Caio Silva Santiago Chile
Santiago, Chile. (Image: Caio Silva via Unsplash)

Industrialization in Latin America and the Caribbean: Challenges and opportunities

The LAC countries’ ability to capitalize on opportunities will depend on their policy responses based on reliable data

By Diego Masera

Sustainable industrialization remains a major avenue for developing countries to achieve economic growth while realizing many of the socioeconomic and environmental objectives identified in the 2030 Agenda for Sustainable Development, specifically Sustainable Development Goal (SDG) 9, which calls for inclusive and sustainable industrial development (ISID).

The significance of a sustainable and inclusive industrialization has further increased as part of the solution to the COVID-19 pandemic and the climate change impacts. ‘Growing back better and green’ has become the objective of many nations and sustainable and inclusive industrialization is paramount to achieve this. Moreover, digitalization is emerging as a requirement for a green transition, as the majority of new technologies are based on or use digital systems.

In this context, there is evidence of a renewed consensus that governments should play a decisive role in shaping the pattern of industrialization. Over 100 countries worldwide have introduced formal industrial policies in recent years.1 The objectives of most of these industrial policies are in line with SDG-9, which continues to serve as a guide for evaluating progress made by countries in terms of industrialization.

Nevertheless, industrialization has not progressed uniformly across the world. The manufacturing sector in Latin America and the Caribbean (LAC) has witnessed a decrease in relative economic importance in recent decades, and its added value is currently at a historic low (figure below). Although the fragmentation of value chainscharacterized by a relocation of certain production activities to developing countriesis a natural consequence of globalization, LAC has remained on the periphery of these developments. Not only has the region failed to participate in productive international value chains as opposed to Asia, it has also been unsuccessful in defending its consumer markets against emerging international competitors. Consequently, the integration of LAC countries in production activities has been especially low, further manifesting dependence on manufacturing imports from outside the region.

Manufacturing value added per capita (constant 2015 US $)

Source: IAP with data from UNIDO MVA 2021 Database.

The region’s inability to take advantage of global value chains (GVCs) reflects a premature abandonment of industrial policies during the 1990s and 2000s in favour of the neo-liberal economic policies associated with the Washington Consensus. Instead of internationalizing their production, LAC countries experienced premature deindustrialization and the internationalization of domestic consumption markets. The relative importance of LAC’s industrial sector has further declined in the wake of the COVID-19 crisis (figure above), with an estimated contraction of annual MVA growth of 12 per cent in 2020. This is the largest decline in any region in the world.

Challenges to industrial development: Tackling climate change and increasing digitalization

Some of the transformations triggered by the aforementioned global challenges have an impact on LAC countries, but may also offer an opportunity for the region to get back on track and to foster industrialization in line with SDG-9.  

Climate change

Climate change adaptation and mitigation measures are major drivers of legislative and regulatory reforms that are shaping both national and international production networks. Additionally, climate change calls for a drastic energy transition towards sustainable solutions and changes in consumption patterns, which in turn impacts production practices. There is a strong case for leveraging industrial policy to facilitate sustainable growth. As exemplified by the upfront R&D costs in green technologies, by the positive social and environmental spillovers, and the under-pricing of carbon emissions, there seems to be a mismatch between financial and social returns on investment.2 Supply-side measures to incentivize, among others, decarbonization, renewable energy, higher resource efficiency, green materials and circular economy practices, are increasingly being embedded in the industrial strategies of both advanced and developing countries.


The world has entered the Fourth Industrial Revolution (4IR), which is characterized by the rise of disruptive technologies, advanced manufacturing and digitalization. The COVID-19 pandemic has accelerated the transformation of the global production landscape and has intensified the adoption of advanced technologies such as artificial intelligence (AI), robotics, big data and the Internet of Things (IoT). According to UNIDO’s 2020 Industrial Development Report, such technologies are largely concentrated within advanced economies.3 LAC countries, with few exceptions, are considered latecomers in adopting advanced productive technologies. Even those countries with a higher involvement in manufacturing, such as Argentina, Brazil, Colombia and Mexico, are more likely to be consumers of imported (advanced) technologies rather than developers of such technologies. This implies that there is a lack of capabilities in LAC countries to develop, absorb, deploy and diffuse more advanced technologies. The relevance of the latter lies in the fact that production capability is one of the major determinants of new technology adoption.

Monitoring and benchmarking progress made towards achieving sustainable industrialization

There are a number of key indicators to better understand and monitor progress made towards achieving sustainable industrialization and SDG-9. For the purpose of this article, the following three indicators have been selected: a) CO2emissions (kg of CO2 per unit of manufacturing value added – constant 2015 US $; b) Medium- and high-tech industry value added as a share of total value added (%), and c) Adoption of digital technology in LAC manufacturing firms.

