Overview: Working together for a strong, sustainable and inclusive recovery in Latin America and the Caribbean

Abstract

The Latin American Economic Outlook 2021 (LEO) sets out policies for a strong, inclusive and sustainable recovery in Latin America and the Caribbean (LAC). This overview summarises the main results of the report. The LEO first assesses the dramatic socio-economic impacts and policy responses to the coronavirus (COVID-19) crisis and the extent to which the pandemic has exacerbated existing development traps in the region. The report then builds on this assessment to explore the key foundations for the recovery: i) strengthening public finances to support productive investment and social spending, as well as a more sustainable model of financing for development; this will require implementing holistic, sequenced and consensual fiscal policies; ii) developing stronger social protection systems and improving quality of public services, building on lessons learned from social policy innovations during the crisis; iii) designing a regional productive strategy to increase competitiveness and formal jobs, and explore the potential of further regional integration; and iv) building consensus across all actors in society on the reforms needed for the recovery and for inclusive and sustainable development, through a renewed social contract that is fair, legitimate and stable, and that puts citizens’ well-being at the centre of policy making. At the international level, the LEO explores the important role renewed international partnerships can play to facilitate the recovery through mission-driven partnerships.

Introduction

The Latin American Economic Outlook 2021: Working together for a better recovery (LEO) analyses and provides policy messages to design a strong, inclusive and sustainable recovery from the coronavirus (COVID-19) crisis in Latin America and the Caribbean (LAC). The crisis is radically transforming the region’s economies and societies. COVID-19 has accentuated the long-standing, multi-dimensional development traps of low productivity, high inequality and informality, deficient public services and institutions, and environmental challenges in LAC. The pandemic hit the region at a time of high social discontent, expressed by the wave of protests across the region, confirming the need to reach a new, overarching consensus among citizens on a new development path for the region, and to rebuild society’s trust in public institutions.

The COVID-19 recovery poses extraordinary challenges for LAC countries, but it can also be seen as a turning point to accelerate pending policy reforms in LAC. The crisis should be embraced as an opportunity to implement a renewed strategy for development that promotes inclusiveness, resilience and sustainability, increasing well-being and responding to citizens’ expectations, while advancing the United Nations 2030 Agenda. Further regional integration and international co-operation involving LAC countries on an equal footing, regardless of their development level, would contribute to the region’s recovery.

The specific socio-economic characteristics of each country, coupled with the varying impacts of the crisis, call for a tailored approach. Nonetheless, some shared aspects will be key for a successful recovery that leaves no one behind: i) paying attention to the political economy of policy reform; ii) establishing a well-defined sequencing of policies; and iii) addressing the socio-political context through clear communication strategies and compensation schemes to mitigate the adverse distributional impacts of reform, particularly those affecting the most vulnerable. The recovery should set in motion an open and inclusive policy-making process that ensures greater accountability and brings all relevant actors to the discussion to achieve consensus. This will require efforts at the national level – in particular, for the most disadvantaged groups – and better co-operation and co-ordination at the regional and international levels.

The LEO 2021 provides tailored policy messages to help stakeholders take action and build forward better. The report first examines the socio-economic impacts of and policy responses to the COVID-19 crisis. It also analyses the key macro-foundations for the recovery in the region. In particular, it insists on the need to implement holistic, sequenced fiscal policies backed by a strong consensus to achieve an inclusive and strong recovery (Chapter 1). Second, it highlights the need to learn from the pandemic and mainstream some of the social policy innovations adopted throughout the crisis to strengthen social protection systems and improve quality and accessibility of public services (Chapter 2). The LEO then highlights the importance of designing a regional productive strategy to increase productivity and boost formal job creation (Chapter 3). These policy efforts will need the backing of a strong consensus among all actors of society; in other words, the renewal of the social contract, one that is fair, legitimate and stable, and that puts citizens’ concerns and well-being at the centre of policy making (Chapter 4). The LEO explores the important role of renewed international partnerships in facilitating the recovery through mission-driven partnerships that ensure equal-footing participation, greater policy coherence across levels of government, integrated approaches across policies, and tools to address the multi-dimensional nature of development, including efforts to measure development beyond income, both nationally and internationally (Chapter 5). The report emphasises that taking into account the political economy of reform and country-specific characteristics will be crucial to reach the stable and long-lasting agreements required for a recovery that works for all. The LEO includes three key cross-cutting themes: i) climate change and the green recovery; ii) the digital transformation; and iii) gender.

