Stagnant Urban Productivity Stunts Latin America’s Economic Growth, Plus Chinese Lenders Turn Away From Latin America

Stagnant urban productivity stunts Latin America’s economic growth. Latin America’s economic growth fell behind Asia’s in the twenty-first century, increasing at half the speed. A recent World Bank study explains why: cities are not particularly productive. Over the last two decades, rural areas saw boosts in productivity and to their economies due to agricultural advancements and rising global demand for minerals and farm products. But cities did not, lessening the urban/rural divide as productivity levels and living standards converged, but overall innovation and economic growth stagnated.

Part of the reason is Latin America’s deindustrialization. Over the last thirty-five years, manufacturing output and jobs faded rapidly, hit by increased competition from imports—led by China’s entry to the World Trade Organization. Yet as manufacturing faded it was rarely replaced with advanced tradable services such as finance, insurance, and information technology. Instead, more workers became stuck in less productive retail, construction, and personal services.

Another factor is moving to cities often doesn’t bring big economic gains for workers. Congestion, poor infrastructure, bad urban planning, and limited public transport segregate people within cities. Poorer people find it hard to leave their neighborhoods, to access public services, and to find better jobs. Large informal economies, with few regulations or worker protections and benefits, further diminish economic upside.

Limited connections between bigger and smaller cities hold back growth as well. It makes it hard to move between locations, and means opportunities don’t flow to more affordable and nearer locales. And the lack of fast, reliable, and affordable high-speed internet limits the possibility of remote work taking hold elsewhere and rewarding talented workers nationally. 

The study points to solutions. Widespread, efficient, and affordable public transport matters for economic growth. Latin America countries spend far less on public investment—just 3 percent of GDP since 1990—than East Asia and other emerging economies. Digital infrastructure matters too, opening career opportunities to workers who remain in place. Such real and virtual connections could make cities an answer to—rather than a source of—low growth.

Chinese lenders turn away from Latin America. China’s financial interest in Latin America began to fall in the late 2010s and has yet to recover. In both absolute dollar amounts and the number of loans, Latin America is increasingly an afterthought for the world’s second largest economy. A new report by the Inter-American Dialogue and the Boston University Global Development Policy Center lays out the stark data trends: Chinese development finance institutions (DFIs) issued less than $1.5 billion in loans in 2023, deepening the downsizing trend. Foreign direct investment (FDI) fell too from an annual average of $14.2 billion per year between 2010 and 2019 to $6.4 billion in 2022. 

The almost decade-long downturn reflects the scaling back of China’s Belt and Road Initiative and lessening needs for Latin America’s commodities as China’s real estate and construction sectors slow. It also results from China’s past bad bets, including billions of dollars to Venezuela and Ecuador. The $1.5 billion China did loan in Latin America last year went mostly to Brazil to build out its infrastructure and green economy. In contrast, Southeast Asia saw FDI from China rise 130 percent over the last decade to some $16 billion in 2022. 

China’s lending pullback leaves a huge financing hole for nations desperate to upgrade their digital and physical infrastructure. But it also provides an opportunity for new lenders and loans on better terms. Chinese loans are often opaque and the terms sometimes quite onerous. More and broader public auctions could bring greater transparency and accountability to public works and infrastructure projects. And with the World Bank and the Inter-American Development Bank again the region’s largest funders, Latin American governments have a greater say in setting the priorities.