Latin America and the Caribbean (LAC) is recovering from a complex macroeconomic scenario. This chapter explores the economic landscape of LA9 assessed countries from 2020 to 2023, providing insights into the LAC labour market, informality, and the pivotal role of SMEs in driving an inclusive, resilient, and sustainable recovery. Additionally, it includes a dedicated section on women entrepreneurship, highlighting its significance in the region's economic revival.
SME Policy Index: Latin America and the Caribbean 2024
Towards an Inclusive, Resilient, and Sustainable Recovery
SME Policy Index
1. Economic context in Latin America and the Caribbean
Abstract
Overview
Economic context
Latin America and the Caribbean (LAC) is recovering from a complex macroeconomic scenario. In 2023, the region experienced a deceleration in economic growth and trade volume, along with persistent inflation surpassing pre-pandemic levels, challenging fiscal situation, escalating interest rates, and low growth in formal employment—defining elements of the economic policy during that year. This complex domestic scenario was further compounded by global financial uncertainties and a general slowdown in global growth and trade (ECLAC, 2023[1]). In a broader context, LAC sustained a path of low growth, with a rate of 2.3% in 2023, compared to 4.1% in 2022 (see Table 1.1).
Table 1.1. Real GDP growth for selected countries (2019-2023)
Note: LA9 refers to the simple average for the 9 LAC countries.
Source: Authors’ elaboration based on * (OECD, 2024[2]) ** (IMF, 2024[3]).
Despite tight monetary policies and falling commodity prices, regional inflation persisted above pre-pandemic levels. Following the inflationary effects of mobility restrictions during and after the pandemic, the global landscape was further impacted by Russia's war of aggression against Ukraine. In the first half of 2022, the upswing in food prices, oil, and transport costs, along with ongoing disruptions in supply chains and heightened financial volatility, contributed to an increase in inflation across LAC economies. The second half of 2022 witnessed several factors leading to a decline in regional inflation, including the deceleration in domestic aggregate demand, the conclusion of support policies for aggregate demand implemented during the pandemic, the adoption of contractionary monetary policies, and lower global prices for food and energy. This trend persisted into the first half of 2023, with inflation standing at 4.9% in year-on-year terms as of June that year (ECLAC, 2023[1]).
Commodity prices, particularly energy commodities, experienced a downward trend since the second half of 2022. This shift was influenced by factors such as a cooler-than-expected start to the year in the northern hemisphere, impacting natural gas and coal prices, and the global economic slowdown, affecting overall energy demand. Notably, it is anticipated that by 2024, commodity prices will remain more than 30% above the average levels recorded in 2019, pre-pandemic onset (ECLAC, 2023[1]).
LAC labour market
While the number of employed people increased by 2% in 2023 compared to 2022, the growth rate decelerated in line with economic activity. ECLAC reports a 1.4% growth in the employment rate for 2023, a notable reduction from the 5.4% recorded in 2022. This trend of slower job creation is expected to continue into 2024, with a projected growth of 1% (ECLAC, 2023[4]). Although the regional unemployment rate steadily declined from 10.5% in 2020 to 6.3% in 2023, concerns have emerged regarding the limitations of standard unemployment measures in capturing the full labour market situation. It is argued that broader measures, which include individuals classified as inactive but ready to take a job, may offer a more nuanced perspective on the state of employment. An alternative unemployment rate measure, accounting for part of the inactive population, suggests levels up to 7 percentage points higher than officially recorded rates. In 2023, this adjusted rate reached 7.2%, 0.9 percentage points higher than the recorded rate (ECLAC, 2023[4]). Looking ahead, the regional unemployment rate for 2024 is expected to increase between 6.5% and 6.8% (ILO, 2024[5]).
Informality
In 2019, one out of every two employed people in LAC held informal jobs. At the onset of the COVID-19 crisis, the informality rate initially declined due to significant job losses, but subsequently, most of the recovered jobs returned under informal conditions (ILO, 2021[6]). By the end of 2021, the region counted a 60% informality rate (ILO, 2021[6]). Although the average informal employment rate decreased from the second half of 2021, the trend continued in 2023, with an average informal employment rate of 47.3%.