Holistic and consensual fiscal policies will determine the strength and inclusiveness of the recovery

In 2020, LAC experienced a historical economic downturn. Among the hardest hit by the pandemic, the region’s gross domestic product (GDP) contracted by almost 7.0% and its per capita level is not expected to return to pre-crisis levels before 2023-24 (Figure 1). Moreover, growth and productivity growth are projected to decline, with an impact in terms of lower potential growth. The pace of recovery depends on the effective roll-out of vaccines, a favourable international context and the course of the political cycle in the region.

Figure 1. Evolution of GDP per capita, constant prices

The impact of the COVID-19 crisis has been asymmetric, particularly affecting the most vulnerable groups and reversing some of the region’s socio-economic gains of recent decades. As a result of the crisis, the extreme poverty rate is estimated to have increased by more than one percentage point in 2020, reaching 12.5% of the population. Moreover, the poverty rate is estimated to have increased by three percentage points, reaching 33.7%. Poverty levels have not been so high for the past 20 and 12 years, respectively. Inequality, measured by the GINI coefficient, is estimated to have increased by 2.9% in the most unequal region in the world, as those most affected by job losses were in the first income quintile.

Latin American labour markets are traditionally informal, fragile and exclusive. More than half of LAC workers have informal jobs (OECD, 2020_[2]). Informal households – that depend on the informal economy for their income – are most affected by job loss brought about by the COVID-19 crisis. On average, 45% of the LAC population live in households that depend solely on informal employment, 22% live in mixed households with at least one member in an informal job, and 33% live in completely formal households (OECD, forthcoming_[3]). Still, according to the Organisation for Economic Co-operation and Development (OECD) Development Centre’s Key Indicators of Informality Based on Individuals and their Households, informality levels at the household level in LAC countries exhibit wide heterogeneity, from less than 20% in Chile and Uruguay, to more than 60% in Bolivia, Honduras and Nicaragua (Figure 2, Panel A).

The negative job and income dynamics exacerbated by the crisis have squeezed the middle class and threaten to deepen existing social and economic gaps. Some 32 million more people now earn a low income (vulnerable, poor and extremely poor) than before the crisis. By contrast, people earning a low middle-income decreased by 7 million, those with a mid middle-income decreased by 13 million (13.1%), those with an upper middle-income decreased by 4 million (14.2%), and those with a high income decreased by 2 million (10.5%) (Figure 2, Panel B).

Figure 2. More than half of Latin Americans live in informal or mixed households while the number of people living on a low-income has increased, and the middle and upper classes have shrunk as a consequence of the COVID-19 crisis

Monetary and fiscal policy have led the response to the crisis and will in large part determine how inclusive and strong the recovery will be. Fiscal policy, through a combination of tax relief measures, budget reallocations, additional expenditure and concessional lending, has been essential to mitigating the impact of the COVID-19 crisis on households and firms, particularly the most vulnerable, and to bolster public healthcare systems (ECLAC, 2021_[7]).

Policy space is more limited in LAC countries that are highly indebted or where inflation is not under control. Expenditure, taxation and debt management approaches thus need to be tailored to each country’s context. Some of these measures require further co-operation and co-ordination at the international level (Chapter 5).

First, a set of tax policy options could increase revenues without compromising the economic recovery or people’s well-being; however, the sequencing of these policies, and the backing of a national consensus, will determine their success (Mora, Nieto-Parra and Orozco, 2021_[8]). Options include measures to reduce tax evasion and avoidance, which in 2018 cost Latin America around 6.1% of GDP in lost personal income tax, corporate income tax and value added tax receipts, or eliminating inefficient tax expenditure (ECLAC, 2021_[7]). Second, as long as the pandemic continues to put lives at risk, countercyclical public spending should continue to focus on protecting people, supporting the most vulnerable households and saving firms and jobs. Vaccination is key to exit the pandemic and reduce the uncertainty of stop-and-go confinement measures. Once the pandemic is under control, public spending should gradually start prioritising long-term capital expenditure aimed at achieving a productive transformation; one that generates formal employment, fully leverages the digital transformation and prioritises the environment. Third, along with strengthening citizens’ trust in government, ensuring fiscal sustainability will be instrumental to the success of these efforts. Given the global implications of the pandemic, and as the financial resources needed to address its consequences increase, global co-ordination of public debt management should be a priority to address or avoid possible debt sustainability issues (OECD, 2020_[2]).

