The great leap: Harnessing genAI to revolutionize Latin America’s service economy

Latin America holds a US$100 billion opportunity if it leverages artificial intelligence (AI) in its knowledge-based services exports over the next decade, with the potential to affect large-scale transformation of the region.¹ AI has “tremendous capacity to scale faster, new business models to address lack of efficiency and cost of essential services, improving affordability, access, and convenience” according to Irene Arias Hofman, CEO of IDB Lab. Given the region’s narrow focus on basic commodities exports, so far AI’s influence has been mostly limited to the manufacturing sector. However, the true AI revolution potential lies in its ability to expand human capabilities to assist beyond automating procedures. This means that most of the short-term gains in productivity from these innovations will occur in service industries like internet technology (IT), financial services and health care, all areas where Latin American economies have historically lagged behind. If the region does not capitalize on utilizing AI to address the gaps in its tertiary economy, Latin America is at risk of being left even further behind amid the global AI boom. 

How can Latin America harness the potential of AI to bridge its skill gaps and realize the potential of its tertiary economy? How does that help level the playing field to reduce regional inequality? This article explores how embracing new innovations in AI will enable Latin America to solve persistent challenges related to its service economy, such as improving language and digital workforce skills, accelerating its development journey and enhancing its competitiveness for global trade opportunities like nearshoring. But it is a cautionary tale: should AI not be applied with intentionality, the region risks increasing its inequality gap and putting the industries on which it has relied at a disadvantage.

A distant revolution

The development of genAI models, including R&D and commercial applications, is mainly being driven by investments in the global north reaching US$190 billion worldwide. In Latin America, combined investment stands at only US$8.2 billion.² In addition to this investment gap, the region is also a nascent adopter of AI solutions. Interestingly, most AI adoption in the region is being driven by governments, while private companies are lagging behind (see Figure 1).

A 2022 survey by the OECD shows that the greatest barriers to AI adoption are cost, followed by lack of skills to adopt AI.⁴ But the heart of the matter is that the industries with high AI exposure, most of them in the tertiary sector, represent a small share of the regions’ economic activities. This foretells a vicious cycle the region seems to be stuck in, missing opportunities to leverage industrial revolutions for gains in its productivity.⁵

AI and the service economy: High adoption and high impact

AI is disrupting the global service economy, expanding capabilities to assist humans with tasks that go beyond automating procedures, as witnessed in the manufacturing industry. In fact, AI has surpassed humans at a number of tasks, including language understanding, speech recognition, image recognition, and code generation (see figure 2).

The service economy in Latin America: the eternal laggard

The growth of the service economy in Latin America has been negligible over the last decade. Globally, services accounted for US$7 trillion in exports in 2022, adding US$2 trillion over the last decade. However, for Latin America, service exports accounted for just US$ 235 million, growing by only US$52 million in the last decade (see Figure 4).¹⁰ To put that into perspective, although the region accounts for 8.3% of the global population, its global market share of knowledge based services is just 1.6%.¹¹

AI’s multiplying effect: The next generation of service economy workers

The post-pandemic era has opened a host of opportunities for the region, mainly concentrated around nearshoring. However, in order to capitalize on this opportunity, the region needs to create a better skilled workforce and firms to meet demand.¹³ In April 2024, the World Bank forecasted that regional GDP for Latin America will expand by just 1.6 percent in 2024, 2.7 percent in 2025 and 2.6 in 2026, the lowest figures compared to all other regions globally, and “insufficient to drive prosperity.¹⁴ Indeed, Latin America has several skill gaps, ranging from language barriers to digital literacy, which affects its competitiveness in a number of industries, including the service sector.¹⁵ According to the OECD, high-skilled workers are likely to benefit more from AI and outcomes for workers tend to be better when they have received training to work with AI.¹⁶

But perhaps solving one skill gap can help the region bridge several at the same time. By improving capabilities in the service economy, through automating translation, information processing, and code generation, among other functions, AI creates an opportunity for the region to improve its productivity in an area where it has historically lagged.

Leapfrogging potential and nascent applications

Across sectors, AI is making slow yet steady progress in being utilized to streamline operations or solve for persistent challenges. International organizations like the Inter-American Development Bank (IDB), through the IDB Lab and their newer fAIrLAC initiative, support and fund hundreds of opportunities that build “models with intentionality in terms of the inclusion of people that may otherwise be left behind,” says Ms. Arias Hofman. Slang, an edtech startup that has developed an educational platform to facilitate English language learning to support worker upskilling, is one such organization to receive IDB funding.^17,18 Harnessing the power of AI to bridge language barriers could help the region compete in the provision of services like call centers, which are currently mostly based out of Asia.

For Juan Jose Galnares, the President of the leading commerce and digital payment platform, Clip, genAI is being increasingly used for both customer service and software development, as AI can “solve coding problems faster and easier” than a human.¹⁹ Egg, one of Latin America’s top 100 edtech startups 2 years in a row, “combines the science of cooperation with AI” to offer online training that is inclusive and collaborative.²⁰,²¹ Its concept of using an algorithm to record which students have been recognized as their small group’s strongest contributor to organize effective learning groups allows for the effective upskilling of the region’s workforce. They offer off-the-shelf courses, such as AI for productivity, as well as bespoke content and solve for the dual-problem of digital upskilling as well as inclusion.²²

