IDB Report Highlights Regional Opportunities for Latin America and the Caribbean Amid Global Shifts

Economic growth in Latin America and the Caribbean has returned to more stable historical averages since the pandemic. However, amid global shifts, the region needs to embrace a series of reforms to seize growth opportunities and chart a course toward greater prosperity for their citizens, according to the Inter-American Development Bank’s (IDB) new macroeconomic report.

The region grew 2% in 2024, exceeding initial forecasts of 1.7%, and is expected to grow 2.3% in 2025.

According to the report Regional Opportunities Amid Global Shifts, projected growth rates are insufficient to address the region’s pressing socioeconomic needs, including reducing poverty and inequality. Countries in the region should therefore focus on boosting productivity while reducing socioeconomic inequalities and maintaining macroeconomic stability.

The report highlights a series of growth opportunities, including capitalizing on the realignment of global supply chains, enhancing intraregional integration, and reducing labor informality, while efficiently managing fiscal and monetary policy.

“Latin America and the Caribbean is at a pivotal moment to tap into unprecedented opportunities. Since the COVID-19 pandemic, the region has achieved a series of positive outcomes. Growth rates have returned to long-term averages, inflation has largely been contained, and many countries have taken steps toward fiscal consolidation. However, substantial risks remain, such as global trade fragmentation, volatility in financial markets, and uncertainty surrounding the global economy,” said Eric Parrado, IDB Chief Economist and Economic Counselor of the Research Department.

According to the report, the median annual inflation rate in the region eased to 3.8% by the end of 2024 after peaking at 9.8% in July 2022. However, domestic factors, such as fiscal uncertainties and robust economic activity in some countries, continue to put pressure on prices. The report analyzes how policymakers can balance monetary easing with inflation risks while ensuring financial conditions remain supportive of growth.

Growth Opportunities for Latin America and the Caribbean

Among untapped economic opportunities, the report highlights that strengthening intraregional integration through trade and foreign direct investment are critical to increasing productivity, fostering industrial diversification, and driving growth in Latin America and the Caribbean. Despite shared economic interests, intraregional trade accounts for only 15% of the region's total trade, compared to 55% in Asia and 68% in Europe. The shifting global dynamics have created opportunities for Latin America and the Caribbean to attract trade and investment flows, underscoring the urgency of integrating the region more deeply into global value chains.

The report also analyzes how labor formalization can favorably impact output, employment, and government revenue. Informal workers and firms contribute less to GDP due to lower productivity and limited access to financing, while informality erodes the tax base and weakens public finances. A formalization process could increase GDP significantly in some countries through gains in productivity, better resource allocation, and enhanced fiscal accounts.

The report highlights how countries can close fiscal gaps while supporting sustainable growth. Under baseline and stress scenarios, average public debt in America and the Caribbean will reach between 57% and 63% of GDP by 2027. In a 2023 report, the IDB concluded the region should reduce public debt ratios to a prudent range of 46%-55% of GDP. In response, governments can strengthen fiscal positions by addressing inefficiencies in public spending, particularly in procurement and investment, transfers, and salaries.

The inefficiencies in public spending across a set of 15 countries increased slightly from 4.4% of GDP in 2015-2016 to 4.6% in 2022, mainly driven by raising energy subsidy leakages. Reducing these inefficiencies can drive a 1.8 percentage point increase in GDP growth, as efficiency reforms strengthen fiscal positions and reduce debt burdens.

On the external account and financial markets front, the report highlights the region's greater resilience in both reducing its vulnerability to sudden stops and strengthening its ability to withstand them. This is evidenced by the return of spreads to pre-pandemic levels despite higher global interest rates. Amid a shifting global economic landscape, countries should remain committed to closing fiscal and external gaps, building reserves, and managing risks to successfully navigate the complex global economic landscape.