Brussels, 09 April 2018 – Three out of four Latin Americans today show little or no confidence in their national governments. Around 80% think corruption is widespread. These levels are both up from 55% and 67% respectively in 2010. Mistrust is rising as in most regions of the world and risks deepening the disconnect between people and public institutions, harming social cohesion and weakening the social contract.

Reconnecting public institutions with citizens by better responding to their demands is thus critical for strengthening growth and sustainable development in Latin America and the Caribbean (LAC) and for the well-being of the region’s citizens, according to the Latin American Economic Outlook 2018, Rethinking Institutions for Development. The region needs more transparent, capable, credible and innovative institutions if it wants to put itself on a higher and more inclusive development trajectory.

The report is jointly produced by the Development Centre of the Organisation for Economic Co-operation and Development (OECD), the United Nations Commission for Latin America and the Caribbean (UN-ECLAC), and the Development Bank of Latin America (CAF) in cooperation with the European Commission.

After five years of economic slowdown and a two-year recession in 2015-2016, LAC is on the path of a frail economic recovery. According to estimates in the Outlook, the region’s gross domestic product (GDP) is projected to increase again between 2 and 2.5% in 2018, after reaching 1.3% growth on average in 2017. This range masks wide heterogeneity within the region, with countries in Central America outperforming Mexico, South America and the Caribbean. The on-going recovery is due mostly to the improving global economic outlook, but also improvement in domestic conditions. Nevertheless growth performance remains less favourable than during the growth cycle of the 2000s.

The three organisations point out the critical role played by institutions in overcoming the middle-income trap –  the slowdown in growth taking place after reaching middle-income levels – in which most Latin American and Caribbean economies remain tangled. Countries in other regions that successfully overcame this trap invested in strong institutions, deepened their integration with the world economy and, in some cases, benefitted from significant external financing that supported public investment.

The weakening of the region’s economic performance over recent years already has had an impact on living standards and could jeopardise the remarkable socio-economic progress achieved over the previous decades. Today, 23% of Latin Americans still live below the poverty line, and around 40% belong to the vulnerable middle-class.

At the same time, the report highlights the rapid expansion of the middle-class as one of the major socio-economic transformations of recent times in LAC, between 2000 and 2015. 34.5 % of the population could be considered consolidated middle-class in 2015, up from 21% in 2001. If subjective measures of social class belonging are used, even more Latin Americans consider themselves as “middle class,” although their level of income would position them in the lower revenue category. The influence of the middle-class on the political agenda – driven by higher aspirations, growing expectations and evolving demands – may thus be even greater than statistics suggest and explain the growing dissatisfaction with the quality of public services.

The report notes that trust in public institutions declined and satisfaction with public services has deteriorated, eroding the social contract in the region. For instance, the share of the population satisfied with the quality of healthcare services fell from 57% in 2006 to 41 % in 2016, well below levels in the OECD of around 70%. Likewise, satisfaction with the education system fell from 63% to 56% over the same period. This contributes to citizens’ discontent and their unwillingness to pay taxes – so called “tax morale” – because they find them unjustifiable.

In 2015, 52% of Latin Americans said they wanted to evade taxes if possible, an increase of 6% since 2011. Discontent with public services is more pressing amongst vulnerable and poor Latin Americans who cannot afford to seek better quality, more expensive services from the private sector.

Supported by this evidence, the Latin American Economic Outlook 2018 calls for rethinking institutions and for building a new state-citizens-market nexus through three axes of policy actions:

• First, sounder institutions are needed to overcome the middle-income trap and to raise productivity through investments in infrastructure, skills, technology, and research and development to spur innovation, competition and better jobs. The region needs to diversify its production structure and increase its value-added. Further regional and global integration is key, notably by making the most of the promising dialogue between all regional integrations initiatives, notably the Pacific Alliance and Mercosur; and between the region and other trading blocs.
• Second, renewing the social contract in LAC demands reinforcing the credibility and capacity of states to fight corruption, deliver services and respond to citizens’ demands. Enforcing integrity at all levels of government and improving regulatory frameworks would foster greater accountability. As for making institutions more effective, the report points to several successful examples from the region of better mobilising tax revenues, strengthening administrative capacities – notably by enforcing merit-based recruitment systems – tapping centres of government (dedicated administrative units that help heads of government ensure the coherence of various sectoral policies), and improving public management cycles.  
• Finally, using new technologies to implement policies in innovative ways can help reconnect with citizens and prepare for the future. This involves, for instance, engaging better with civil society on new technologically innovative platforms, facilitating open-government policies and more extensively using big data analytics.

Participants at the report’s launch included Stefano Manservisi Director General for International Cooperation and Development at the European Commission; Christian Leffler, Deputy Secretary General for Global Economic Issues at the European External Action Service; Mario Cimoli, Deputy Executive Secretary of ECLAC; Mario Pezzini, Director of the OECD Development Centre and Special Advisor to the OECD Secretary-General on Development and Gonzalo de Castro, Senior Executive at CAF – Development Bank of Latin America.