Strengthening social protection and mainstreaming social policy innovations from the crisis for an inclusive and sustainable recovery

The crisis has revealed that current social protection mechanisms in the region are insufficient. LAC countries entered the crisis with close to 40% of workers without social protection coverage. This is largely due to the prevalence of labour informality in the region, affecting almost 60% of workers, although the situation is highly varied across countries.

Women, youth, the elderly, indigenous peoples, Afro-descendants and migrants have been disproportionately affected by this crisis. The ageing trend is already posing difficult challenges for societies. On average, before the crisis, around 75% of the population over age 65 received a pension, although the amount of transfers of contributory pensions was insufficient to replace a person’s level of income during their productive life. Moreover, while almost one-third of pensions came from a non-contributory scheme, 42% of people over age 65 were covered by the public non-contributory healthcare system, limiting adequate coverage and access to quality care and adding financial pressure on social systems. Disparities in access to and quality of health care are associated with income, gender and urban/rural location. High out-of-pocket (OOP) expenditure and low ratios of human resources, such as specialised doctors, nurses and other physical resources, have constrained the response to the pandemic. People’s discontent with healthcare services – already high compared to OECD countries – has increased during the COVID-19 crisis.

The pandemic and school closures amplified existing inequalities in access to and quality of education in Latin America. Many schools in LAC were forced to close to contain the spread of the virus (Figure 3). Since the start of the pandemic, schools were fully closed in LAC for an average of 26 weeks compared to 19 weeks globally, making it the region with the highest average number of school days lost (UNICEF, 2021_[9]). On average, between March 2020 and May 2021, schools in LAC were closed 70% longer than in the OECD. Most LAC students do not have the resources to connect or use an electronic device, with a clear difference between advantaged and disadvantaged schools, resulting in further education inequalities among students from different socio-economic backgrounds. Prolonged education interruptions cause human capital loss and have caused women, who primarily bear childcare responsibilities, to lose their jobs, ultimately affecting the recovery.

Figure 3. Longer school closures in LAC than in the OECD threaten to deepen education inequalities

The level of distrust in the social protection system is high, particularly among poorer groups and informal workers. Overall, more than one in three people in LAC doubt that they will ever receive a pension (Figure 4). The crisis presents an opportunity to reform social protection systems to make them more inclusive and more sustainable. Current protection mechanisms could be better adapted to the region’s labour markets dynamics and workers’ heterogeneous skills. Policy responses to the COVID-19 crisis present a basis to move towards universal, comprehensive and sustainable social protection systems.

Figure 4. Proportion of workers who doubt that they will ever get a pension, by socio-demographic characteristics, selected LAC countries

Governments responded rapidly to the COVID-19 crisis by adopting innovative approaches to reach the most vulnerable population. This innovative response could set the basis for stronger social protection systems in the future. Social assistance during the pandemic targeted vulnerable populations not covered by existing social programmes or social protection mechanisms. As these populations are usually hard to identify, as many are unregistered, or to reach, as they do not always have a bank account, governments invested in improving registries, by crosschecking existing ones, and finding alternative ways of delivering money transfers, mainly through digital technologies and mobile phones (Basto-Aguirre, Nieto-Parra and Vazquez-Zamora, 2020_[12]). Permanently targeting and providing vulnerable populations with social protection are key conditions of a functional and inclusive welfare state. Social protection in the LAC region needs stronger financing mechanisms, making social contributions more flexible with a mix of non-contributory, contributory and voluntary contributions. Improving social protection schemes to support the elderly, in terms of both pension and healthcare coverage, is key in ageing societies.

Policy action to tackle inequalities in education and skills acquisition at an early stage of people’s lives, later translates into higher chances of getting quality jobs. This challenge has been exacerbated during the pandemic: the safe reopening of schools and the provision of training and extra-curricular support for the most disadvantaged students, are therefore priorities to facilitate an equal recovery in the region. Planning teacher supply and demand and improving training and access to the Internet and technologies for those who cannot return to school are intermediate steps that should be rapidly implemented to protect education access and quality. Likewise, the differentiated impact of the crisis for women has been particularly evident as a result of school closures. Designing gender-sensitive policies for the recovery and ensuring a more equitable redistribution of care work are key to improving women’s socio-economic conditions.