The environmental efficiency of several regions’ industrial production in terms of CO2 emissions per unit of manufacturing value added (MVA) are illustrated in the figure below. Amongst the regions included, LAC stands out as the best performing region with reference to CO2 emissions – carbon emissions in the region are well below developing regions’ average, and have been declining (thus improving) since the 2000s. This can be explained by the region’s widespread use of renewable or low-carbon energy technology, especially in Brazil. Renewable sources account for nearly half of Brazil’s total energy consumption, with 65 per cent of the country’s electricity being supplied by hydroelectric power plants (compared with the global average of just 15 per cent).

Regional averages of CO2 emissions for LAC countries and sub-regions

Note: The figures present data as regional averages for LAC countries and sub-regions.(Mexico is included in the Central America data.) Corresponding values for other regional aggregates and world averages are reported for comparison. 

Source: IAP with data from UNIDO MVA 2021 Database and IEA (2020), CO2 Emissions from Fuel Combustion.

The share of medium- and high-tech industry as a share of total value added (figure below) provides an (imperfect) indication of shifts in specialization within manufacturing over time. LAC is lagging behind other regions, with Central America (excluding Mexico) and the Caribbean showing a particularly poor performance. Mexico is an exception, however, with a share of nearly 40 per cent, primarily attributable to its participation in the North American Free Trade Agreement (NAFTA).

Medium- and high-tech industry value added as a share of total value added (%)

Source: IAP with data from the CIP 2020 database.

The LAC region’s weak domestic technological development is reflected in other indicators as well. A recent UNIDO survey shows that only 13 per cent of manufacturing firms in the region use advanced digital technologies (figure below). Although this gap is less pronounced in countries such as Argentina and Brazil, than it is in others, such as Bolivia, the figure is lower than the average for middle-income Asian countries (19 per cent).

Adoption of digital technology in manufacturing firms

Note: “Analogic”: standard non-microelectronic-based systems; “Rigid” non-integrated machines; “Lean” full or partial automation; “ADPTs”: computerized/smart technologies for both customers and production.

Source: Calza, E., Lavopa, A. and L. Zagato (2021) Advanced digital technologies and industrial resilience during COVID-19 pandemic: a firm-level perspective.

Transforming challenges into opportunities

Advanced digital production technologies and the transition to more sustainable production activities have the potential to redefine traditional industries and to create new ones, thereby restructuring the international production system and transforming global value chains (GVCs). Nevertheless, these developments entail both risks and opportunities for the LAC region.

On the one hand, automation and digital technologies are more likely to replace low-skilled tasks, which could prompt some advanced countries to reshore some of their production activities. This poses a serious threat to the socioeconomic development of the LAC region which has traditionally operated in upstream activities of GVCs. The downsizing of low-skilled manufacturing jobs will disproportionately affect the most vulnerable groups, thereby exacerbating social and income inequalities. On the other hand, digital technologies can also create new job opportunities in complementary activities, albeit mostly in high-skilled job categories.

LAC countries are especially vulnerable to the physical effects of climate change, which pose a particular risk for less developed countries, vulnerable groups and coastal and commodity-based economies. The transition to a circular economy therefore represents a window of opportunity for the region. LAC economies, which are heavily reliant on natural resources, can promote intra-sectoral diversification and generate higher value-added from by-products.4 A study by ECLAC and the International Labour Organization (ILO),5 for example, estimates that the adoption of circular economy principles could add a net total of 4.8 million jobs in the region by 2030.

Some LAC countries have already mapped future trajectories and developed strategic responses to these global challenges. These include Colombia’s Visión 2032, Mexico’s Visión 2030, Peru’s National Roadmap for Circular Economy in the Industrial Sector, Uruguay’s National Circular Economy Action Plan, and Chile’s Strategic Programme Smart Industries 2015–2025. Other countries, including Argentina and Brazil, have established working groups to discuss challenges and explore ways to address them.6 As the industrial and technological race intensifies, the LAC region continues to lag far behind developed regions, and even behind some developing regions in Asia.

Ultimately, the impact of both climate change and digitalization and the LAC countries’ ability to capitalize on productivity and employment opportunities will depend on their policy responses based on reliable data. The region will need to deploy a wide range of industrial policies if it is to successfully build the necessary industrial and technological capabilities, and to develop the skills, institutions and digital infrastructure required to achieve sustainable and inclusive industrial development.

In this context, UNIDO has introduced the SDG-9 Accelerator, a collaboration, communication and information platform that provides decision makers, experts and civil society with opportunities for knowledge exchange, tools and good practices in pursuit of SDG-9. The network promotes South–South cooperation by bringing together business, government and civil society, and facilitating access to technical services and knowledge in priority sectors. It also includes capacity-building opportunities as well as activities to support governments in the formulation and implementation of industrial policies that address and respond to global challenges and their impacts on the region.

We thank Marco Sanfilippo and Lídia Ruppert for their background research, as well as Aiden Selsick and Niki Rodousakis for their editorial guidance.

  • Diego Masera is Deputy Director, Department of Programmes, Partnerships and Field Integration, and Chief of the Latin America and the Caribbean Division at the United Nations Industrial Development Organization (UNIDO).

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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