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Latin America and the Caribbean have unique assets: the region is home to almost 50% of the world's biodiversity, a third of its energy matrix comes from renewable sources and has significant reserves of raw materials crucial to the energy transition. Its geographical location, cultural strength and young population represent key assets for better integration into global value chains.
However, the Covid-19 pandemic and a complex global context as well as the structural challenges ahead have slowed social and economic progress in recent years. Inequalities are profound: in almost 45% of households, all members work informally and 29% of the population live below the poverty line.
In the sixteenth edition of the Latin American Economic Outlook (LEO) 2023: Investing for Sustainable Development, we propose that the region adopt an ambitious investment agenda to promote inclusive and sustainable development.
The challenge is significant as investment in the region accounts for about 20% of GDP, one of the lowest levels of any region in the world. To achieve this, it is necessary to work on five lines of action:
1. Promote and encourage investments in strategic sectors aligned with productive development policies
A massive increase in investment is key to creating jobs and creating local value in emerging sectors. The green transition in areas such as sustainable transport and circular economy; digital transformation; health and care industry; and sustainable agricultural and food systems, among others, represent areas that countries and their territories could prioritize as part of their productive development policies.
To harness this potential, investments in infrastructure in the areas of energy, water, transport and telecommunications are essential. Investment in research and development barely reaches 0.65% of GDP in the region (2.7% in the OECD). It is therefore essential to significantly increase these investments as well as investments in education, particularly in training the skills required for the new economy.
2. Leverage foreign investment to promote innovation and quality jobs
In 2022, Latin America and the Caribbean was the region with the largest relative inflows of foreign direct investment (FDI), accounting for 4% of regional GDP. To increase the quality and impact of these investments, it is important that foreign direct investments promote greater knowledge and technology transfer into the production structure and focus on renewable energy sectors and activities that create formal jobs for the population. It is also important to ensure that the profits from these investments are taxed in the jurisdictions in which the value creation occurs.
3. Strengthening the fiscal framework and new financial instruments to invest more and better
Financing development involves implementing tax reforms that promote fairer, more efficient tax and spending systems that support entrepreneurship. In Latin America and the Caribbean, the region's tax-to-GDP ratio is below 22%, while the OECD average is 34% and the EU average is 40%. In particular, access to finance for MSMEs needs to be strengthened. It will also be crucial to promote innovative financial instruments such as green, social, sustainable and sustainability-related bonds.
4. Towards stronger institutions to connect the investment agenda with social priorities
Mobilizing large investments will not be enough to drive development. Robust public institutions are needed to ensure that investments are consistent with the region's social and productive priorities. Establishing dialogue mechanisms with socio-economic actors will be crucial to forge a new social contract that promotes the creation of quality jobs and the transition to a green and fair economy. In addition, reducing inequalities will help increase demand and increase shared well-being, creating a more attractive environment for investment.
5. Collaborate through strengthened international alliances
An investment agenda of this magnitude cannot be tackled in isolation. It is necessary to build new international alliances and innovative forms of cooperation between the countries of the region and the rest of the world. There are close political, economic and cultural ties between the European Union (EU) and Latin America and the Caribbean. The two regions together represent 21% of global gross domestic product, 14% of the world's population and a third of the United Nations membership. The EU is one of the leading trade and investment partners in the region and wants to deepen these relationships. In this sense, the European Union's Global Gateway Initiative, with its EU-Latin America and Caribbean Investment Agenda of €45 billion to 2027, presented at the July 2023 Summit, represents an innovative step to engage with and achieve the region of the goal Sustainable Development Goals.
Our institutions stand ready to cooperate and support the efforts of countries in the region.
Josep Borrell He is High Representative of the Union for Foreign Affairs and Security Policy and Vice President of the European Commission. Mathias Cormann He is Secretary General of the OECD, Sergio Diaz Granados He is Executive President of the CAF Development Bank for Latin America and the Caribbean José Manuel Salazar-Xirinachs He is managing director of ECLAC.