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It is a secret to no one: talking about energy or digital transition 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 regions that emits the least emissions and, however, it is one of the most affected by climate change and where the inequality gap is deepest. The resources to adapt to the ravages of warming are as urgent as they are scarce. In 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 much lower percentage than the 2.7% of the countries of the Organization for Economic Cooperation and Development (OECD). According to the report Latin America: Economic Outlook 2023, investing in sustainable development, presented this Friday in Santiago de Chile, 60% of these investments are managed by Governments. Again, this is a big difference compared to developed countries, where the largest percentage 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 CAF-development bank of Latin America and the Caribbean. “And small companies are often informal, have little human capital and little access to credit markets, which keeps them from investing in research and development.”
The study has been 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 of these entities, the horizon is clear. The region should focus on strengthening and improving investment in four main areas: digital transformation, health and care sector, agriculture and food systems, and the green transition.
According to comments José Manuel Salazar-Xirinachs, Executive Secretary of ECLAC, while “digital transformation can contribute to improving the productivity and competitiveness of the region, in addition to being a way to take advantage of technological progress,” the health services and science industries of life “can help increase resilience and preparation for future health crises.” Regarding the care economy, he explains that it is a sector that will have to be strengthened not only for the care of children, but also for older adults, since by 2050 it is expected to have a population of around almost 150 million people. . Regarding agriculture, he assures that it will be a key sector because “Latin America and the Caribbean has the largest reserve of soil with agricultural potential in the world.”
Finally, regarding the green transition, the report points out that it is a huge opportunity to reduce the very high percentage of informality that reigns in the region and which, by 2022, will reach 48.7%. This transition refers to the migration from the use of hydrocarbons to renewable energies, as well as environmental protection policies and, according to multilaterals, requires qualified personnel with advanced scientific knowledge and skills, which could increase formalization. However, due to these same two reasons, it is more likely that green jobs will end up being assigned to men with higher education, so this transformation must be combined with “policies to improve female 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. “The provision of care services will allow women more time to enter the labor market,” she says. “If the care [ya sea de niños o niñas, o de adultos mayores]”, does not fall exclusively on women, daughters or mothers, they will be able to participate more in the opportunities that the green market will bring.”
Foreign investment, still key for the region
The exhaustive report makes a valuable economic assessment of the different types of investment throughout the region and points out the weak points and the strategies that are working. Foreign investment is one of the aspects that is most celebrated. In 2022, for example, Latin America and the Caribbean was the region in the world that recorded the largest inflows of foreign direct investment, equivalent to 4% of the region's GDP for that same year. “In 2022, inflows of this type of foreign investment increased by 55%, reaching almost $225 billion, the highest level in the last three decades,” says Salazar-Xirinachs. This increase was due, specifically, to investments in services, hydrocarbons and manufacturing.
Likewise, Arreaza, from CAF, confirms that during the investigation “they found that foreign direct investment and foreign companies have higher productivity in all countries in the region than domestic companies. So, in that sense, foreign investment can have a guiding effect for the rest of the productive apparatus,” when it comes to giving clues about where to invest.
The analysis also reveals other interesting data. Over the last decade, for example, private financing focused on development in Latin America increased from $3 billion in 2016 to $9 billion in 2021. “International partnerships can also help increase the socioeconomic impact of investments by creating of an environment conducive to investment; fostering collaboration between institutions and promoting investment and the private sector,” the report states.
More than half of these entries in 2022 went to Brazil and Mexico, while Central America saw a decline of 11.9% that year. In terms of origin, and based on project announcements, the European Union (EU) and the United States have accounted for more than half of these funds in the region.
Two strategies to boost investment in innovation and development
Although foreign investment has been key for Latin America and the Caribbean, the region cannot be satisfied with this. To achieve a more ambitious scenario, the authors of the report also assure that at the public level certain signals need to be given to begin to follow a better path. “Moving towards more effective and progressive fiscal systems, more efficient management of public spending and debt, and more solid and sustainable fiscal 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 financial resources towards development objectives. The first is the role played by development financial institutions, since they can help finance small and medium-sized businesses that, 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, sustainability and sustainability-linked bonds”, since they currently represent 32% of the 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, promoting productive chains, the demand for new skills, the generation of new companies and the development of new financing and investment instruments. stake”.
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