Nearshore Americas

7 Reasons to be Skeptical About Digital Expansion in LatAm

Since the Covid-19 pandemic hit, academics, policy think tanks and government officials have proposed a new wave of strategies to advance digital performance and facilitate economic recovery. This is particularly true for Latin America and the Caribbean, a region heavily impacted by the current health crisis. 

The potential benefits of broader use of digital technology in the region are undeniable. However, the reality is that businesses still face many challenges ahead of full implementation of their digital strategies. The region suffers from alarming levels of unequal internet access, labor informality and political division. Meanwhile, instability weakens the prospects of a robust cross-border digital economy emerging.

Here are the top seven issues that are prohibiting Latin America and the Caribbean’s digital progress.

The Education Gap

Recent research suggests that the likelihood of today’s students to completing secondary education in Latin America may soon drop from a regional average of 61% to 46%. 

Ashley Friedman , Vice President of Policy at the Information Technology Industry Council

“Education needs more attention and resources globally,” Ashley Friedman, Vice President of Policy at the Information Technology Industry Council told Nearshore Americas recently. “As a global technology trade association, we work with corporations that have set up programs to facilitate both the upskilling of the workforce and the introduction of resources in basic levels of education in many countries. But there is still work to do.”

The pandemic-driven regression on general education is not the only factor affecting prospects for digital advancement. The skills gap present also adds complexity to the issue. Despite specific examples in mass exercises of reskilling and upskilling of the labor force, Latin American and Caribbean economies face a shortage of qualified professionals. The region will need massive new investments in education and training to equip workers with the necessary digital skills.

The Brazil Equation

According to research by McKinsey, Latin America and the Caribbean is the fastest growing region in the world for digital payments. However, those results are mostly concentrated in Brazil. In contrast, 68% of all transactions in Latin America and the Caribbean in 2020 were made with cash as the payment method. 

Most of the statistics bringing optimism about the region’s digital landscape are inflated by the strong performance of its biggest nation, which has seen average growth rate of 40% in digital technology penetration over the past two decades.  The rest of the region, although with some fluctuations, experiences a very different reality. 

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This outcome repeats itself when analyzing areas such as telemedicine, e-commerce or online education. Brazil carries the weight of Latin America and Caribbean’s digital performance statistics. Even when considering internationally successful digital-native companies, most of them come from Brazil as well.  

Lack of Investment into Digital Infrastructure

On average, Latin American and Caribbean countries invest four times less in digital infrastructure than other OECD countries. The Inter-American Development Bank suggests that digitalization of public services like water and electricity could lead to 5.7 % GDP growth over 10 years in the region. In spite of this, in many corners of the region there is still resistance to further spending on digital infrastructure. The IDB has calculated the continent’s infrastructure gap at $150 billion, or 2.5% of its entire GDP.

A Fragmented Region

Regional integration has been a persistent economic and political idea in Latin America. The region has around a dozen organizations and cooperation mechanisms with a regional focus. However, ideological divisions have undermined Latin America and the Caribbean’s ability to engage in effective dialogue and cooperation. 

The Inter-American Development Bank suggests that digitalization of public services like water and electricity could lead to 5.7 % GDP growth over 10 years in the region

“One of the major obstacles facing digital transformation in Latin America is the lack of integration among countries. Even though we see various bodies with a regional mandate, there is not a formal central organization such as the European Union in Europe. This risks regional fragmentation,” Friedman said. 

“When you have different jurisdictions that should be experiencing some level of integration but instead present often contradictory regulations between each other, smaller markets are impacted as companies decide to go to countries like Mexico or Brazil, where investing the time and effort to adapt practices to local regulations makes more sense in terms of the business prospects,” added Friedman. 

Cybersecurity Blind Spots 

Applied digital technology, from automated production lines to cloud services, has the potential to not only increase results but to guarantee business continuity in moments of crisis, as demonstrated during the Covid-19 pandemic.

However, increasing digital performance is impossible without making cybersecurity a priority. As the complexity in digital infrastructure increases, so too are the frequency and sophistication of cyber-attacks leading to losses on all fronts of the business. 

VC investment reached 0.09% of Latin America and the Caribbean’s GDP in 2019, in contrast to 0.62% in the US

Threats such as ransomware are further causing distress to all kind of organizations. To address such challenges, cyber-security should be weaved into the designing and building of the digital strategies and not be treated as an afterthought only.

Latin America is particularly vulnerable to cyber-attacks and many countries in the region simply lack the capacity to respond to major cyber incidents. The lack of a security trained workforce puts many countries in an even more challenging position.

Insufficient Funding for Innovation and Complex Regulatory Frameworks

Venture capital investment only reached 0.09% of Latin America and the Caribbean’s GDP in 2019. By contrast, VC investment accounted for 0.62% of US GDP during the same period. At the same time, complex tax and regulatory systems make it harder to do business in region. Even Brazil, the region’s most attractive economy suffers from this issue. Brazil is considered to be the 2nd most complex jurisdiction for financial compliance, after China. 

World-Leading Inequality

For many countries in the region, internet access is just another indicator of inequality. While 75% of the richest section of Latin America’s population uses the internet, only 37% of people from the poorest sections of society do. The difference between the rich and the poor is much higher, almost 40 percentage points, than in OECD countries, below 25 percentage points. 

At the same time, high levels of informality mean a large part of the workforce remain disconnected from digital working methods, banking and other financial services. On average, only 20% of jobs in Latin America can be done remotely, compared to 41% in the United States. These factors compromise the region’s economic recovery and diversification, and threaten to leave large swathes of the population behind.

Bryan Campbell Romero

Bryan Ch. Campbell Romero is the Investment and Policy Editor at Nearshore Americas. He also contributes to other publications with analysis on political risk, society and the entrepreneurial ecosystems of Cuba and the Latin American region. Originally from Cuba, Bryan holds a Bachelor’s degree in Philosophy (Licenciatura en Filosofía) from the University of Havana.

1 comment

  • More fundamental problems persist, and until there is focused effort on the basics, discussion of higher-order problems like cybersecurity and digital transformation divert attention to more fundamental problems.

    Education: the underlying approach to education remains “rote” learning. Critical thinking, problem-solving and innovation are not part of the curriculum, up through and including university programs. Students are trained to be task workers, and this is not what is needed in tech.

    Infrastructure: how about this for infrastructure problems: 1) keep the electricity on and affordable, and 2) provide reliable (and affordable) internet access for companies.

    I agree with the article’s points, but the root causes are much deeper and systemic.