How can Latin America avoid being left behind?

The year 2015 saw the adoption of three landmark global agreements that set forth a transformational vision of sustainable development.

In the framework of the United Nations and in a context of renewed impetus for multilateralism, countries agreed upon the Addis Ababa Action Agenda, recasting development financing in July, upon the 2030 Agenda for Sustainable Development and the 17 Sustainable Development Goals (SDGs) in September and finally, upon the Paris Agreement on climate change in December.

These agreements may not be perfect, but they lay new foundations for the adoption of sustainable development pathways integrating the economic, social and environmental dimensions. They call for the eradication of extreme poverty and for greater equality in our societies, for the promotion of inclusive growth with increased productivity, for the unprecedented mobilization of traditional and innovative financing, and for the progressive decarbonization of production, consumption and urbanization patterns, all under principles of intergenerational solidarity and common but differentiated responsibilities among countries.

As we enter 2016, governments, the private sector and civil society must now come together and turn this vision into reality by shifting into “implementation mode” in order to meet expectations and achieve the global goals by the year 2030. For Latin America and the Caribbean, whose social and economic development is still hampered by historical structural gaps, this implies addressing major challenges of adjusting to unfolding global shifts, on the one hand, and tackling a complex growth and trade outlook while avoiding stagnation of social progress, on the other.

The region’s weaknesses have been exposed

Global growth has still not recovered from the effects of the economic and financial crisis of 2008-2009. Developed countries show a mixed economic performance: while the recent increase in the FED rate in the United States signals the return to more normal conditions, the euro zone is still struggling to avoid deflation. The emerging and developing economies, in particular China, show clear signs of a slowdown. Also, although current account imbalances have eased since the first decade of the 2000s, some countries are still running large surpluses that act as a drag on aggregate demand growth - which is badly needed to boost the world economy.

Within this context, the Latin American and Caribbean countries are encountering significant difficulties in increasing exports, output and more importantly investment. In particular, the economies whose production and export structure are anchored in natural resources are experiencing a slowdown in output and employment. The mounting deficits and, in some cases, increased debt levels, and the consequent reduction of fiscal space have also limited the scope for using public spending as a countercyclical instrument, and have forced the adoption of tighter monetary policies.

The weakness of global aggregate demand has negative implications for the region, whose growth has historically been limited by external constraints that have led to stop and go situations and frequent foreign-exchange and external debt crises. A production and export structure concentrated in low-productivity sectors and a lack of technological dynamism means that the region remains highly vulnerable to the vagaries of international demand. After temporary relief during the recent commodity supercycle, the weakness of the region’s export structure is now again apparent.

Against this background, ECLAC estimates that the Latin American and Caribbean economies contracted by 0.4% in 2015 and will grow by just 0.2% in 2016, while the value of the region’s goods exports dropped by 14% in 2015. This has been the third consecutive year of falling export value, making 2013-2015 the worst three-year stretch for the region’s exports since the Great Depression.

Latin America and the Caribbean: annual variation in GDP and merchandise export value, 2012-2015* (Percentages)

A. GDP

B. Exports

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

*Figures for 2015 are estimates

Will the region also be left out of the new digital and green revolutions?

The current digital revolution is transforming the production, trade and distribution of goods and services and affecting all economic and social activities affecting our capacity. Production will be increasingly concentrated in a few large enterprises with a worldwide presence, while markets will become increasingly fragmented.

In parallel, although far from what was expected, the Paris Agreement on climate change sends the message that the world has to make a critical structural change towards environmental sustainability. Governments must now provide powerful incentives for public and private actors to become key driving forces in generating cleaner patterns of production and consumption.

Urban development in Latin America and the Caribbean — as the most urbanized region in the world, with over 80% of its population living in cities — could also offer new opportunities in areas such as smart urban public transport and traffic management, solid waste and waste-water treatment, and low-energy buildings, and thus enable the region to tap into the digital, technological and data revolutions. Greening the economy through lower-carbon production systems in industry, improved energy management, lighter vehicles and the development of renewable energies such as solar and wind power, enshrines huge global potential.

However, this will not be possible unless the countries develop the capabilities for the new technological and environmental landscape - especially a skilled workforce. But the Latin American and Caribbean region still has a long way to go to become an innovation-driven region.

Latin America and the Caribbean: share in total patent applications, 1990-2014 (Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the World Intellectual Property Organization (WIPO)

Since the creation of more advanced technology occurs basically outside the region, it will need structural changes in tune with the current industrial revolution in order to catch up. Growth and employment will depend on the level of integration with the global digital economy, which requires the development of a regional digital ecosystem, improved infrastructure and human capital and a better business environment. The definition of global standards, regulation of data flows, intellectual property rights, security and privacy are critical elements for creating a single Latin American digital market.

Regional economic and technological integration are a must

The Latin American and Caribbean region faces the bleakest international economic outlook since 2009. The entrenching of its natural resource specialization and its persistently low-tech production structure with environmental externalities are making it hard for the region to find a way out. Although some traction could be gained from the nominal depreciation of several countries’ currencies, this effect is limited by a narrow export basket.

The region must therefore deepen its economic and technological integration. Progressing towards an integrated space with common rules is vital to promote production linkages, strengthen intraregional trade and support environmentally sustainable production and export diversification. Industrial and technology policies are crucial to raise the region’s long-term growth potential and improve its development prospects and require rethinking relations between governments, the private sector, civil society and multilateral organizations in order to establish a environmental “big push” for sustainable development.

Author: Alicia Bárcena, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC). She is participating in the World Economic Forum’s Annual Meeting in Davos.