In addition to workforce upskilling, the region is also starting to use AI in the healthcare sector, through the use of applications as well as administrative support. The COVID-19MX app, launched during the pandemic, used AI models to detect probable cases of the virus, as well as simplifying health status reporting processes and facilitating integration with other health management applications.²³ Caroline Merin, founder & CEO of Leona, a healthcare startup in Mexico City that enables patients to access a highly qualified pediatrician 24/7 through Whatsapp, discussed the potential for AI to act as “copilot” for the doctor, saving them time in administrative processes like transcribing medical records.²⁴

In the technology space, companies like IBM have set up research labs in emerging economies like Latin America, with teams dedicated to advancing the fields of AI, among others, in order to find solutions to climate-related challenges and improving conversational AI.²⁵ To that end, IBM Research Brazil are exploring “the understanding of human speech, the theoretical foundations of natural-language processing (NLP), and the processing and production of Brazilian languages (including Portuguese and indigenous languages) by machines.”²⁶

The region’s AI star startup, currently valued at US$500 million and ranked among the top 50 most innovative companies in 2021, is Chile’s food-tech unicorn, NotCo.²⁷ The food company uses a proprietary algorithm to learn how to combine plants to replicate the flavor and texture of animal products, without compromising on taste, feel or function.²⁸ It is sold at major US retailers like Whole Foods and Walmart.

Conclusion

While AI can be a strong lever to unlock productivity in Latin America’s tertiary sector, allowing the region to leapfrog in its development by providing the skill support workers need to compete in the service economy, it is still in a nascent phase. Lack of regional investments in basic digital infrastructure, transformation strategies, literacy, and talent are constraints that could prevent the region from realizing this opportunity. However, by utilizing advanced genAI models developed abroad while simultaneously investing in region-specific AI solutions, the region can improve its competitiveness and leapfrog in its development, becoming a more attractive destination for both domestic and international investment opportunities.

¹https://publications.iadb.org/en/publications/english/viewer/Deep-Tech-The-New-Wave.pdf

²ECLAC LAAII, Chapter A

³https://indicelatam.cl/chapters/

⁴https://www.oecd-ilibrary.org/sites/08785bba-en/1/3/2/index.html?itemId=/content/publication/08785bba-en&_csp_=9f4368ffe3fc59de4786c462d2cdc236&itemIGO=oecd&itemContentType=book#back-endnote0ac11d4d262

⁵https://www.undp.org/latin-america/blog/riding-digital-wave-will-latin-america-and-caribbean-take-its-shot-reshaping-productivity

⁶https://time.com/6300942/ai-progress-charts/

⁷https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-ai

⁸https://www.mckinsey.com/capabilities/quantumblack/our-insights/the-state-of-ai-in-2022-and-a-half-decade-in-review

⁹https://www.mckinsey.com/capabilities/quantumblack/our-insights/the-state-of-ai-in-2022-and-a-half-decade-in-review

¹⁰https://databank.worldbank.org/reports.aspx?dsid=2&series=TX.VAL.SERV.CD.WT

¹¹https://publications.iadb.org/en/publications/english/viewer/Deep-Tech-The-New-Wave.pdf

¹²https://www.undp.org/latin-america/blog/riding-digital-wave-will-latin-america-and-caribbean-take-its-shot-reshaping-productivity

¹³https://www.economist.com/the-americas/2023/06/08/why-are-latin-american-workers-so-strikingly-unproductive?utm_medium=cpc.adword.pd&utm_source=google&ppccampaignID=17210591673&ppcadID=&utm_campaign=a.22brand_pmax&utm_content=conversion.direct-response.anonymous&gclid=CjwKCAjwu4WoBhBkEiwAojNdXnSd6p3MR4JyR784a608C3cGWDdfzvBh8EWOIRR1rOztKoDBq87L-hoC04YQAvD_BwE&gclsrc=aw.ds

¹⁴https://www.worldbank.org/en/news/press-release/2024/04/10/revitalizing-growth-an-urgent-agenda-for-latin-america-and-the-caribbean#:~:text=The%20World%20Bank%20forecasts%20that,and%20insufficient%20to%20drive%20prosperity.

¹⁵https://www.weforum.org/agenda/2018/03/latin-america-has-the-biggest-skills-gap-in-the-world-here-s-how-to-bridge-it/#:~:text=Over%20four%20in%2010%20firms,%25%2C%20and%20Peru%2049%25.

¹⁶https://www.oecd-ilibrary.org/sites/11f81ef6-en/index.html?itemId=/content/component/11f81ef6-en

¹⁷https://www.iadb.org/en/whats-our-impact/RG-L1168

¹⁸https://www.alive-ventures.com/post/slang-closes-a-us-14-million-series-a-funding-round-led-by-dila-capital-and-alive-ventures#:~:text=Slang%20relies%20on%20proprietary%20artificial,Colombia%2C%20Mexico%2C%20and%20Brazil.

¹⁹“Latin America's Technological Renaissance: Leading the Global Digital Wave”; Milken Institute 7 May 2024

²⁰https://www.holoniq.com/notes/2023-latin-america-edtech-100

²¹https://www.holoniq.com/notes/2022-latin-america-edtech-100

²²https://egg.live/es-ar/

²³https://fundacioncarlosslim.org/english/the-itu-recognizes-the-carlos-slim-foundation-and-america-movil-for-their-technological-innovation-in-health-care/

²⁴“Latin America's Technological Renaissance: Leading the Global Digital Wave”; Milken Institute 7 May 2024

²⁵https://research.ibm.com/labs/brazil

²⁶https://research.ibm.com/projects/conversational-intelligence

²⁷https://www.businesswire.com/news/home/20210309005794/en/NotCo-Named-to-Fast-Company%E2%80%99s-Annual-List-of-the-World%E2%80%99s-Most-Innovative-Companies

²⁸https://notco.com/