Latin America and the Caribbean Face Key Reforms to Boost Economic Growth Amid Global Shifts

The report asserts that to achieve sustainable growth, Latin American countries must focus on improving productivity, reducing socio-economic disparities, and maintaining fiscal stability.

Latin America and the Caribbean (LAC) have experienced a return to more stable economic growth since the COVID-19 pandemic, with the region’s economy growing by 2% in 2024, surpassing initial forecasts of 1.7%. The economic outlook for 2025 remains positive, with projected growth at 2.3%. However, the Inter-American Development Bank (IDB) warns that these growth rates are insufficient to address the region’s most urgent socioeconomic challenges, including poverty reduction and tackling inequality.

The IDB’s latest macroeconomic report, titled Regional Opportunities Amid Global Shifts, emphasizes the need for deeper structural reforms to fully capitalize on growth opportunities and guide the region toward sustained prosperity. The report asserts that to achieve sustainable growth, Latin American countries must focus on improving productivity, reducing socio-economic disparities, and maintaining fiscal stability.

The Growth Outlook and Economic Risks

While growth in LAC has returned to pre-pandemic levels, much work remains to be done. The region’s economic recovery has been commendable, but inflationary pressures, persistent poverty, and inequality continue to be major hurdles. Inflation, although reduced from its peak of 9.8% in mid-2022 to a median rate of 3.8% by the end of 2024, remains a concern, particularly in certain countries with robust economic activity that continues to fuel price increases. Policymakers face the complex challenge of balancing efforts to control inflation while supporting economic growth through favorable financial conditions.

Moreover, risks stemming from global trade fragmentation, financial market volatility, and the uncertainty of the global economy could undermine the region’s recovery. These external pressures highlight the importance of strengthening domestic economic policies, with an emphasis on fiscal prudence and the stabilization of external accounts.

Capitalizing on Growth Opportunities

Despite the challenges, the IDB report identifies several opportunities for Latin America and the Caribbean to stimulate economic growth. One of the most pressing opportunities is the strengthening of intraregional trade and investment. Currently, trade within the region accounts for only 15% of LAC’s total trade, a significantly lower share than other regions like Asia (55%) and Europe (68%). The report underscores the potential of increasing intraregional trade, which would not only boost productivity but also foster industrial diversification, a key factor for long-term growth.

The ongoing global realignment of supply chains presents a unique chance for Latin America to position itself as a more integral player in global value chains. To achieve this, regional economies must focus on enhancing their trade infrastructure and regulatory frameworks, which would increase their attractiveness to international investors.

Another vital area for growth is labor market formalization. A significant portion of the workforce in LAC remains informal, which undermines productivity, limits access to financing, and weakens fiscal resources. By formalizing labor markets, countries could increase government revenue, reduce inequality, and foster higher productivity. The IDB estimates that formalization could lead to a considerable increase in GDP, as workers and businesses would have better access to financial services, technology, and markets.

The Role of Fiscal Reform and Public Spending Efficiency

The report also highlights the importance of fiscal reforms to reduce public debt and create more sustainable fiscal policies. While many countries have made strides toward fiscal consolidation, the region's average public debt is projected to reach between 57% and 63% of GDP by 2027. The IDB recommends that countries aim to reduce their public debt ratios to a more prudent range of 46%-55% of GDP. Achieving this target would require addressing inefficiencies in public spending, particularly in areas like subsidies, procurement, and public sector salaries.

Over the past several years, inefficiencies in public spending across 15 countries in the region have slightly worsened, growing from 4.4% of GDP in 2015-2016 to 4.6% in 2022. These inefficiencies are largely driven by increased energy subsidy leakages, which have undermined fiscal resources. The IDB suggests that by reducing such inefficiencies, countries could unlock significant economic benefits, including an estimated 1.8 percentage point increase in GDP growth. Reforms in public spending would improve fiscal stability, reduce debt burdens, and foster a more sustainable growth trajectory.

Navigating External Economic Pressures

The region's ability to weather external economic shocks has improved in recent years. A key indicator of this resilience is the return of credit spreads to pre-pandemic levels, even as global interest rates have risen. However, the IDB warns that continued vulnerabilities exist, particularly in terms of external debt and financial markets. The region must continue strengthening its financial resilience by building up foreign reserves, managing external risks prudently, and staying committed to fiscal and monetary discipline.

Given the changing global economic environment, LAC nations are urged to further integrate into global markets, foster intraregional cooperation, and manage their fiscal policies efficiently to reduce vulnerabilities. Strengthening the region's external accounts and its capacity to absorb external shocks will be crucial to maintaining economic stability.

 

Latin America and the Caribbean are at a crossroads, with the potential to capitalize on global shifts and steer their economies toward more prosperous futures. However, achieving this will require comprehensive reforms across various sectors, including trade, labor markets, fiscal policy, and public spending efficiency. The IDB's report makes it clear that while the region has made significant strides since the pandemic, the challenges ahead are substantial. By addressing these challenges with bold and strategic reforms, Latin America and the Caribbean can pave the way for a more prosperous and equitable future.