesa, 2023[78]).

Nonetheless, health systems are highly integrated with other social protection programmes in the region, and overall social protection contributes significantly to improving the right to health thanks to programmes such as paid leave, cash transfer programmes, labour inclusion programmes, care systems and access to basic services. These support mechanisms contribute positively to people’s health status and the reduction of health inequalities throughout the life cycle, while also lessening the financial burden for households and governments (Hone, 2018[79]). This approach, known as primary health care (PHC), is considered a priority area in LAC (ECLAC, 2022[80]; WHO and UNICEF, 2018[81]). PHC plays a strategic role in co‑ordinating health systems with social protection and promoting the changes required by health systems to move towards universality. By strengthening PHC, it is possible to address the fragmentation of health services and the segmentation of the demand for care based on people’s ability to pay.

Unemployment benefits are another fundamental aspect of social protection, as their primary goal is to secure the income conditions of persons who, though capable and willing to work, cannot find a job (Isgut and Weller, 2016[82]; ILO, 2021[83]; ILO, 2021[63]). Unemployment benefits are provided through contributory systems, with social security contributions paid by workers and/or employers (unemployment insurance), or through monetary transfers funded by the public budget (unemployment assistance) (ECLAC, 2023[56]).

Unemployment benefits are currently insufficient in LAC: only ten of the region’s countries have unemployment insurance. This low coverage is explained by the structure of the region’s labour markets, with high informality and few self-employed workers having the ability to pay voluntary contributions (Weller, 2023[84]). Countries had to adjust their social protection policies and programmes during the COVID-19 pandemic to provide adequate support for the unemployed (ECLAC, 2022[80]; Velásquez, 2021[85]; Velásquez Pinto, 2003[86]). The modifications involved lowering the minimum required contributions to access entitlements, extensions of coverage to other groups or for partial unemployment, extensions of the duration of the measures and an increase in amounts. Despite these efforts, unemployment benefits covered just 12.5% of the region’s total unemployed population in 2021, with high heterogeneity across countries. Coverage did not exceed 10% of unemployed workers in Argentina, Ecuador and Venezuela, while countries with higher coverage than the rest of the region included Barbados (88.0%), Uruguay (31.4%), the Bahamas (26.9%) and Chile (24.3%) (Robles and Holz, 2024[75]). Adapting unemployment benefits to the characteristics of the labour market and linking them to active labour market programmes are key to promoting workers’ reinsertion while protecting the most vulnerable groups without disincentivising job formalisation.

Finally, active labour market policies (ALMPs) are policy actions designed to foster employment opportunities, improve job quality in terms of formality and upgrade workers’ skills and competencies (Espejo et al., 2023[87]; ECLAC, 2023[56]). As key elements in the implementation of social assistance programmes, well-designed ALMPs can help to narrow social disparities. The number of these programmes increased in 22 LAC countries from 70 in 2010 to 121 in 2019 (ECLAC, 2023[56]).

ALMPs in the region are targeted to different stages of people’s lives, particularly to the unemployed and workers in informal employment. In 2022, 31 of the region’s 120 programmes targeted the inclusion of young people in the labour market, but further efforts are needed given the significant gaps that youth face in labour market access. Other programmes meet the needs of vulnerable groups that face multiple barriers in LAC labour markets, like people with disabilities, women, and ethnic minorities such as indigenous peoples and Afro-descendants (ECLAC, 2023[56]). These programmes should be expanded, both in numbers and in scope, to break down barriers to entry and ensure the labour inclusion of vulnerable groups that experience multiple forms of inequality, discrimination, and exclusion (Espejo et al., 2023[87]).

