Can AI Drive Latin America’s Economic Revival? Exploring Solutions for Productivity Stagnation

The IMF's 2024 report explores how artificial intelligence (AI) can help boost stagnant productivity in Latin America and the Caribbean, emphasizing the need for policies to enhance technology diffusion, workforce transition, and infrastructure investment. Despite the potential for AI to transform industries, the region faces significant challenges in adoption due to large informal sectors and inadequate human capital.

The International Monetary Fund’s (IMF) October 2024 paper by Bas Bakker, Sophia Chen, Dmitry Vasilyev, Olga Bespalova, Moya Chin, Daria Kolpakova, Archit Singhal, and Yuanchen Yang, explores the potential of artificial intelligence (AI) to address the long-standing issue of stagnant productivity in Latin America and the Caribbean (LAC). Since 1980, income levels in LAC have failed to converge with those of the United States, a trend that contrasts sharply with the rapid economic growth seen in emerging Asia and Europe. A primary reason for this lack of convergence is the region's sluggish labor productivity growth, which has been broad-based across industries, compounded by a large informal sector. Unlike regions where the formal economy has absorbed much of the informal sector, LAC has struggled to transition workers and firms to the formal sector, limiting productivity gains.

The Slow Adoption of Technology in LAC

One of the core issues in LAC is the slow diffusion of technology, especially compared to other emerging markets in Asia and advanced economies. Firms in the formal sector, which are crucial for driving productivity, have not widely adopted the latest digital technologies, including AI. This has led to stagnation in output growth, which further restricts the ability of these sectors to attract workers away from the informal economy. The reasons for this slow adoption include poor governance, weak competition, inadequate human capital, and low investment in research and development (R&D). As a result, technology, which has driven substantial productivity gains in other parts of the world, has had a limited impact on LAC’s economy.

AI's Potential to Transform the Economy

AI has the potential to significantly boost productivity in LAC by transforming industries and enabling firms to leapfrog outdated technologies, similar to the impact that personal computers and the internet had in previous decades. AI could help formalize the economy, reduce informality, and foster economic growth, particularly in sectors like healthcare, finance, and education. Despite this potential, LAC faces a real risk of falling further behind advanced economies and frontier emerging markets in adopting AI technologies. This risk is particularly pronounced due to the large size of the informal economy in the region, which reduces overall exposure to AI technologies. In advanced economies, up to 60 percent of the workforce is exposed to AI, compared to less than 40 percent in LAC. The region’s large informal sector, lack of specialized AI talent, and smaller firms all contribute to the lower adoption rates of AI technologies. However, the formal sector’s exposure to AI is comparable to that of advanced economies, which indicates that there is significant potential for growth if the region can overcome its structural challenges.

The Dual Effect of AI on Jobs and Productivity

The adoption of AI technologies has the potential to transform sectors by automating processes, enhancing efficiency, and reducing costs. For example, AI can help doctors in healthcare by automating administrative tasks, allowing them to spend more time with patients. Similarly, AI can be used in sectors like agriculture and logistics to optimize operations and improve decision-making. However, as with any technological advancement, AI could also lead to job displacement, particularly in roles that are highly exposed to automation, such as call centers. The report suggests that around 25 percent of jobs in key LAC countries, including Brazil, Chile, Colombia, Mexico, and Peru, are highly exposed to AI and at risk of automation. At the same time, AI will create new opportunities in other sectors by improving productivity and enabling firms to create new kinds of jobs, similar to how previous waves of automation generated new employment opportunities.

Policy Recommendations for AI Adoption

To ensure that LAC can fully benefit from AI, the IMF report emphasizes the need for governments to implement policies that facilitate technology diffusion and support workforce transitions. Key policy recommendations include fostering competition by lowering entry barriers for new firms, upgrading regulatory frameworks around data protection and cybersecurity, and investing in digital infrastructure to support broader access to AI technologies. Addressing the skills gap through AI-focused education and training programs is also crucial for equipping workers with the necessary skills to thrive in an AI-driven economy. Additionally, implementing unemployment insurance schemes could help mitigate the negative impact of AI on workers, ensuring a smoother transition for those displaced by automation. Moreover, significant investments in digital infrastructure, particularly in underserved areas, are essential for enabling broader participation in the digital economy.

The Future of AI in Latin America

The report concludes that AI presents a unique opportunity for LAC to enhance productivity and stimulate economic growth, but the region’s success will depend on its ability to overcome significant structural barriers. By focusing on policies that promote technology adoption, formalization of the economy, and human capital development, LAC can capitalize on the potential of AI to transform its economy. However, without concerted efforts to address the region’s underlying challenges, LAC risks falling further behind advanced economies and missing out on the benefits of the AI revolution. With the right policies and investments, AI could serve as a critical tool in reversing the region’s productivity stagnation and enabling it to converge with more developed economies over time.