factor contributing to the widening income gap between most LAC countries and the United States (Daude and Fernández-Arias 2010).<sup>23</sup> The contribution of labor force growth to LAC’s potential output growth has declined substantially since the early 2000s, mainly owing to falling population growth. The growth of the working-age population fell to an average of 1.3 percent a year in 2011-21 from 1.8 percent a year in 2000-10 in spite of a marginal rise in the working-age share of the population. Labor’s contribution to growth has declined even though female labor force participation has risen more than in other EMDE regions. It increased by approximately 10 percentage points between the mid-1990s and 2019, reaching nearly 60 percent.

The growth of fixed capital investment in LAC over 2000-21 broadly followed the contours of movements in commodity prices and the region’s terms of trade. It was weak in the early 2000s, stronger in the decade 2003-13 (except for the period of the global financial crisis), and weaker again in 2014-19, contracting by 1.3 percent a year on average. There was then a collapse of more than 11 percent in the 2020 recession, followed by a rebound in 2021 amid sharply rising commodity prices. In 2011-21, investment grew at an average of just 1 percent a year, well below the 2000-10 annual average of 4.5 percent. Although the deterioration in the region’s terms of trade was a key factor underlying much of the investment decline prior to the pandemic, policy uncertainty and bouts of tightening financial conditions have also been important (IMF 2015; World Bank 2016, 2017a). The role of commodity price movements was augmented in some commodity-exporting countries by procyclical effects on fiscal revenues and public capital expenditures.

In terms of LAC’s three sub-regions, the slowing of potential growth between 2000-10 and 2011-21 is accounted for predominantly by South America—the largest subregion in economic size. Around half of the countries in South America experienced a slowdown in potential growth, including the largest two economies, Brazil and Argentina (figure 12). Although the contribution to potential growth from TFP in Mexico and Central America remained lower than in other LAC subregions, at just 0.2 percentage point a year during 2011-21, this subregion avoided the slowdown in potential TFP growth that afflicted South America and other EMDEs. TFP growth contributed more to potential growth in the Caribbean than in the other subregions, but still slowed between 2000-10 and 201121. Increasing contributions from labor force growth and capital accumulation offset this, however, so that the Caribbean was the only LAC sub-region where potential growth increased in 2011-21, relative to 2000-10.

The pandemic-induced recession of 2020, which was deeper in LAC than any other EMDE region, and its after-effects, have eroded potential growth further. Although total investment largely recovered to its long-term trend in 2021, inward foreign direct investment is estimated to have fallen more sharply in 2020, and not to have recovered to its pre-pandemic level in 2021 (UNCTAD 2022). This may imply less transfer of

> 23 Another study applying growth accounting to data from 1820 onwards found that over nearly 200 years, among nine LAC countries, only Chile narrowed its per capita income differential with the United States (Hofman and Valderrama 2020).