Common types of initiatives in the LAC region include technical training and support for self-employment, which is particularly important in tackling informality given that own-account workers are overrepresented among informal workers. In 2022, 79 labour inclusion programmes provided technical and vocational training; 48 supported self-employment; 21 were indirect job creation schemes; 10 involved adult education and initiatives to encourage students to remain in school; and 9 were direct job creation initiatives. The focus of labour inclusion programmes varies depending on the targeted age group, as inclusion needs vary along the life cycle (Espejo et al., 2023[87]). Overall, the data suggest that technical and professional training are fundamental for youth and adults. Anticipating market demand for future skills is also key for designing effective labour market policies (ECLAC, 2023[56]; OECD et al., 2023[7]). ALMPs targeting the most vulnerable populations should promote both social inclusion and the efficient use of financial resources. One of the main challenges of the region is to systematically design impact evaluation studies. Existent empirical evidence suggests that training programmes generally have a positive impact on increasing the employment chances of beneficiaries and that they are effective in increasing the probability of having a formal job (Escudero et al., 2019[88]). The few available studies are less conclusive with respect to the countercyclical role of public works programmes, while wage subsidies generally boost employment probabilities, particularly when they are targeted directly at individuals (ILO, 2016[89]).

The rich diversity and abundant natural resources of LAC are juxtaposed against a backdrop of persistent inequalities, vulnerability to climate change and recent socio-economic upheavals. Structural social, economic and environmental challenges in the region call for strategic policy actions that put better and higher levels of investment at the centre (OECD et al., 2023[7]).

Well-sequenced and co‑ordinated policy planning is essential in this landscape as development challenges are multi-dimensional and not easy to grasp. These challenges are deeply interconnected, requiring strategies that transcend sectoral boundaries and that leverage synergies between different development objectives (OECD, 2021[90]). Multi-dimensional measures of development offer a useful framework for designing policy strategies to address deeply interconnected problems. The multi-dimensional framework of the SDGs is perhaps the most important reference for quantifying progress towards multiple development goals and therefore useful for understanding the costs of this challenge (UNCTAD, 2023[91]). Ongoing discussions about a post-2030 agenda acknowledge the need for continued efforts to achieve sustainable development (UofT and UCL, 2024[92]; Partners for Impact, 2024[93]). The OECD’s multi-dimensional well-being measurement framework also offers useful indicators for understanding progress in development and the challenges ahead (OECD, 2021[90]).

Evaluations show that the progress made to date on the SDGs in LAC is insufficient for achieving most targets by 2030. Although 73% of measurable indicators, representing 72% of the targets outlined in the 2030 Agenda, indicate progress in the intended direction, 41% of these indicators (equivalent to 47% of the targets) require intensified efforts to expedite progress. This acceleration is necessary to ensure that the benchmarks set for 2030 are met within the coming seven years (ECLAC, 2024[45]). According to available data, only 25% of the SDG targets look likely to be achieved by 2030 (Figure 1.17). There is slow progress on around 48% of the targets, while the remaining 27% are regressing (ECLAC, 2022[80]).

The OECD's framework for measuring multi-dimensional well-being provides a complementary analytical tool for understanding the status and main challenges in advancing towards greater well-being for citizens (OECD, 2020[94]). Looking beyond averages reveals wide variations between and within countries. The two decades prior to the pandemic saw considerable gains in average well-being in the region, but the pace of progress has slowed since the mid-2010s, and structural problems such as informality and inequalities persisted through 2019 (OECD, 2021[90]). Furthermore, many of the resources that underpin the sustainability of well-being – natural, human, social and economic capital resources – are under threat or in decline. Adopting a policy approach focused on well-being4 would help LAC countries to address their highly interconnected societal challenges more effectively.

The financing gap refers to the difference between the current levels of investment in sustainable development and the amount needed to achieve the SDGs by 2030. Measuring the financing gap for sustainable development in LAC is a key task that demands collective efforts across governments and multilateral institutions. Understanding the magnitude of the gap is essential for planning effective development initiatives. Despite the inherent challenges in quantifying such a complex gap, efforts have been made to estimate the resources required to meet global economic, social and environmental objectives (Box 1.2).

