Lower interest rates, slowing inflation and structural reforms can help attract much needed investments, says World Bank report
WASHINGTON, October 09, 2024 - Latin America and the Caribbean (LAC) will grow 1.9 percent in 2024, slightly exceeding previous estimates, according to the World Bank's report "Taxing Wealth for Equity and Growth" published today. In 2025, the region is forecast to grow 2.6 percent. These are the lowest rates among all global regions, highlighting persistent structural bottlenecks.
To accelerate growth, the region must seize the current momentum. The U.S. Federal Reserve's decision to lower interest rates is expected to provide some relief. Inflation control is another positive development, thanks to the region's effective macroeconomic management. Brazil and Peru are on track to meet their inflation targets in 2024, with other major economies expected to follow soon after.
"The region has made strides in managing inflation and stabilizing its macroeconomic environment. This is a crucial moment to leverage these achievements to attract the investments necessary for sustainable development, foster innovation, build human capital, create more and better jobs, and empower the region to break free from this low-growth cycle," said Carlos Felipe Jaramillo, World Bank Vice President for Latin America and the Caribbean.
The report highlights that both public and private investments in LAC remain low, and the region is not fully capitalizing on nearshoring opportunities. Foreign direct investment (FDI) levels are below those of 13 years ago in real terms, with greenfield investment announcements favoring other regions. DespiteThis is a good time for the region to reconsider how its tax systems can best generate revenue while stimulating growth and advancing equity," said William Maloney, World Bank Chief Economist for Latin America and the Caribbean.Seizing LAC's major windows of opportunity, the green transition and the nearshoring movement, requires structural reforms across the board to make the region more productive and competitive. This will require generating more fiscal space, improving government efficacy, as well as reducing the tax burden on the productive sectors. This is a good time for the region to reconsider how its tax systems can best generate revenue while stimulating growth and advancing equity," said William Maloney, World Bank Chief Economist for Latin America and the Caribbean.
Taxing Wealth for Equity and Growth
According to the report, the debt-to-GDP ratio rose to 62.8 percent in 2024, up from 59.1 percent in 2019, and high debt levels and servicing costs continue to hinder the region's ability to create fiscal space for public spending and investment. Closing this gap is part of a broader development agenda, including improvements in administrative capacity, spending, and revenue collection.
The report looks at different options countries can explore in this context and takes a deeper dive on wealth taxes to generate fiscal space, equalize incomes, and stimulate growth. Currently, LAC has some of the highest statutory corporate taxes globally, averaging 24.7 percent, which is higher than the OECD average of 23.9 percent and Asia's 19 percent. However, LAC collects only 2.7 percent of its revenues from wealth taxes, compared to 12.8 percent in North America and 4.3 percent in Western and Central Europe.
Among the different types of wealth, the report identifies property taxes as a possible avenue to focus. It finds that LAC countries have a "property tax paradox": 80 percent of wealth in the region is held in real estate, even among the top 10 percent of earners, yet countries typically collect only 2 percent of their tax revenue from property taxes. In North America, about 47 percent of wealth is held in real estate, and helps to collect about 12.8 percent of tax revenues.
The report recommends modernizing property valuation systems and collection efforts to benefit from this potential. According to some studies, properly administered property taxes could contribute up to 3 percent of GDP, significantly enhancing the region's capacity to finance development.
Revisiting property taxes also has an important equity component. They can empower subnational governments entrusted with their collection, incentivize more productive and environmentally friendly land use, and shift the fiscal burden away from the business environment. However, the report warns that reforms must be carefully designed to ensure progressivity and avoid burdening low-income property owners.
Access the report here.
Website: www.worldbank.org/caribbean
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