The Latin American Economic Outlook analyses issues related to economic and social development in the Latin America and the Caribbean (LAC) region. Each year, since the launch of the first edition in November 2007, the report compares LAC’s performance with that of other countries and regions around the world, analysing the main development challenges of the region, and putting forward policy recommendations, experiences and good practices.

The Latin America and the Caribbean (LAC) region has been experiencing a growing disconnect between citizens and public institutions in recent years. Indeed, the latest Latinobarómetro survey shows that 75% of Latin Americans showed little or no confidence in national governments in 2017, up from around 55% in 2010. Trust in other institutions like the judicial system or elections also deteriorated as dissatisfaction with the quality of public services grew.

Citizens in Latin America and the Caribbean (LAC) are increasingly dissatisfied with their governments and public institutions at large. The growing disconnect between society and public institutions has emerged as a common feature across LAC in recent years. Citizens’ trust in institutions, traditionally low in LAC, has deteriorated further. The share of the population having little or no trust at all in governments reached 75% in 2017, 20 percentage points (p.p.) higher than in 2010. Satisfaction with public services has also deteriorated. Over 2006-16, the share of the population satisfied with the quality of healthcare services fell from 57% to 41%, well below levels in the OECD (stable at around 70%). Likewise, satisfaction with the education system fell from 63% to 56% over the same period.

In recent years, the growing disconnect between society and public institutions has become a common feature throughout Latin America and the Caribbean (LAC). Wellbeing and recent socio-economic gains, which have been extraordinary in the last 15 years, are at risk because of this divide that undermines the social contract. Demands from citizens for greater transparency and integrity, higher quality of key public services such as education and health, and more government openness are not being fully met. This results in decreasing levels of trust in institutions and erodes the social contract.

This chapter illustrates the weakening of the social contract in the region, and aims to better understand its intricacies and the policy challenges and areas that are crucial for its strengthening. First, it presents evidence that suggests the growing disconnection between citizens and public institutions in Latin America and the Caribbean (LAC), which in turn is a sign of a weaker contract. This section argues that two factors could explain this growing disconnection: the rising aspirations of a middle class that has significantly expanded in the last decade, and the difficulties of public institutions to respond to new socio-economic challenges and guarantee greater well-being. The strength of the social contract is also assessed by exploring tax morale – i.e. the willingness to pay taxes – in the region. Second, it looks at how well-being has diminished recently in LAC, and suggests the need to rethink institutions to provide better opportunities and public goods and services and respond to citizens’ evolving demands, thus improving their well-being.

Latin America and the Caribbean (LAC) is undergoing a subdued recovery after a two-year recession. In the short term, growth paths vary from one country to another, reflecting differences in exposure to external shocks and soundness of domestic policy. In the medium term, potential growth is lower than expected and most of the region seems to be tangled in the middle-income trap, with low productivity growth at the heart of the problem. This chapter assesses LAC’s growth prospects and explores the role that trade could play to increase productivity and ensure higher potential growth. In addition, it analyses the need for the region to continue to pursue openness and globalisation, with a special focus on regional integration.

This chapter puts forward recommendations and highlights ideas and best practices that can guide policy makers in redesigning the institutional framework of the state in Latin America and the Caribbean. It is divided into four parts. The first one analyses the importance of improving the rule of law to overcome some of the main challenges for building inclusive institutions in a context of policy capture, corruption, criminality and impunity. The second section analyses the administrative capacities that need to be strengthened to make states more efficient and effective to deliver their functions. The third part focuses on modernising states by making them more innovative and fostering the connection with citizens through open government initiatives. The final part gathers the main conclusions and policy recommendations for the region.

This chapter argues that discussion around rethinking institutions for development in the LAC region should be forward-looking. To feed this discussion, the first part focuses on the potential impact of technological change on the world of work and on economic activity. It also reflects on the institutional challenges to guarantee good quality jobs and economic opportunities in the context of the “fourth industrial revolution”. A forward-looking approach to policy making also demands a sustainable fiscal framework. This is the subject of the second part of the chapter, which analyses how to improve taxation to raise more revenues, how to improve spending and how to ensure the long-term sustainability of public finances.