The pandemic has amplified the urgency of addressing the challenges of inequality, climate change and environmental degradation together. While the pandemic has increased the number of people living under the poverty line in LAC, climate change is projected to result in an additional 5 million poor in the region by 2030, principally affecting vulnerable groups and households with greater dependence on natural resources. Nonetheless, green growth and socio-economic prosperity can go hand in hand in LAC. If the right policies are put in place, a green recovery could create 15 million net jobs in the region by 2030 (ILO/IDB, 2020_[13]).

Policy making related to social welfare systems should incorporate climate considerations as a cross-cutting theme. Integrated approaches would allow social and human development issues to be taken fully into account in the ecological transition, with the aim of achieving global carbon neutrality and reducing multi-dimensional inequalities. The political economy of reforming social protection systems is challenging, but this crisis may create the enabling environment required to advance delayed structural reforms. People are well aware of the need for policy change. People throughout the region seem to be in favour of pension reform in general, but they seem to disagree on the policy options to implement it, especially if fiscal sustainability is taken into account. Well-informed citizens are more likely to support broad reforms but information alone is not sufficient, especially if trust in institutions is low. Managing the trade-offs and taking into account fiscal sustainability in reforming social protection and improving public services will be essential but not easy. Targeting interventions to support those most exposed to the current crisis may be a good starting point.

Increased regional integration and productive transformation to unlock development opportunities

The unprecedented disruptions in global trade and production systems caused by the COVID-19 pandemic exposed LAC’s reliance on international production and its weak regional integration. The magnitude of the COVID-19 economic crisis and countries’ capacity to react depend largely on the productive structure of their economies and companies’ participation in regional and global value chains. In this context, developing stronger intra-regional industrial and productive policies is essential to allow the region to strengthen existing capacities and generate new ones in strategic sectors.

Regional integration must play a key role in the crisis-recovery strategies in the region. In a global context of increased production regionalisation, major industrial policy efforts will be required for LAC to develop stronger regional value chains and compete in highly diversified global supply chains. The convergence between existing integration mechanisms and institutions could provide an opportunity to boost investments in knowledge and technology, develop productive capacity and overcome regional market fragmentation.

Although regional integration remains weak in the region, it could be an engine for productive transformation. Most LAC integration initiatives have focused on trade and market integration, with little attention to productive integration. Despite its many intraregional trade agreements, LAC has one of the lowest levels of intraregional trade worldwide. Barely 13% of its exports stayed within the region in 2020, and that proportion has been declining steadily since 2014 (Figure 5). The scarce productive integration among LAC countries is evidenced by the less than 6% on average of intra-regional imported content in total exports. Similarly, LAC’s integration into global value chains is low and has been mainly associated with the extraction and processing of raw materials.

Figure 5. Latin America and the Caribbean: Intraregional exports, 1960-2020

LAC’s productive structure, sectoral specialisation and business structure do not contribute to regional integration. LAC has not been able to achieve long-term productivity gains that allow it to sustain higher growth (Chapter 1). LAC has a poorly diversified productive structure, clustered in low added value sectors, and exports are concentrated in goods with low technological content. In the last two decades, 76% of the average GDP growth achieved in LAC was generated through the accumulation of employment and only 24% through increases in labour productivity. This pattern contrasts with countries like China, where the contribution of productivity is 96%, and India, where it is almost 80%.

The characteristics of the region’s productive structure limit opportunities and incentives for technical change and diversification. The region’s international integration is mainly limited to a small number of large companies in natural resource intensive sectors, offering few opportunities for participation in higher value-added activities. In parallel, there is an abundance of unproductive micro, small and medium-sized enterprises (MSMEs) that are disconnected from international markets. With limited incentives for those MSMEs to invest in productive or technological capacities, the region remains locked in a low productivity and low value-added trap.