It is noteworthy that, since the beginning of the COVID-19 pandemic in the region, various direct actions have been implemented to sustain businesses, preserve employment, mitigate household income losses—particularly for vulnerable households primarily in the informal economy—and generate new jobs. Initially, most countries responded promptly to alleviate negative economic and employment effects by implementing programmes aimed at protecting formal employment and compensating for the loss of labour and household income, especially within the informal economy. Concurrently, income support measures have been in place in several countries throughout this period, initially addressing the loss of labour income during the most critical phase of the pandemic, and later dealing with escalating inflation and the resulting decline in the purchasing power of labour and household incomes (ILO, 2022[7]).
SMEs as the engine towards an inclusive, resilient, and sustainable recovery
SMEs play a crucial role in driving economic recovery from crises, including the impact of the COVID-19 pandemic and more recent challenges such as supply chain disruptions and escalating energy costs derived from Russia's war of aggression against Ukraine. Fostering SMEs not only facilitates innovation, necessary for seizing new opportunities and boosting productivity, but also addresses societal challenges. This emphasis on entrepreneurship becomes imperative for governments globally (GEM, 2023[8]).
In LAC, SMEs form a fundamental part of the business landscape, contributing significantly to economic development and growth strategies. Within the formal economy, SMEs represent 99.5% of enterprises in the region, with microenterprises constituting the majority at 88.4% (Dini and Stumpo, 2020[9]). However, the region faces challenges such as low levels of productivity among SMEs, generating only a quarter of the regional GDP (CAF, 2018[10]).Factors like limited productive capacities, informality, and specialisation in raw materials contribute to this productivity gap, with nearly 50% of SMEs operating informally and facing constraints in accessing skilled human resources, infrastructure, managerial, and technological capabilities (ILO, 2022[11]).
Across LAC, there has been a consistent stagnation in both Labour Productivity (LP) and Total Factor Productivity (TFP) since before the COVID-19 pandemic. From 2013-2018, labour productivity in the region experienced an average annual increase of only 0.4%, significantly below the average rate of 1.7% per year recorded from 2003-2008. This growth rate places the region second lowest among the six regions in emerging and developing economies globally during the considered period (ILO, 2022[11]).
LAC governments have identified the promotion of SMEs as a policy priority. SMEs have remained at the centre of countries' agendas to propel economic growth, reduce poverty and inequality, and integrate SMEs into the fundamental, dynamic component of the productive structure. In LAC, the state has played a fundamental role in the promotion of SMEs, and its policies have a direct impact on their evolution. Well-designed, implemented, monitored, and evaluated public policies can help improve the business environment and create the necessary conditions for SMEs to grow and prosper.
Furthermore, the development of SMEs is a marked priority for policymakers, as SMEs not only drive economic growth but also contribute significantly to job creation, poverty reduction, and addressing inequality. This necessitates a public policy framework that targets various segments of the SME population through a range of initiatives (OECD/CAF, 2019[12]). Additionally, the perception of citizens towards companies plays a crucial role, as these entities are crucial for productive transformation and are key sources of investment. Therefore, governments in the region should actively implement a series of policies aimed at encouraging SMEs to boost investment and hire new employees.
Support for SMEs can be justified by the existence of positive externalities derived from their associative capacity to generate demand for goods and services from other productive sectors. In this case, these positive attributes serve as an argument for supporting the emergence and development of SMEs. A second group of arguments is based on equity issues, given that SMEs represent a high percentage of the labour force, especially those with lower skill levels and more limited job opportunities. Supporting the growth, technification, and productive development of SMEs can be seen as a mechanism for improving the livelihoods of those who derive their income from the business activities of these enterprises. LAC governments have designed policies in this sector with three main objectives: job creation, solving market failures, and increasing competitiveness. Additionally, other goals, such as the development of human and managerial capital and innovation capacities, have been proposed in these policies. These promotion schemes encompass various policy areas, as summarised in Figure 1.1.
