This blog was first published by the Inter-American Development Bank (IDB)
Latin America and the Caribbean (LAC) face a structural challenge of low economic growth, which threatens the region’s long-term development prospects. The demographic dividend that supported growth over recent decades is fading, and now more than ever, the region must boost productivity and capital investment to sustain economic growth.
As a result, increasing domestic and foreign direct investment (FDI) will be crucial. Unfortunately, the region is lagging. Total investment peaked in the 2010s at an average of 22% of GDP, but has since declined, approaching levels seen at the start of the century, according to our calculations. FDI has also lost momentum compared to other emerging economies. While average inflows have decreased across the board so far this decade, the drop has been steeper in LAC compared to the rest of the emerging world.
What can governments do? Tax policy can be a powerful tool for attracting investment across the region and the IDB has been working with several governments in such reforms. By making tax frameworks more business-friendly and improving system efficiency, governments can foster a more competitive business environment while also enhancing the resilience of public finances—especially critical for countries still grappling with high debt levels.
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