The technological content of LAC exports is generally low. However, the proportion of the manufacturing content compared to primary products in intraregional trade in Latin America and the Caribbean, is higher than it is compared to exports to the rest of the world. On average, industrialised products accounted for 73% of intraregional flows in 2018-19, but only 63% in the case of extra-regional exports (Figure 6). These figures show the crucial role that intraregional trade could play in economic diversification, the development of manufacturing capacities and the internationalisation of small and medium-sized enterprises (SMEs).

Figure 6. Latin America and the Caribbean (main integration mechanisms): sectoral structure of goods exports, 2018-19

A single market could be a way to foster technological development in LAC. The digital transformation is generating important changes for companies and market dynamics. While the digital transformation presents an opportunity to address the persistent challenge of low productivity, in a region where productivity disparities are considerable depending on the size of firm, there is also a risk of it reinforcing these differences (OECD et al., 2020_[15]).

Regional integration and coordinated policy strategies will be key to ensure the creation of digital opportunities to increase productivity. Despite progress in terms of connectivity, the pace of the digital transformation has been moderate. On average in LAC, digital adoption in business was 4.5% between 2014 and 2016, well below highly dynamic countries in Southeast Asia (13.1%) or China (16.4%). An integrated market would be economically beneficial for the region. For example, since the creation of the digital single market strategy in the European Union, its degree of digitisation grew more than that of other OECD countries that are not part of this space.

Overall, the region needs a structural shift to overcome the limitations imposed by its current development model and increase productivity growth (ECLAC, 2020_[16]).The production structure must shift towards more technology-intensive sectors with higher rates of demand and skilled employment. This should be achieved while preserving natural resources, biodiversity and the environment. Since markets cannot drive sustainable structural transformation alone, these changes call for a co-ordinated set of technological, industrial, fiscal, financial, environmental, social and regulatory policies to promote sustainability. Each country, given its productive structure and its societal priorities needs to determine the activities and policies to foster progressive structural change and the big-push for sustainability (ECLAC, 2020_[16]).

Many COVID-19 recovery strategies in the region allocated resources to specific sectors to address national or regional development needs. The transformation of the productive structure and the combination of forward-looking investments to provide the basis for a big push for sustainability in the region could focus on sectors with high potential, including the automotive, pharmaceutical and renewable energy sectors, the circular economy and sustainable agriculture.

A renewed social contract will be key to support the reforms needed to boost the recovery and overcome structural weaknesses in the region

Social discontent, as demonstrated in the wave of protests shaking the region in recent years, mistrust of government and demands for greater democratic reforms are rising at a time in which the Covid-19 crisis is putting the resilience of LAC countries to the test.

In 2020, only 38% of the regional population trusted their government (Gallup, 2021_[20]), more than half of LAC’s citizens believed that their government was performing poorly in tackling corruption (Transparency International, 2019_[18]), and most LAC countries exhibited medium and high impunity levels in the Global Impunity Index (CESIJ, 2020_[19]). Confidence in government remained highly volatile as the COVID-19 pandemic evolved, and satisfaction with public services, including education and health, markedly decreased. In 2020, on average almost 50% of the population in LAC was dissatisfied with public education and 53% was dissatisfied with healthcare, in part due to the challenges to ensuring continuity of school curricula during lockdowns, the increased childcare burden during school closures and the lack of resources to respond to the health crisis (Figure 7).

Figure 7. Dissatisfaction with public services has steadily increased in recent years, including during the COVID-19 crisis

Concentration of power has been another source of dissatisfaction, with 73% of Latin American citizens believing that their country is governed in the interests of a few powerful groups. Interpersonal trust has characterised the region historically, with a notable declining trend after 2011, reaching particularly low levels in 2020 (12%) (Latinobarometro, 2021_[17]). Finally, identification with a political ideology has increased in recent years in LAC while trust in political parties has declined. Traditional mechanisms of representation have failed to channel growing and changing political demands, increasing popular frustration.

These dynamics suggest a profound erosion of the social contract in the region. The COVID-19 pandemic has accentuated these trends, while placing the region at a tipping point; without a strong consensus among all societal actors, the reforms needed to drive the recovery and overcome longstanding structural weaknesses will not come to fruition. This is why a new social contract is needed. LEO 2021 defines the social contract in broad terms as the comprehensive yet intangible and implicit agreement that binds society together and exists within a certain set of formal and informal rules and institutions.

