large LAC economies between 2017 and 2019 was around 29 percent, compared to the 23 percent average for all EMDEs.

# 7.3 Regional investment needs

Investment needs in the region remain signi fi cant, both regarding gross fi xed capital formation (GFCF) for services like transportation and digital connectivity and, beyond GFCF, regarding investment in human capital formation through improved healthcare and education. Low-quality infrastructure, re fl ecting historically low investment, weighs on regional productivity and economic growth. Thus, infrastructure bottlenecks may be a key factor limiting agglomeration-related productivity gains that might otherwise be expected to accrue from the region’s high levels of urbanization (Gómez-Lobo et al. 2022). High income and wealth inequality between and within countries contributes to highly variable performance on health and education indicators. Even the region’s richer countries have pockets of signi fi cant need, despite higher spending on human development than in other EMDEs (World Bank 2022f). LAC economies could bene fi t substantially from a global green transition, but realizing this potential will require greater investment in enabling industries, backed by conducive policy frameworks. More generally, the increase in labor productivity needed across LAC to raise living standards is likely to be achieved only through higher investment growth, including in the private sector.

Infrastructure. Surveys indicate that mediocre infrastructure is a key constraint holding back LAC’s development. In 2017, the average economy in LAC ranked 79th out of 136 countries on infrastructure quality, marginally better than the EMDE average but well below the averages of East Asia and the Paci fi c (EAP), Europe and Central Asia (ECA), and the Middle East and North Africa (MNA; World Economic Forum 2018). It has been estimated that meeting the infrastructure-related sustainable development goals (SDGs) will require infrastructure investment in LAC of around 4.5 percent of GDP annually at least ( fi gure 4.12; World Bank 2019c). Extrapolating from data from 2008-15, roughly 70 percent of such needed infrastructure investment (over 3 percent of GDP annually) is likely to be public, but in the years leading up to the pandemic, public infrastructure investment in LAC countries was about 1 percent of GDP, suggesting a sizeable public investment gap (Infralatam database; Serebrisky et al. 2018). Past estimates of the total infrastructure investment gap in LAC are in the range of 3 to 4 percent of GDP (Brichetti et al. 2021; Kohli and Basil 2011).

Inadequate infrastructure provision is likely to be a key contributor to high levels of urban congestion. This is an important challenge because LAC is projected to be the most urbanized EMDE region by 2050. Rising congestion costs may o ff set otherwise bene fi cial returns to scale in urban environments, representing one potential cause of an apparent lack of agglomeration bene fi ts in productivity growth in LAC cities (Gómez- Lobo et al. 2022). The annual cost of tra ffi c congestion alone is estimated to be worth more than 1 percent of production in the cities of Buenos Aires, Sao Paulo, Montevideo, and Santiago (Calatayud et al. 2021).