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It's no secret to anyone: talking about energy or digital transformation without signed budgets is nothing more than a handful of good intentions. Smoke. Latin America knows the situation very well. This region is the most biodiverse in the world, one of the lowest-emitting regions, but also one of the regions most affected by climate change and where the inequality gap is widest. Resources to adapt to the devastating effects of warming are as urgent as they are scarce. Over the last two decades, around 0.65% of the average regional gross domestic product (GDP) has been invested in development and research. This is a significantly lower percentage than the 2.7% of Organization for Economic Co-operation and Development (OECD) countries. According to the report “Latin America: Economic Prospects 2023 on Investment in Sustainable Development,” presented Friday in Santiago, Chile, 60% of these investments are managed by governments. This is also a big difference compared to developed countries, where the largest share of this investment comes from the private sector.
“The companies that usually invest in research and development are large companies, and in Latin America small companies predominate,” explains Adriana Arreaza, vice president of knowledge at the CAF Development Bank for Latin America and the Caribbean. “And small businesses are often informal, have little human capital and little access to credit markets, which discourages them from investing in research and development.”
The study was carried out with the participation of four international organizations with a large presence in the region: the OECD, the Economic Commission for Latin America and the Caribbean (ECLAC), the European Commission and CAF. For the experts at these companies, the horizon is clear. The region should focus on strengthening and improving investments in four key areas: digital transformation, health and care, agriculture and food systems, and the green transition.
According to comments José Manuel Salazar-Xirinachs, Executive Secretary of ECLAC, said: “Digital transformation can help improve the region’s productivity and competitiveness, in addition to being a way to benefit from technological progress.” can help increase resilience and To increase preparation for future health crises.” Regarding the care economy, he explains that it is a sector that needs to be strengthened not only for the care of children, but also for older adults, as almost 150 million people are expected to be there by 2050 will live. Regarding agriculture, he assures that it will be a key sector because “Latin America and the Caribbean have the largest land reserves in the world with agricultural potential.”
Finally, as for the transition to a green economy, the report points out that it represents a great opportunity to reduce the very high level of informality in the region, which will reach 48.7% by 2022. This transition refers to the shift from the use of hydrocarbons to renewable energy and environmental protection measures and, according to multilateral organizations, requires qualified personnel with advanced scientific knowledge and skills, which could increase formalization. However, for the same two reasons, green jobs are more likely to ultimately go to men with higher education. Therefore, this change must be combined with “measures to improve women’s employability”. In other words, the challenge now is to include women in this transition.
At this point, Arreaza adds, the care economy plays a role again. “Providing care services gives women more time to enter the workforce,” she says. “If the care [ya sea de niños o niñas, o de adultos mayores]“It’s not just up to women, daughters or mothers; they will be able to participate more in the opportunities that the green market brings.”
Foreign investment remains crucial for the region
The detailed report provides a valuable economic assessment of the various types of investments in the region, highlighting the pain points and strategies that work. Foreign investment is one of the most celebrated aspects. For example, in 2022, Latin America and the Caribbean was the region of the world that recorded the largest inflows of foreign direct investment, accounting for 4% of the region's GDP in the same year. “In 2022, inflows of this type of foreign investment increased by 55%, reaching almost $225 billion, the highest level in three decades,” says Salazar-Xirinachs. This increase was due in particular to investments in services, hydrocarbons and manufacturing.
Likewise, CAF's Arreaza confirms that, as part of the research, they “found that foreign direct investments and foreign companies have higher productivity than domestic companies in all countries in the region.” In this sense, foreign investments can have a directional effect for the rest of the productive apparatus have” when it comes to providing guidance on where to invest.
The analysis also reveals other interesting data. For example, over the last decade, private financing focused on development in Latin America has increased from $3 billion in 2016 to $9 billion in 2021. “International partnerships can also help increase the socio-economic impact of investments by creating an investment-friendly environment; “Promoting collaboration between institutions and encouraging investment and the private sector,” the report said.
More than half of those listings in 2022 went to Brazil and Mexico, while Central America saw an 11.9% decline this year. By origin and project announcements, the European Union (EU) and the United States accounted for more than half of these funds in the region.
Two strategies to promote investment in innovation and development
Although foreign investment is crucial for Latin America and the Caribbean, the region cannot be satisfied with this. In order to achieve a more ambitious scenario, the authors of the report also assure that certain signals must be given at public level to chart a better path. “The transition to more effective and progressive tax systems, more efficient management of public spending and debt, and more robust and sustainable tax frameworks is essential to expand public investment in a context of limited fiscal space,” they say.
They then mention two strategies that can help improve the flow of public and private finance for development goals. The first is the role played by development finance institutions, as they can contribute to the financing of small and medium-sized enterprises, which on average have not been able to meet 75% of their financing needs. The second is to develop innovative financing instruments, such as “green, social, sustainable and sustainability-linked bonds”, as they currently represent 32% of total international bond issuance in Latin America.
“The areas for innovation are very diverse,” concludes Salazar-Xirinachs from ECLAC. “The interesting thing is to see how we manage to get the most out of the investments that can be made in each of these sectors by supporting production chains, the demand for new skills, the creation of new companies and the development of new financing opportunities.” Investment instruments. Participation”.