The building blocks of a post-pandemic social contract should revolve around two interconnected dimensions. First, it should be a transversal agreement across: i) socio-economic groups; ii) territories; and iii) generations. Second, it should advance towards: i) broader and more effective social protection systems (Chapter 2); ii) resilient and sustainable productive strategies that prioritise the creation of quality and green jobs and embrace the digital transformation (Chapter 3); and iii) more sustainable financing for a low-carbon development model (Chapter 1). The intersection of these objectives shows that the social contract is underpinned by a set of social pacts across various policy domains that each country must adapt to its specific needs and goals (Table 1).

Table 1. The building blocks of a new social contract

Note: Own elaboration.

Implementing a new social contract entails a profound rethinking of its foundational pillars (e.g. the current constitutional process in Chile) or more targeted attempts to reach an inclusive pact on critical areas of the recovery (e.g. fiscal, green and jobs). Whatever the nature of the endeavour, a key lesson learned from past experiences is that close attention to the process itself is of the utmost importance for building a consensus that is fair, legitimate and durable, especially in a context of high discontent and reduced fiscal space (Cabutto, Nieto-Parra and Vázquez-Zamora, 2021_[21]).

Four main principles should contribute to guide the process of consensus building. They can be summarised by four Cs: conciliate, contextualise, compensate and communicate, not necessarily in that order (Cabutto, Nieto-Parra and Vázquez-Zamora, 2021_[21]). First, the process must be inclusive. This means reconciling various interests and bringing all interested parties into the discussion from the very beginning. An inclusive policy-making process that leverages the ideas and resources of various players can result in greater accountability and trust, less concern over undue influence, greater policy commitment across time by all stakeholders, more sustainable reforms, and innovative solutions to complex issues. Second, context matters. Participatory processes can fail if not well designed. It is important to evaluate aspects of the socio-political context that may generate risks or opportunities for the strategy (Naser, Williner and Sandoval, 2021_[22]). Third, compensating potential “losers” is crucial. Reforms can make things worse before they make them better and can leave certain vulnerable groups worse off. It is important to account for clear compensation mechanisms to mitigate the potential negative distributional impacts of a reform (Rodrik, 1996_[23]; OECD, 2010_[24]). Fourth, communication about the rationale and potential impact of reform is essential. In a context of polarised political discourses and rising misinformation, evidence-based analysis and effective communication are key to shed light on the benefits of reform. Independent ex ante and ex post evaluations are important to build the case (Worley, H. et al., 2018_[25]).

The sequencing and speed of these steps are critical for successful reforms, although both dimensions are highly context specific. For instance, in the case of fiscal policy, the sequencing of policy action in terms of expenditure, taxation and public debt management is crucial to balance fiscal needs while financing policies to support the most vulnerable and ensuring wide support for the reforms (Mora, Nieto-Parra and Orozco, 2021_[8]). Generally, successful reforms can help increase support for subsequent ones. Policy makers may prefer to bundle reforms into a comprehensive package so that losses from one reform are compensated by positive spillovers from others (Dayton-Johnson, Londoño and Nieto-Parra, 2011_[26]), or if this is not possible, they may prefer to reach specific agreements in areas where there is potential for consensus.

Last, to reach and maintain a consensus, effective intermediary institutions are key to ensure the long-term sustainability of a renewed social contract. By acting as interlocutors between citizens and the state, intermediary institutions, such as political parties, trade unions and associations, make public institutions more accountable and give individuals the opportunity to voice grievances (OECD, 2021_[27]). This two-way dialogue can promote social cohesion and provide useful feedback during the implementation and potential adjustment phase of reform. Strengthening the engagement of public institutions with these intermediary bodies stands out as a relevant area to underpin legitimacy and inclusive policy making (Cabutto, Nieto-Parra and Vázquez-Zamora, 2021_[21]).

The role of international co-operation in facilitating a new social contract in LAC

The opportunity for a new social contract in LAC to overcome the crisis implies moving from today’s fragmented status quo to a new equilibrium founded on equality of opportunities. Given rising social discontent and the increasing interconnection between national development and global megatrends, international co-operation becomes a critical policy sphere in supporting the region in this process by contributing to build new development models in the region. The current vicious cycle between global and national development dynamics in LAC calls for further consolidation of the Development in Transition (DiT) framework – proposed in the LEO 2019 – and for international co-operation to take on a facilitating role in supporting Latin American and Caribbean countries overcoming development traps – institutional, productivity, social and environmental – and setting the region’s inclusive and sustainable development.

