climate change could raise LAC’s annual potential growth by 0.1 percentage point. More climate-resilient infrastructure could also help mitigate a possible climate change-related reduction of 0.1 percentage point in annual potential growth resulting from increasingly frequent extreme weather events that damage capital stocks and erode labor productivity (OECD 2018). But the potential benefits of climate-smart investment go beyond mitigating bad outcomes. Many investments needed to help boost productivity directly can also aid climate change adaptation or mitigation. For example, more efficient irrigation systems would raise agricultural productivity as a first order consequence, but also increase the sector’s climate resilience (World Bank 2022k). Increasing the contribution of renewables to the energy mix could also dampen an important source of volatility in the terms of trade of the region’s energy importers, which could reduce the volatility of their growth. LAC may be the best positioned EMDE region to rapidly achieve the infrastructure- and climate-related SDGs because its existing energy mix is comparatively green (due largely to hydropower). This implies a smaller marginal investment requirement.

Most of the positive growth effects of the reforms assumed in the scenarios result from higher investment. Public investment in LAC tends to be constrained, however, by limited fiscal space (Vashakmadze et al. 2017). In these circumstances, curtailing unproductive public spending to increase space for productive investment, or increasing the efficiency of public investment (for example, through additional use of public-private partnerships), could improve the quality of infrastructure, while avoiding potential distortions from increased taxation (IDB 2018). Improvements in transportation infrastructure could be especially effective in raising productivity in the region’s urban environments, where there is little evidence of positive agglomeration effects, in contrast to advanced economies. High and increasing costs from congestion in many of the region’s largest cities may lie behind this apparent lack of returns to urban scale (Ferreyra and Roberts 2018). Meanwhile, improving telecoms infrastructure, which is relatively cheap compared to meeting infrastructure investment gaps in other sectors, could help accelerate the adoption of new information and communications technologies in ways that can both raise firm productivity and result in more inclusive growth (Brichetti et al. 2021; Dutz, Alemida, and Packard 2018).

Gains from the reforms assumed in the scenarios will vary among countries depending on their specific characteristics and circumstances. In Mexico and several other Central American economies, for instance, female labor force participation is well below that of male participation. Measures to improve access to childcare and parental leave have been found to raise female labor force participation in LAC (Novta and Wong 2017). Moreover, since Central American economies have some of the highest child dependency ratios and worst education attainment records in LAC, this subregion would likely benefit significantly from investments in education and health care. In many countries in the region, as in other parts of the world, students from the poorest households have been found to be substantially less competent in reading and mathematics than those from the richest households (World Bank 2018a). The COVID-19 pandemic is likely to have further