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Latin America’s Missing Middles

Decades of weak growth in Latin America have left large parts of the population economically vulnerable. But by taking advantage of digital disruption, the region has a golden opportunity to nurture faster growth that benefits everyone.

MEXICO CITY – Once the world’s most prosperous emerging-market region, Latin America is in danger of being overtaken by its peers, owing to its sluggish and unevenly distributed growth. To break that pattern and make growth more dynamic and inclusive, Latin American economies must fill two “missing middles”: a lack of medium-size firms that can foster competition, and too few middle-class consumers whose spending could create much-needed demand. Harnessing the power of new digital technologies will be crucial to meeting both imperatives.

Despite reform initiatives and poverty reduction, the region’s economies are struggling. GDP growth in the region averaged just 2.8% per year between 2000 and 2016, well below the 4.8% average rate in 56 other emerging economies. Moreover, labor-force expansion accounted for 72% of Latin America’s growth over that period. As fertility rates fall, the region will need to increase productivity to compensate.

Although Latin America is home to some highly productive global companies, it lacks the backbone of midsize firms that drive innovation and competition – and create productive, well-paying jobs – in more vibrant economies. The region has fewer large- and medium-size firms (with more than $50 million in annual revenue) than Turkey, India, South Africa, and many high-performing Asian emerging-market economies; and those it does have are far less productive than its large businesses. Compounding the problem, many Latin American economies have a long tail of small, often informal companies that collectively employ millions, but that hold back growth because of their low productivity.