productivity-enhancing knowledge and technology (Bruhn, Calegario, and Mendonca 2020). Perhaps even more significant, LAC saw the longest school closures among EMDEs, holding back the development of human capital in young people. In March 2021, it was estimated that the number of secondary school children in LAC unable to read a basic text may have increased by more than 15 percent (World Bank 2021f). Such learning losses, if not remediated promptly, are likely to lower labor productivity and lifetime incomes for the current school-age generation (Werner, Komatsuzaki, and Pizzinelli 2021). To the extent that they compromise social mobility, such losses can also compound over generations (Hill and Narayan 2020).

# 7.3. Potential growth prospects in LAC

In the rest of the 2020s, potential output growth in LAC appears likely to stagnate at low levels, with no improvement in South America, and a slight pick-up in Mexico and Central America offset by a modest slowdown in the Caribbean. Labor force growth seems likely to continue to decline. Investment growth is expected to improve somewhat on average, but not markedly and only after further near-term weakness. TFP is expected to regain some momentum from its near-zero growth rate in 2011-19, but only enough to offset the effects of slowing labor force growth. Thus, without significant policy action or a major productivity breakthrough, potential growth in LAC is expected to remain at 2.2 percent a year in 2022-30, identical to the period 2011-21 and the lowest of all EMDE regions (figure 13).<sup>24</sup> The contribution of labor force growth to potential output growth in 2022-30 will be constrained not only by a falling working-age population share (expected to soon peak), but also by limited potential for additional gains in already high female labor force participation rates. With the contribution from labor force growth shrinking, potential growth is expected to sustain due to a slight increase in per capita potential growth in 2022-30, to 1.6 percent. Improved per capita potential growth is underpinned by a modest projected pick-up in potential TFP growth, expected to contribute about 0.5 percentage point a year to potential growth. This estimate takes into account the past relationships in LAC between investment growth and TFP growth, and between rising commodity prices and investment growth. However, no simple mapping can be assumed between commodity-related investment and productivity improvements, especially given the potential for expansion of primary commodity exports to crowd out manufacturing and compromise the competitiveness of other sectors (Alvarado, Iniguez, and Ponce 2017).

The war in Ukraine is expected to have largely negative effects on potential output growth in LAC (World Bank 2022k). It has contributed to tighter financial conditions, through both confidence and monetary policy channels. By driving commodity prices higher, the war further increased already elevated inflation in LAC and advanced economies, contributing to larger interest rate increases as central banks sharply tightened rates to

> 24 For the period 2022-30, 16 LAC economies are included in estimations, representing 97 percent of 2020 LAC GDP.