The European Union and Latin America and the Caribbean Convergent and sustainable strategies in the current global environment FOR SUSTAINABLE DEVELOPMENT WITH EQUALITY Thank you for your interest in this ECLAC publication ECLAC Publications Please register if you would like to receive information on our editorial products and activities. When you register, you may specify your particular areas of interest and you will gain access to our products in other formats. www.cepal.org/en/suscripciones Alicia Bárcena Executive Secretary Mario Cimoli Deputy Executive Secretary Raúl García-Buchaca Deputy Executive Secretary for Management and Programme Analysis Ricardo Pérez Chief, Publications and Web Services Division This document was prepared by the Economic Commission for Latin America and the Caribbean (ECLAC) for the Meeting of Foreign Ministers of the Community of Latin American and Caribbean States (CELAC) and the European Union, held in Brussels on 16 and 17 July 2018. Álvaro Calderón and Sebastián Rovira of the Division of Production, Productivity and Management of ECLAC were responsible for the overall coordination of the document. The following staff members contributed to its preparation: Leandro Cabello, Mathilde Closset, Marco Dini, Valeria Jordán, Jorge Patiño, Wilson Peres, Cecilia Plottier, Laura Poveda, Nunzia Saporito and Giovanni Stumpo of the Division of Production, Productivity and Management; Daniel Titelman, Jürgen Weller and Cecilia Vera of the Economic Development Division; Sebastián Herreros and Javier Meneses of the Division of International Trade and Integration; Simone Cecchini, Beatriz Morales and Daniela Trucco of the Social Development Division; Eduardo Alatorre, David Barrio Lamarche and Carlos de Miguel of the Sustainable Development and Human Settlements Division; and Jeannette Sánchez of the Natural Resources and Infrastructure Division. This document was prepared within the framework of the project “Mejores políticas para las micro, pequeñas y medianas empresas en América Latina (EUROMIPYME)”, financed by the European Union. The opinions expressed in this document do not necessarily reflect the official views of the European Union, the Community of Latin America and Caribbean States (CELAC) or the European Union-Latin America and the Caribbean Foundation (EU-LAC Foundation). The boundaries and names shown on the maps included in this publication do not imply official acceptance or endorsement by the United Nations. United Nations publication • LC/TS.2018/56/Rev.1 • Distribution: L • S.18-00902 Copyright © United Nations, 2018 • All rights reserved • Printed at United Nations, Santiago This publication should be cited as: Economic Commission for Latin America and the Caribbean (ECLAC), The European Union and Latin America and the Caribbean: convergent and sustainable strategies in the current global environment (LC/TS.2018/56/Rev.1), Santiago, 2018. Applications for authorization to reproduce this work in whole or in part should be sent to the Economic Commission for Latin America and the Caribbean (ECLAC), Publications and Web Services Division, [email protected]. Member States and their governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and to inform ECLAC of such reproduction. Contents Foreword 5 I. Latin America and the Caribbean and the European Union in the new global context 7 A. Globalization has moved towards a tipping point in recent years 9 B. Uncertainty regarding countries’ potential growth has increased, but the region’s economic outlook has improved somewhat 10 C. Global positioning and growth potential will depend largely on the development of manufacturing 11 D. In a world of exponential digitization, technological development will be a determining factor for countries 12 E. Together with digital development, the degree of maturity to drive the fourth industrial revolution will be a key component in countries’ development 13 F. Migratory movements are another key component of development processes, especially in the most advanced countries 14 G. Against this backdrop, and with a view towards achieving the 2030 Agenda for Sustainable Development, strengthening multilateralism is more important than ever 15 H. The historical and cultural ties between the two regions heightens the strategic importance of Latin America and the Caribbean for the European Union 17 I. The region’s commitment to the Sustainable Development Goals —embodied in the Forum of the Countries of Latin America and the Caribbean on Sustainable Development— together with the European Union’s experience, can be a deciding factor in achieving the 2030 Agenda for Sustainable Development 18 II. An economic, social and environmental overview 21 A. The macroeconomic situation 23 B. Social situation 36 C. The environmental situation 47 III. The keys to more inclusive production development: the role of knowledge and digitalization 57 A. Productivity is a basic prerequisite for countries to develop, and Latin America and the Caribbean has fallen behind 59 B. Science, technology and innovation are essential ingredients in countries’ growth and competitiveness strategies 60 C. The decade-long boom in Latin America and the Caribbean did not remedy the dearth of innovation or bring movement towards progressive structural change 61 D. This limited commitment to technological development has translated into a low level of export complexity in the region’s countries, in contrast with the dynamic economies and trade surpluses of European countries 64 E. The low level of diversification in Latin American economies is of particular concern in a world that is moving rapidly towards the knowledge economy and digitalization 65 F. At the same time, the development and progress of the Internet of things, big data analytics, robotization and artificial intelligence will determine countries’ geopolitical positioning and the distribution of global income and wealth 68 G. Convergence between physical and digital technologies, which are the pillars of the fourth industrial revolution, requires a more collaborative and integrated approach 69 H. Connectivity and infrastructure investment will thus be vital if the region is to move forward with the digital economy and society 71 3 Economic Commission for Latin America and the Caribbean (ECLAC) I. Digital skills and capacity-building will also be crucial factors 72 J. In this context, giving greater continuity to the digital agenda for Latin America and the Caribbean becomes a moving target 73 K. Although access to digital platforms has made a whole range of previously unimaginable services available to the countries and inhabitants of Latin America, digital technology is still developed exogenously 74 L. Progress towards a regional digital market is needed for the digital economy to expand, as it would boost regional trade and integration 75 M. Innovation and digital progress are not everything; rising concern about climate change and the environment requires a new approach linking innovation and environmental sustainability 76 IV. Trade and production integration between the European Union (EU) and Latin American and the Caribbean 79 A. Trade and value chains 81 B. Foreign direct investment (FDI) to modernize and strengthen productive structures 92 V. Micro-, small and medium-sized enterprises (MSMEs): key actors for development 107 A. Performance and main characteristics of MSMEs 109 B. Main achievements of MSME promotion policies 115 VI. New institutions to carry forward the development process in Latin America and the Caribbean 133 A. Transition economies face old and new challenges 135 B. Improved growth rates and greater inclusiveness in the countries of Latin America and the Caribbean have translated into a growing middle class and a substantial reduction in poverty 136 C. The emerging middle class of Latin America and the Caribbean has become more demanding and more critical of the quality of State-provided services 137 D. Perceived corruption and low tax morale are matters of concern in the region 138 E. Strengthening and restructuring public institutions is crucial for the countries of Latin America and the Caribbean to be able to increase their well-being and progress on the path to development 139 F. Rethinking institutions requires a new nexus between the State, the market and society 140 VII. Opportunities for cooperation between the European Union and Latin America and the Caribbean 141 A. Macroeconomic policy 143 B. Cooperation opportunities for advancing social development 146 C. Climate change mitigation: an urgent priority 148 D. Science, technology and innovation: a fertile arena for cooperation between the two regions 152 E. Towards strategic biregional cooperation in trade and investment 153 F. The European experience: a reference point for the development of smaller businesses and of the institutions charged with their promotion 155 G. Closing infrastructure gaps: new opportunities for cooperation between the two regions 157 4 Foreword In the past decade, a series of global tectonic shifts in the geopolitical, economic and technological arenas have marked a turning point in the process of globalization and countries' international positioning. These structural changes have been accompanied by other factors linked to new global demands related to the Sustainable Development Goals and the 2030 Agenda for Sustainable Development. Sluggish economic growth and weaker global trade momentum since