The magnitude of the LAC region’s challenges calls for substantially mobilising resources, far exceeding what public finance alone can provide, and for using those resources effectively. This underscores the urgent need for a collaborative effort that brings together government, the private sector, civil society and international partners to pool resources and expertise coherently and strategically. By fostering an environment that encourages private investment, and by developing innovative and efficient financing mechanisms and strengthening international co‑operation, the region can mobilise the resources needed to achieve its development goals (Chapters 3 and 4). The path to a sustainable and resilient future for the LAC region lies in harnessing the power of collaborative financing, driving innovation, and ensuring that development efforts benefit all segments of society (OECD, 2022[103]).

The region can navigate its path towards sustainable growth and resilience by formulating a clear roadmap for development. Amid pressing development challenges and constrained fiscal capacities, the region requires a comprehensive development strategy with a delineated financing agenda at its core. Strategic policy actions to address the region's disparities and mobilise resources effectively require the identification of innovative financing mechanisms and the alignment of public and private investments with development goals (United Nations, 2024[104]).

National Development Plans (NDPs) are crucial in shaping coherent strategies – owned by the partner country governments – for the public and private sectors to mobilise resources towards achieving major development goals. This is particularly important for optimising resources in the region’s tight fiscal landscape. For the public sector, NDPs serve as guiding frameworks, and even in some cases compulsory frameworks, that outline public investments and ensure efficient allocation of resources. For the private sector, NDPs provide direction on national strategies, enabling investors to channel resources into sectors vital for development (OECD et al., 2019[1]). By aligning public and private interests, NDPs foster synergy in resource mobilisation efforts, facilitating sustainable economic growth and social progress.

Sectoral plans should be aligned with NDPs to co‑ordinate the implementation of multifaceted policy strategies, such as the “triple transition” encompassing the green, social and digital transitions. For instance, Colombia’s National Strategy for Energy, Connectivity and Educational Communities provides a co‑ordinated sectoral roadmap for parallel programmes that aim to provide green energy to schools and also digital infrastructure to guarantee Internet access in remote areas. Furthermore, productive development policies play a vital role, as they allow countries to focus on transforming sectors prioritised for sustainable growth (ECLAC, 2024[105]). These policies are essential for targeting efforts where they can have the greatest impact, fostering industrial diversification and enhancing competitiveness in selected sectors. By aligning financing with productive development goals, NDPs ensure that resources are channelled into sectors that offer high potential for economic and social returns, further driving the region’s structural transformation.

Effective NDPs also establish the necessary conditions for collaboration between the public and private spheres, ultimately driving investment towards priority areas and fostering inclusive development. At only 20% of GDP, the LAC region exhibits one of the lowest levels of total investment across all regions globally (OECD et al., 2023[7]).

Public financing is crucial for tackling social challenges that are paramount to the region’s sustainable development but that might not immediately attract private investment (Chapter 2). These include social programmes aimed at poverty reduction, educational equity, social protection, and universal access to health care – areas where the benefits are widely distributed across society and where the direct payback to private investors is more difficult to determine (Figure 1.18).

Likewise, certain environmental conservation areas require public investment due to their lack of profitability for the private sector. At a time when LAC is grappling with significant inequality and vulnerability to climate change, the region requires substantial investment in infrastructure resilient to environmental impacts and in social programmes that can bridge the inequality gap (Chapter 2). Public investment in renewable energy projects and the preservation of biodiversity hotspots, such as the Amazon rainforest, are critical for the region's sustainability goals and need to be supported by government-led financing and international aid (OECD et al., 2022[10]). Ensuring transparency and efficiency in public expenditure is vital for maximising the impact of these investments, as it builds public trust and ensures that resources are used effectively (IMF, 2019[107]).

Public funding is insufficient to finance all of the region’s development needs (see above on fiscal policy and Chapter 2). Governments in LAC are grappling with fiscal constraints that have been exacerbated by the economic fallout of the COVID-19 pandemic, limiting their ability to invest in health, education, climate, environment and social protection at the levels required (Bierbaum and Schmitt, 2022[108]; OECD et al., 2021[109]). This fiscal reality accentuates the critical role of the private sector in filling the financing gap. While the private sector remains the main driver of investment in LAC, its 78% share in total investment in the region is below the OECD average of close to 84% (Figure 1.19) (OECD et al., 2023[7]).