Figure 1.1. Area of state involvement
Source: Authors’ elaboration based on (UNCTAD, 2021[13]) (GEM, 2023[8]) (ILO, 2021[6])
Women entrepreneurship
Women entrepreneurs in the region are challenging traditional gender barriers and spearheading successful business initiatives across various sectors. In terms of economic autonomy in LAC, one out of every two women is excluded from the labour market, while for men, it is one out of every four. Additionally, one out of every three women has no income of her own, compared to one out of every ten men (ECLAC, 2023[1]). Nevertheless, recent years have witnessed an increase in women's economic participation and a growing awareness of the importance of promoting equal opportunities, reflected in the modification of regional public agendas where reducing the gender gap is a priority (GEM, 2023[8]). This commitment is further underscored by countries' decision to incorporate, for the first time, a gender mainstreaming approach in the second edition of the SME Policy Index.
In this regard, regional governments are encouraged to give attention to the promotion of programmes that support the achievement of the SDGs, particularly focusing on Goal Five. This goal emphasises providing women and girls with equal access to education and healthcare, opportunities for decent work, and representation in political and economic decision-making processes. Gender-sensitive public policy programmes can play a crucial role in creating an enabling environment for women to start and grow their businesses. Key areas that public policy must address to support female entrepreneurship include access to financing, education and training, and the removal of legal and regulatory barriers.
References
[10] CAF (2018), América Latina: en busca de pymes más competitivas, https://www.caf.com/es/actualidad/noticias/2016/06/america-latina-en-busca-de-pymes-mas-competitivas/.
[9] Dini, M. and G. Stumpo (2020), Mipymes en América Latina: un frágil desempeño y nuevos desafíos para las políticas de fomento, https://repositorio.cepal.org/server/api/core/bitstreams/2c7fec3c-c404-496b-a0da-e6a14b1cee48/content.
[4] ECLAC (2023), Balance Preliminar de las Economías de América Latina y el Caribe, https://repositorio.cepal.org/server/api/core/bitstreams/3134f367-6f78-4e17-b22c-
[1] ECLAC (2023), Estudio Económico de América Latina y el Caribe. El financiamiento de una transición sostenible: inversión para crecer y enfrentar el cambio climático, https://repositorio.cepal.org/server/api/core/bitstreams/4a7c3fb9-83f3-45e3-94e1-35318fa65fbd/content.
[8] GEM (2023), Global Entrepreneurship Monitor 2022/2023 Global Report. Adapting to a “New Normal”, https://www.gemconsortium.org/reports/latest-global-report.
[5] ILO (2024), World Employment and Social Outlook Trends 2024, https://doi.org/10.54394/HQAE1085.
[7] ILO (2022), 2022 Labour Overview of Latin America and the Caribbean, https://www.ilo.org/wcmsp5/groups/public/---americas/---ro-lima/documents/publication/wcms_867497.pdf.
[11] ILO (2022), Informe Regional Productividad. Transición digital, cambio tecnológico y políticas de desarrollo productivo en ALC: desafíos y oportunidades, https://www.ilo.org/wcmsp5/groups/public/---americas/---ro-lima/documents/publication/wcms_847153.pdf.
[6] ILO (2021), 2021 Labour Overview of Latin America and the Caribbean, https://www.oitcinterfor.org/sites/default/files/file_publicacion/plaboral2021.pdf.
[3] IMF (2024), World Economic Outlook Update, January 2024: Moderating Inflation and Steady Growth Open Path to Soft Landing, https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024.
[2] OECD (2024), Real GDP forecast (indicator), https://doi.org/10.1787/1f84150b-en (accessed on 13 March 2024).
[12] OECD/CAF (2019), Latin America and the Caribbean 2019: Policies for Competitive SMEs in the Pacific, OECD Publishing, https://doi.org/10.1787/d9e1e5f0-en.
[13] UNCTAD (2021), Informe sobre el Comercio y el Desarrollo 2021 de la UNCTAD: de la recuperación a la resiliencia: ¿juntos codo con codo o sucumbir uno tras otro?, https://unctad.org/es/press-material/informe-sobre-el-comercio-y-el-desarrollo