Overcoming Latin America’s Stubborn Productivity Gap

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Call it Latin America’s perennial challenge: Low productivity.

Measured as output per worker or per hour, productivity in most of the region remains a fraction of that in advanced economies and has hardly improved over the past 75 years. The result is a development constraint that scholars and observers use to explain why Latin America and the Caribbean are currently immersed in a “low growth trap” that limits wages and political stability alike.

Early last year, the UN Development Program concluded in a report that low productivity is one of the “biggest obstacles” to regional growth and issued an urgent message to highlight the relevance of that constraint: “The region has struggled to take advantage of past technological revolutions and risks missing out on the benefits of digitalization and AI.” 

Recent data puts this structural challenge into perspective: Between 1950 and today, the region’s productivity relative to the U.S. barely moved, and a Latin American worker produces, on average, about one-fifth of what a U.S. worker produces, according to the World Bank. While East Asia used productivity gains to fuel its convergence with advanced economies, Latin America largely stagnated, and from 2005 to 2019, the region’s average productivity growth was negative. Growth spurts—such as the commodity exports boom of the early 2010s—came and went without translating into sustained efficiency or development gains. 

To make things worse, in 2017 the region reached a “milestone” in the decline of its productivity, even as average global productivity grew. That year, it was the first year in which “the region’s productivity fell below the global average, since when it has continued to drop further behind,” according to ECLAC.

Often discussed in abstract terms—total factor productivity, capital accumulation, human capital—the productivity problem is ubiquitous and entrenched, and its consequences are visible in everyday life across the region. Take logistics. A Brazilian agribusiness survey noted in 2024 that it can be cheaper to ship soybeans from Mato Grosso to China than to move them to Brazil’s own ports. In Mexico, a country lagging behind the G20 and the OECD on growth charts, small manufacturers complain that unreliable electricity and local extortion cost them more than labor costs, which explains why productivity has decreased from 38.2% in 2016 to 32.7% in 2023. In the Caribbean, the tourist industry quietly admits that bureaucratic delays to import basic equipment can add weeks—and significant costs—to routine investments. These anecdotes, echoed across sectors and countries, illustrate how inefficiency has become normalized.

A growing body of research has identified the persistent culprits, but also the solutions that we urgently need. Low productivity limits the region’s ability to capitalize on new global opportunities—including those emerging from today’s rapidly shifting trade environment.

Removing distortions 

Two recent studies offer insight and some hope about low productivity in the region. In its 2025 Regional Economic Outlook for the Western Hemisphere, published last October, the IMF mentions “productivity” 113 times across its 59 pages, labeling it as one of the region’s “structural challenges.” The report argues that “the lackluster productivity growth associated with persistent resource misallocation is among the most binding constraints in the region, together with sluggish firm-level productivity growth.”

To improve productivity, governments need to implement policies that enhance the performance of private companies, the main drivers of economic growth. “Boosting productivity calls for eliminating barriers to factor reallocation and financing frictions that hinder firm expansion,” the IMF’s economists wrote in the paper. “Removing policy distortions, such as subsidies and differential tax treatment, could also strengthen incentives for firms to grow.”

The IMF research shows three key problems across the region: lack of competition, size-based regulatory systems, and lack of access to financing. Market structures in Latin America are often characterized by high market concentration, with incumbents operating as monopolies or as dominant conglomerates. Less productive firms of all sizes are often buoyed by subsidies, weak or absent antitrust enforcement, and other preferential treatment afforded to incumbents.

Some of these advantages for incumbents may not even be intentional. Many of the region’s countries have size-based regulatory systems that treat large businesses differently than small and medium-sized enterprises (SMEs), with a view to encouraging SMEs. The downside is that this system causes some of the most productive SMEs to choose not to scale up.

Meanwhile, even some of the region’s most efficient firms sometimes struggle to access capital. According to the OECD, Latin America’s credit-to-GDP ratios are below emerging-market averages. Consider the case of Micro-, Small-, and Medium-sized Enterprises (MSMEs). They represent 25% of the region’s GDP, employ 60% of the population, but “their support to GDP growth is relatively small due to their low productivity and inability to raise funds to scale,” an IDB study concluded in 2023. The situation has resulted in a $1.8 trillion financing gap, or 35% of regional GDP, the MSME Finance Forum has recently estimated. For international investors, this gap signals an opportunity.