Developing financing models involving the private sector, such as public-private partnerships (PPPs), can facilitate the infusion of private capital into crucial sectors, bringing efficiency, scalability, and innovation to development projects (IDB, 2021[111]). Some LAC countries have made strong improvements in the regulatory and institutional frameworks of PPPs, but significant regional disparities persist in project preparation and sustainability. Weak state institutions, unclear legislation and deficient contract design have allowed anomalies such as the frequent and costly renegotiation of road concessions (Bitran, Nieto-Parra and Robledo, 2013[112]). Specifically, substantial gaps exist in the management of PPPs, with improvements needed in risk management, project monitoring and assessment of the economic and social impacts of operational PPPs (OECD et al., 2023[7]; Economist Impact, 2022[113]).

Public financing in LAC often focuses on critical infrastructure investments, such as roads, highlighting the strategic emphasis placed by governments on essential physical networks (Figure 1.20). Private financing fuels economic growth through investments in sectors where commercial viability is clear and market-driven solutions can thrive, and it is thus pivotal in the region (Chapter 3). This includes industries such as technology, telecommunications, and transport connectivity, as well as certain infrastructure projects that can generate both direct economic returns and social benefits (OECD et al., 2020[114]; OECD et al., 2023[7]). As a dynamic growth sector, the telecommunications subsector in particular tends to attract private financing. Such digital investments are crucial for boosting connectivity and also enhance the green and social transitions.

Mobilising private sector resources entails more than just filling financing gaps: it represents an opportunity to support productive development policies by fostering economic transformation in priority sectors (Chapter 3). The private sector's involvement can introduce new technologies and business models that enhance productivity and competitiveness while addressing critical social and environmental issues. By encouraging investments aligned with productive development strategies, the private sector can drive sustainable growth while also supporting countries’ development agendas (ECLAC, 2024[105]). Such targeted investments enable structural changes that boost competitiveness and promote high-impact industries, which are crucial for the region’s resilience and long-term growth. For example, investments in renewable energy and sustainable agriculture can contribute to climate change mitigation and adaptation efforts, creating jobs and fostering economic resilience (OECD et al., 2022[10]). Furthermore, business opportunities that are aligned with environmental objectives and new regulations are growing, becoming increasingly attractive to the private sector. The region’s growing tech startup ecosystem, for example, demonstrates how private capital can drive innovation in digital banking, e-commerce and fintech solutions, addressing both economic and access-related challenges (Chapter 3).

Investment in research and development (R&D) is a transformative sector that offers attractive opportunities and incentives for private investment. Unlike other sectors that rely heavily on public financing due to limited commercial appeal, R&D stands out as a dynamic area that can appeal to private capital, particularly when bolstered by incentives such as tax breaks and intellectual property rights (ECLAC, 2022[116]). Investment in R&D drives innovation and competitiveness, which are crucial for addressing regional challenges like economic stagnation and social inequality. By strategically enhancing R&D, private investment not only fosters technological advancements and high-skilled employment but also contributes significantly to sustainable economic growth (ECLAC, 2022[116]). Compared to other regions and countries, such as the European Union, OECD countries, China or the United States, 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 (Figure 1.21).

Creating an enabling environment for private investment involves addressing structural challenges that can deter investors, such as political instability, regulatory uncertainty, and inadequate infrastructure. Unlocking private investment requires the creation of a conducive environment that mitigates risks and offers attractive returns while aligning with the SDGs (Chapter 3). The social contract plays a foundational role in this process by fostering inclusive, participatory governance that builds trust, strengthens fiscal systems, and aligns diverse stakeholders’ interests with long-term, sustainable policy goals (OECD et al., 2021[109]). Strengthening legal and institutional frameworks and improving transparency and governance are crucial steps towards building investor confidence (OECD, 2015[119]). This implies a regulatory and policy framework that incentivises sustainable investments (e.g. taxonomies, disclosures), risk-sharing mechanisms and clear guidelines on sustainable practices (OECD et al., 2023[7]).

