Nearshoring and green economy offer paths to higher growth for Latin America and the Caribbean

Once again, a period of low growth looms ahead for Latin America and the Caribbean (LAC). But there is much that the region can do about it: a renewed focus on global economic integration offers the most convincing pathway to prosperity , not least as it allows the region to harness its unparalleled strengths in the green economy.

Although LAC has navigated challenges such as mounting debt, inflation, and uncertainty caused by the war in Ukraine with some success, fresh difficulties are arising in the shape of lower commodity prices, higher interest rates, and a patchy economic recovery in China. A new World Bank report, The Promise of Integration - Opportunities in a Changing Global Economy, estimates lower-than-expected growth of 1.4 percent this year, rising to just 2.4 percent for 2024 and 2025 - not nearly enough to have a real impact on LAC’s perennial problems of poverty and inequality. 

Greater integration in the global economy could play a key role in breaking out of this pattern of disappointing growth, which is lower than all regions except war-torn Eastern Europe. Despite past efforts, LAC remains one of the least integrated regions in the world. In fact, trade openness has stagnated and foreign direct investment flows have fallen over the past 20 years.  Excluding Mexico, China is now the region’s main trade partner, but mostly in primary commodities; meanwhile, foreign direct investments to the region have tumbled by 16.4 percent in absolute terms and 9.5 percentage points as a fraction of total foreign investments to emerging markets since 2010.

Two areas of opportunity in the global economy for Latin America and the Caribbean

1. Trend towards “nearshoring.” The havoc wreaked on supply chains by the pandemic and heightened geopolitical tensions has created a demand to diversify suppliers and bring them closer to home. This gives the region a golden opportunity to capture links in value chains centered on the United States and Europe, and capitalize on its increased competitiveness, especially now that wages in China are higher than in much of LAC. Mexico has already shown that this is possible.
2. Global push to tackle climate change. In this context, the region can leverage its extraordinary comparative advantage in renewable energy production, its generous endowments of commodities needed for emerging green industries , and the unique natural capital in its forests. To make the most of these advantages, LAC needs more active insertion into the global economy to keep up with all the innovative ideas emerging globally and access global markets to gain scale and discipline local actors.

While greater integration offers a potentially powerful source of growth, to benefit fully from the opportunities at hand will require implementing a range of policies to facilitate access to global markets, capital, and technology.  Many of the necessary reforms are well-known but will take time. They include reducing systemic risk, improving education and human capital across the spectrum, investing in both traditional and digital infrastructure, making cities better platforms for manufacturers and services, and ensuring sound financial markets to provide liquidity and diversify risk.

In the shorter term, the region can turn to at least two quick policy wins. First, regulatory improvements in customs and transport are relatively cheap and could be done as part of deep trade agreements that provide a framework and add to confidence in the basic rules of the game. Second, export and investment promotion agencies in LAC have often lacked focus and so failed to achieve their potential – that could easily be changed. 

Finally, it is impossible to emphasize enough the importance of LAC’s relatively newfound resilience and macroeconomic stability. To draw on the wisdom of Hippocrates, just as doctors should above all strive to do no harm to their patients, LAC’s governments must protect the stability that has become increasingly normal over the past two decades. 

This is now the second major global crisis in which LAC has not fared worse than its peers. The region’s relative success in fighting inflation and adopting more countercyclical monetary policies reflect hard-won gains in the quality and credibility of macroeconomic management that has bred a resilience that did not exist a generation ago. It is crucial to preserve this credibility, especially with the institutionality of macroeconomic policy at risk in some countries.

All of this could help LAC to build a renewed and more dynamic engagement with the global economy. As always, mobilizing investment and know-how to seize these opportunities will be challenging. But as the region seeks to reinvigorate growth, diversify its economies, and reduce its environmental footprint, it is clear that expanding trade exposure and making the most of its new areas of green comparative advantage are critical steps to success.