The productivity paradox 

Also in October, the United Nations’ ECLAC addressed the region’s low productivity by providing a sectoral analysis. Among its many important findings, one stands out: in Latin America, the lowest-productivity sectors account for most jobs.

Agriculture, cattle raising, and fisheries are the sectors with the lowest productivity, followed by commerce and construction, and they employ the majority of workers in each country in the hemisphere. In contrast, sectors such as mining, basic services, and business services account for “only a tiny fraction of the employment,” the report said, which results in labor productivity in Latin America and the Caribbean being only 29.7% as high as in the European Union.

To change this dynamic, Latin American governments and the private sector can collaborate to implement the necessary reforms to tackle this challenge. The IMF highlights New Zealand, Peru, and Estonia as examples of successful policy reforms. 

New Zealand became a model after its 1980s reform efforts increased competition, improved access to credit, and enhanced labor flexibility. The outcome was significant and vibrant. Peru passed similar laws in the 1990s, which led to increased capital and credit flows, turning the country into an economic success story during its Golden Decades (1993-2019), a 26-year stretch of steady growth that often doubled the pace of its regional peers. Estonia adopted new technology in the 2000s, embracing digital governance, making its former Soviet economy more transparent, and creating an environment where new companies in emerging industries could emerge and grow.

The recent success of Poland—now the world’s 20^th largest economy—helps show how. A World Bank study found that most of Poland’s explosive productivity growth over the last decade came from improvements within companies, driven by the adoption of new technologies, managerial practices, and a focus on innovation. 

A new horizon ahead

Multinational corporations (MNCs) can also play an important role in this transformation. The InterAmerican Development Bank (IDB) has found that these companies play a special role by bringing advanced technologies, global market access, and managerial expertise to emerging markets. Costa Rican firms collaborating with MNCs, for example “saw employment rise by 26% and productivity improve by 4%–9% within four years,” the bank recently reported. In other words, smart foreign investment can sometimes provide its own momentum for productivity gains.

There are other signs pointing to hope. The OECD recently observed that Latin American countries are increasingly shifting toward knowledge-intensive sectors—industries less vulnerable to commodity price swings and better aligned with global technology and innovation networks. This trend is occurring across sectors, such as pharma, technology, and agriculture. 

Costa Rica, Uruguay and Guatemala are building on their strong pharma production, and countries like Colombia and Brazil have drafted “bioeconomy plans” that touch sectors like chemicals, food, pharma and more. For investors, the growth of knowledge-driven sectors creates a virtuous cycle of opportunities in tech education and what that education will produce. 

Data centers also offer a clear opportunity for a breakthrough, given the region’s wealth in hydropower and other renewable energy sources.  At present, the region accounts for about 5% of global data center infrastructure. However, since 2024, close to 30 new data centers have either opened or are under construction, according to a report by IDB Invest, the investment arm of the IDB. Brazil, Mexico, and Chile are leading the expansion, but Colombia, Peru, and Costa Rica “are also emerging as attractive tech hubs,” the study found. 

The growing global demand for food may also help the region’s performance. Over the past few decades, Latin America has been one of the better-performing regions globally in agricultural productivity growth. Last December, a McKinsey report estimated that the region’s agri-food sector could generate about $425 billion in additional annual revenues by 2040, but this would require cumulative investment of up to $760 billion. “Latin America’s agri-food sector showcases a powerful combination of production capacity (crops, meat, fish, and fruits) and processing expertise (crops, meat, fish, fruits, and vegetables; beverages; oils and fats; and animal feed) across the value chain,” the study concluded.

Finally, an apparent shift toward a world of more regionally integrated supply chains may also play a role. Latin American countries, in addition to drawing closer to the U.S. supply chain, have huge growth possibilities if they can better integrate with each other; at present, only 15% of its trade occurs within the region, far below Europe (68%) or Asia (55%), according to the IDB. This means that Latin America can still realize productivity gains from deeper supply chain linkages, technology diffusion, and sectoral specialization.

Latin America’s productivity challenge stems from deep structural barriers and cannot be solved overnight. However, proactive governments and entrepreneurs recognize that the time to act is now, as we face the prospects of a third lost decade of growth, as ECLAC’s study warns. As the global economy shifts, the region has a crucial window of opportunity.

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Tags: Business, Economy, Growth Challenge, Latin America, Productivity