Latin America and the Caribbean needs better fiscal policies to finance its development

Latin American and Caribbean (LAC) countries should improve tax collection, spending and public debt management, as well as mobilize more private resources to finance their ambitious development agendas, according to the 2024 edition of the Latin American Economic Outlook (LEO): Financing Sustainable Development which was published today.

The 17th edition of the report argues that to reduce LAC’s sustainable financing gap – estimated at USD 99 billion per year – coordination between public and private actors must be improved, with the help of their international partners. Given the difficult socioeconomic context of the region, a set of far-reaching reforms is needed. Productivity growth remains low: average labor productivity rose to only 33% of OECD levels in 2023, while that same year 27.3% of the region’s total population lived in poverty , the lowest level in the last two decades. Extreme poverty, however, has remained persistently high, affecting one in ten (10.6%) people in Latin America and the Caribbean.

Many countries maintain a tight monetary policy stance to keep inflation expectations under control and are undergoing a phase of fiscal consolidation, following the significant decline in the region’s fiscal space following the COVID pandemic. -19. In this context, the room for maneuver to formulate expansionary economic policies that support aggregate demand and promote the achievement of social objectives is limited.

The report identifies the following priorities to mobilize resources for sustainable development in LAC:

• Improve the way taxes are levied. In most LAC economies, tax revenues are low, averaging 21.5% of GDP in 2022, compared to 34% in the OECD. Furthermore, adjusting the tax structure or boosting existing taxes could help reduce inequalities, contribute to the green transition, boost health outcomes and promote entrepreneurship.

• Optimizing budget allocation and increasing spending efficiency can free up additional resources. Public spending is concentrated on current spending (82% in 2023), is short-term and its allocation is inefficient.

• Improve debt management through sound fiscal frameworks to maintain fiscal sustainability. LAC countries have seen their debt service increase from 9.8% of tax revenues in 2012 to 12.2% in 2022. In the past decade, in some countries, interest payments have even doubled spending on education, to triple health spending and to quadruple capital investments.

• Deepen financial markets and foster innovation to channel more private resources toward development goals. In LAC, financial systems lack depth, since domestic credit to the private sector amounts to 50% of GDP. Financial systems continue to exclude some vulnerable groups, including women. About 15% of formal households had access to mortgage loans in 2020, compared to only 2.3% of informal households.

• Promote the transformation of production to achieve sustainable growth and promote competitive sectors by increasing the presence of private issuers and liquidity in capital markets. Currently, debt markets in the LAC region are driven primarily by the public sector, which accounted for 81% of local issuance between 2015 and 2023. To reduce this concentration, policies should seek to increase the participation of institutional investors, update regulatory frameworks, improve financial competition and strengthen regional integration.

• Development financial institutions (DFIs) play a crucial role in a financial market that is still developing. 34% of DFIs have the specific mandate of promoting the financial inclusion of micro, small and medium-sized enterprises, but only 19% of the financial instruments they propose address the green transition, gender equality and digital transformation or innovation.

• International cooperation is essential to mobilize new resources, including the EU-LAC Global Gateway Investment Agenda, which mobilizes financing through public-private partnerships to cover infrastructure needs, in addition to creating local added value and promoting growth, employment and social cohesion.

• Financial instruments such as green, social, sustainable and sustainability-linked bonds remain an attractive mechanism, increasing from 9.3% of total LAC bond issuance in international markets in 2020 to almost 35% in 2023. Catastrophe bonds, debt-for-nature swaps and natural disaster clauses can also mobilize public and private investment where it is most needed. The creation of harmonized frameworks and reliable monitoring and supervision mechanisms for these instruments should avoid cases of green washing.

• Finally, the region should coordinate to present its own regional perspective at the United Nations Fourth International Conference on Financing for Development (to be held in Seville in mid-2025).

The Latin American Economic Outlook is prepared jointly by the Development Center of the Organization for Economic Co-operation and Development (OECD), the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), the Development Bank of Latin America and the Caribbean (CAF) and the European Commission.

rmation about the report: https://www.oecd.org/en/publications/latin-american-economic-outlook-2024_c437947f-en.html.

Press contacts:

– CAF: [email protected]; Tel: +57 (1) 743-7368

– ECLAC: [email protected]; Tel: + (56 2) 2 210 2040

– OECD Development Center: [email protected]; Tel: +33 (0) 145 24 82 96