SANTIAGO, Chile, CMC—Latin America and the Caribbean (LAC) countries should strengthen tax collection and spending, improve public debt management, and mobilize more private resources to finance their ambitious development agendas, according to the latest edition of the Latin America Economic Outlook (LEO).
The LEO is jointly produced by the Development Centre of the Organisation for Economic Cooperation and Development (OECD), the United Nations Economic Commission for Latin America and the Caribbean (UN-ECLAC), the CAF-Development Bank of Latin America and the Caribbean, and the European Commission.
The 2024 edition, titled “Financing Sustainable Development,” contends that LAC’s sustainable financing gap, estimated at US$99 billion annually, can be bridged if private and public actors improve coordination with the support of their international partners.
It said that the region’s challenging socioeconomic context calls for an ambitious set of reforms. Productivity growth remains weak, with average labor productivity amounting to just 33 percent of OECD levels in 2023. Poverty accounted for 27.3 percent of the region’s total population in 2023, its lowest level over the past two decades.
Extreme poverty has remained persistently high, affecting one out of 10 or 10.6 percent of Latin American and Caribbean populations.
Many countries maintain a tight monetary stance to keep inflation expectations anchored and are undergoing a fiscal consolidation phase after the region’s budgetary space decreased significantly following the COVID-19 pandemic. In this context, there is little space for expansionary economic policies to support aggregate demand and social goals.
The report includes various priority measures to mobilise resources in pursuit of LAC’s sustainable development, including improving tax levies.
It said that in most LAC economies, tax revenues are low, with an average of 21.5 percent of gross domestic product (GDP) in 2022, compared to the OECD’s 34 percent. Additionally, adjusting the tax structure or leveraging existing taxes could help reduce inequalities, support the green transition, improve health outcomes, and foster entrepreneurship.
The report also calls for LAC to optimise budget allocation and increase spending efficiency to free up additional resources. It said public spending is concentrated in current expenditures, such as wages and transfers (82 percent in 2023), short-term-focused, and ineffectively allocated.
The document calls for improving debt management through robust fiscal frameworks to maintain fiscal sustainability.
It said LAC countries have seen their debt service increase from 9.8 percent of tax revenue in 2012 to 12.2 percent in 2022.
Over the past decade, interest payments in several countries have been up to twice the spending on education, three times that on healthcare, and four times that on capital expenditure.
There is also a need to deepen financial markets and encourage innovation to channel more private resources towards development goals. In LAC, financial systems need more depth, with domestic credit to the private sector reaching 50 percent of GDP.
Financial systems still exclude some vulnerable groups, including women. In 2020, close to 15 percent of formal households had access to housing loans compared to just 2.3 percent of informal households.
The report encourages production transformation to achieve sustainable growth and promote competitive sectors by increasing the presence of private issuers and enhancing capital market liquidity. Currently, debt markets in the LAC region are largely public-sector-driven, accounting for 81 percent of local issuances from 2015 to 2023. To address this concentration, the report says policies should aim to expand institutional investor participation, update regulatory frameworks, improve financial literacy, and strengthen regional integration.
It said development finance institutions (DFIs) play a key role in a financial market that is still developing. Thirty-four percent of DFIs have a specific mandate to support the economic inclusion of micro, small, and medium-sized enterprises. However, only 19 percent of the financial instruments they propose address the green transition, gender equality, and digital transformation or innovation.
The report notes that international cooperation is key to mobilizing new resources, including the EU-LAC Global Gateway Investment Agenda, which mobilizes funding through public-private partnerships to address infrastructure needs while creating local added value and promoting growth, jobs, and social cohesion.
It said financing instruments like green, social, and sustainability-linked bonds continue to be attractive mechanisms, increasing from 9.3 percent of total LAC bond issuance in international markets in 2020 to almost 35 percent in 2023.
Catastrophe bonds, debt-for-nature swaps, and natural disaster clauses can mobilize public and private investment where needs are greatest. Establishing harmonized frameworks and reliable monitoring and supervision mechanisms for these instruments should prevent greenwashing.
Finally, the region should coordinate to present its own regional perspective at the UN’s Fourth International Conference on Financing for Development, which will be held in mid-2025 in Sevilla.
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