The LAC region faces significant challenges due to institutional and regulatory complexity, both internally and across different jurisdictions. This complexity includes issues such as unequal treatment of investors, inconsistent due diligence practices and regulatory requirements that vary between jurisdictions (OECD et al., 2023[7]). By fostering regulatory systems’ interoperability and integrating sustainable development taxonomies, the LAC region could enhance investment quality, mitigate risks for private companies and create a coherent and supportive business environment, thus contributing to attracting domestic and international investors. Moreover, building trust and dialogue among the public sector, private investors and communities is vital not only for strengthening the social contract but also for ensuring that projects are aligned with local needs and development priorities. Financial innovations such as green, social, sustainability and sustainability-linked bonds, impact investing and blended finance instruments can offer viable pathways for channelling private funds into sustainable development projects (Chapter 4).

International co‑operation and partnerships play a pivotal role in amplifying the impact of development financing. Multilateral development banks, international financial institutions and bilateral donors can provide not just financial resources but also valuable technical expertise, capacity building and policy support (OECD et al., 2019[1]). For instance, the GEMMES Colombia model offers scenarios for financing the trajectory of Nationally Determined Contributions (NDCs), aiding decision-makers in shaping political strategies to combat global warming (AFD, 2024[61]). This external support is crucial for leveraging additional resources, sharing risk and ensuring the sustainability of investments. Furthermore, international partnerships can facilitate access to global markets, technologies and best practices, enhancing the region's ability to address its development challenges more effectively (United Nations, 2024[104]).

In order to move forward successfully with financing for sustainable development, the LAC region must continue to get the macroeconomic policy mix right. Efforts to maintain or strengthen credibility in monetary authorities are essential to anchor inflation expectations and avert the financial risks derived from higher international interest rates, which could stimulate capital flight. Similarly, efforts to increase fiscal space should be continued. Although debt stocks are being reduced, they should continue to be monitored, and credible fiscal frameworks should be maintained or strengthened as they are essential for fiscal sustainability and to promote investments.

Moving forward, the region must address its long-term development challenges. Well-designed development strategies should be implemented by LAC countries through national development plans, in the form of multi-annual investment plans. Reshaping economic institutions – such as property rights protection, rule of law, contract enforcement, state capacity and regulatory frameworks – will help firms with the allocation of resources and innovation, which are key to increasing productivity and boosting sustainable growth. Building systems that facilitate financing is vital for firms to expand, export and survive adverse economic shocks. Removing the barriers that inhibit well-functioning financial systems is equally crucial. Easing access to credit will help individuals in their occupational choices, especially talented entrepreneurs pursuing high-potential projects.

Building more resilient societies will be key for a more inclusive development model. A good mix of structural policy reforms and well-designed social protection schemes will be essential to tackle persistent labour informality, poverty and socio-economic inequalities. In a context of limited financial resources, support for the design of effective and efficient policies is crucial. For example, policy interventions on social protection systems should aim for greater universality while recognising that the way in which contributory pension and health schemes are financed is fundamental to promoting job formalisation. In addition, well-targeted non-contributory social protection schemes, such as conditional cash transfers, could provide better protection to the most vulnerable groups.

Interconnected challenges must be addressed by well-sequenced, co‑ordinated, and effective policy planning. The region should increase public investment in resolving social challenges, building resilient infrastructure and upgrading essential services, while at the same time enhancing transparency and efficiency in spending. Encouraging a stable regulatory environment will attract private investment, supported by sound institutional frameworks on public-private partnerships and other types of investments. This is fundamental given the relatively low participation of the LAC private sector, particularly in research and development.

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