Figure 8. A vicious cycle between global and national development dynamics in LAC

Although innovative practices in international co-operation emerged during the crisis, structural shortcomings in supporting the region prevailed. Despite efforts – official development assistance reached an all-time high in 2020 – current international financial mechanisms have proven to be insufficient, particularly for middle-income countries which make up the majority of LAC countries. Co-operation with and within the region provides innovative examples of technical, South-South, triangular and even South-North co-operation that took place in the region throughout the crisis. Concrete transformative proposals were made, advancing a DiT approach, for example the Fund to Alleviate COVID-19 Economics (FACE) proposed by Costa Rica and the new Team Europe scheme co-ordinated by the European Union.

Looking ahead, international co-operation that facilitates a new social contract in LAC and enables a virtuous cycle between national and international development dynamics, calls for: i) mission-driven partnerships that prioritise equal-footing co-operation, participatory approaches and policy coherence across objectives and actors; ii) regional co-operation that strengthens the voice of the region in the world; and iii) a balanced use of tools, such as sustainable financing, global rules and standards; and technical co-operation for capacity building; all of which must be sustained by stronger international political and policy dialogues.

Mission-driven international partnerships entail thinking beyond currently defined areas and institutions to encompass all relevant resources, tools and actors in issue-based coalitions. With a predetermined objective and time-bound, mission-driven partnerships could provide better incentives to achieve measurable development results. Mission-driven partnerships could also drive the experimentation of new ways of bringing citizens into the conceptualisation and implementation of international co-operation. The active participation of groups representing civil society, the private sector, subnational governments and academia in the agenda-setting process would positively politicise and increase the legitimacy of its mission, turning it into an opportunity to connect global governance more closely to citizens’ daily concerns. Finally, mission-driven partnerships would put particular emphasis on addressing policy incoherence, whether among national and international objectives, or across policy objectives.

Regional co-operation and integration will be a key building block in this process. Regional initiatives have a big role to play to support national efforts towards new development models for the recovery, embrace megatrends like digital transformation as tools for recovery and create resilience in the face of future crises. The region is a unique space within which states facing similar challenges can share best practices and guidance on how to design policies, and compare results. Collaboration across the region can also help form a regional vision for action to face regional and global challenges. LAC could take stock of other regional initiatives, such as the European Union’s long-term budget, the African Union’s Agenda 2063 and the Association of Southeast Asian Nations’ Comprehensive Recovery Framework, to amplify a common voice in the multilateral system and leverage more transformative policy actions across the region in the long term through shared development agendas. LAC has a lot to learn from its own regional experience, from the Central American Integration System to the most recent participatory experience, supported by the United Nations Economic Commission for Latin America and the Caribbean, that led to the signature of the Escazú Agreement.

Table 2. Integrated approaches for international co-operation to enable a new social contract in LAC

Source: Own elaboration.

A balanced use of international co-operation tools, underpinned by strengthened international political and policy dialogues, is also crucial for LAC’s recovery. First, a co-ordinated solution for managing the challenge of debt should be a priority, especially considering the investments to be made in the medium and long term to recover and attain the SDGs. Innovative financing mechanisms should also be a priority, including improving the participation of the private sector. Second, the cross-border nature of major development issues not only calls for the improvement of national capacities but equally, or even more importantly, it requires multilateral agreements on shared rules and standards that reduce global inequality and promote policy coherence. Finally, international co-operation efforts should place particular emphasis on transferring capacities and exchanging innovative policy options for reinvigorating regional productive strategies, expanding the reach of social protection or ensuring environmental sustainability.

Continued transformation of international co-operation is essential to achieve the full potential of a new social contract in the region, align it with global agreements and involve LAC in the governance of global trends through effective multilateral co-operation. LAC is a fertile ground to strengthen and experiment new forms of multilateralism by boosting policy dialogue within the region and beyond, through equal-footing international policy partnerships that put people and policy first. The pressing need to adapt international co-operation so that it contributes meaningfully to the recovery by building new development models in the region, should translate into an urgent global call to action.

References

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