ensure inflation expectations remained anchored. Elevated geopolitical uncertainty brought on by the war has also soured global risk appetite, which is likely to curb investment in many EMDEs, including in LAC. The combination of a sharp rise in global interest rates and faltering investor confidence could precipitate financial crises in some EMDEs, including vulnerable countries in LAC, possibly resulting in large permanent output losses (Kose et al. 2021). A sustained war and secular rise in geopolitical uncertainty could also further fracture global trade and financial networks, which could raise trade costs, shrink markets, and slow the dissemination of technological innovation (Guénette, Kenworthy, and Wheeler 2022).

However, the war could also have some partially offsetting effects that benefit potential growth in LAC. Concerns about the resilience of geographically dispersed manufacturing supply chains could bolster manufacturing investment in some LAC economies (so-called “nearshoring”). Heightened awareness of vulnerabilities related to fossil fuel dependence and supplier concentration could also raise investment in the region’s extractive industries. LAC is endowed with minerals and metals that are important inputs for electrification and the manufacture of renewable energy technologies, demand for which could accelerate given heightened focus on energy security globally (World Bank 2022k). The region also offers potential alternative sources of oil and gas supply while the world is transitioning to clean energy. Capturing enduring productivity benefits from such resource-related tailwinds will likely depend on policy makers harnessing increased commodity earnings to fund sustainable infrastructure and enact health, education, and governance reforms

# 7.4. Policy options to lift potential growth in LAC

In a scenario in which the largest 10-year improvements during 2000-21 in education outcomes, life expectancy, and female labor force participation for each country in LAC are repeated, and labor force participation among older workers rises modestly due to social benefit reforms, it is estimated that average annual potential output growth in the region in 2022-30 could increase by around 0.2 percentage point (figure 14).

A sustained investment boom could offer greater potential growth benefits. Raising investment growth over 2022-30 by its largest previous 10-year increase (per country between 2000 and 2021) could raise potential growth by an average of around 0.3 percentage point a year, via capital accumulation and improved potential TFP growth. To be durable, an investment boom would need to be underpinned by structural reforms to increase domestic savings and boost returns to private investment (for example, via improvements in competitiveness, infrastructure, and the diffusion of new technologies), rather than by a transitory rise in commodity prices, as was often the case in the past. Indeed, past analyses highlight the risks for LAC countries of conflating several years of higher commodity rents with improvements in potential output (Alberola et al. 2016).

An investment drive focused purely on meeting the climate change-linked elements of the region’s infrastructure-related Sustainable Development Goals (SDGs) by 2030 could also materially benefit potential output growth. It is estimated that investments to address