Jorge Arbache
Vice-Presidente do Setor Privado, CAF –banco de desenvolvimento da América Latina-
Predictions about the economic future of Latin America and the Caribbean (LAC) invariably have a bitter taste. Reasons for pessimism include low productivity, low participation in global value chains, low investment in science and technology, human capital deficiencies, regulatory and institutional deficiencies, high informality, challenging fiscal management, financing limitations, savings and investment, crime, among other known issues.
However, it is also important to consider the half-full glass. And there are plenty of reasons for optimism. For instance, consider a couple of themes. The first is demography. The region's population is still relatively young, and the peak population is expected to occur in four to five decades, potentially significant implications for investment, consumption, and competitiveness. The second theme is productivity. Yes, the region's productivity is structurally low, but the "low-hanging fruits" space to increase it is enormous. Targeted and inexpensive interventions can have disproportionately high and rapid economic impacts.
Now, consider the economic policy. Like other regions, Latin America and the Caribbean (LAC) were also exposed to the disruption of global value chains during the pandemic years. However, prudent monetary management led to exemplary inflation control, with substantially lower and less persistent rates compared to advanced countries. Additionally, there's something virtuous in the region's prudent macroeconomic management, which has largely been maintained even amidst political orientation changes in governments.
But the region's attractions go beyond. Unlike any other, it has enormous potential to become a major driver of solutions for decarbonization and food scarcity. Unlike in advanced countries, the sustainability agenda is not a wedge dividing political debate. On the contrary, it is a point of convergence in public policy formulation, which has helped to expand and accelerate these agendas.
The growing global need to accelerate decarbonization creates a significant sphere of influence for the region. Consider 'powershoring', the business strategy of geographically locating production associated with the availability of green, safe, affordable, and abundant energy. Indeed, the region has the cleanest electric grid in the world – Uruguay and Paraguay, for example, have almost 100% green electric matrices, and Brazil's is 85% green, while the global average is just a fraction of that, making the region attractive for energy-intensive industrial investments.
The region holds enormous potential for producing competitive green hydrogen (H2V), has vast reserves of many critical minerals for the new economy like lithium, copper, nickel, graphite, silicon, rare earths, high-grade iron ore, and others. It's rich in fresh water, diverse biomes and forests, has immense bioeconomy potential, abundant fertile lands still available, plenty of biomass, unparalleled potential for participating in and expanding the carbon market, and is a global leader in technologies, business models, and biofuel production. The region is also a natural candidate for participating in the geographical diversification of manufacturing production, associated with building resilience networks against extreme climate phenomena. It has been a target of nearshoring and friendshoring strategies, relocating industrial plants formerly located in Asia to Latin America to serve the United States and European markets.
With this unique set of attributes, the region can produce industrial goods with far fewer emissions than advanced countries and with unmatched time-to-market and cost structures. Agriculture, in turn, can significantly expand production while advancing in sustainable and regenerative technologies, use of degraded lands, and other environmentally friendly techniques. Powershoring is already attracting investments, including sectors like steel, green hydrogen (H2V), cement, paper and pulp, fertilizers, SAF, glass, ceramics, chemicals, and others that need to decarbonize to protect business competitiveness and meet environmental compliance.
And consider geopolitics. Unlike other regions, Latin America and the Caribbean are shielded from many of the most complex issues, providing space to explore trade and investment opportunities pragmatically. This issue is not minor, after all, geopolitics increasingly determines investment locations.
As the region presents itself to the world as a source of solutions for major issues, all this can lay the foundation for growth that is not only more sustainable but also more sustained. However, for the region to realize its full potential, it will need to focus on adding value, ensuring international markets function properly, and addressing unilateral protectionist measures, subsidies, the imposition of rules, standards, certifications, and other non-tariff barriers that neutralize the environmental comparative and competitive advantages of LAC.
According to IMF estimates, the region is expected to grow modestly in 2024, but at a rate much higher than advanced countries, and the gap with the average of emerging countries is narrowing. It would not be surprising, as has recently happened, for the growth recorded to be higher than expected. Despite the global decline in Foreign Direct Investment (FDI), the region's relative and absolute share of FDI has been increasing, rising from 9% of the total in 2021 to 16% in 2022, with projections indicating further increases. Even in a complex fiscal and international context, some countries in the region have experienced an improvement in risk indicators, and several of the world's largest fund managers are already increasing their exposure in LAC.
Despite the difficulties we face, there is evidence that LAC will be better off in the picture this year, and the winds of the future should continue to favor us. It's up to us – governments, the private sector, banks, and multilateral organizations – to do our part to help turn all that potential into reality.
