Challenges in the transition to a low-carbon economy for developing countries: estimating capital-use matrices and imported needs

The low-carbon transition in developing countries requires large investments in new technologies, which will generate a high demand for imported machinery and equipment. To account for the important role of investment in the transition, we endogenize fixed capital in the input-output (IO) framework, estimating capital-use matrices for six developing countries in Latin America and the Caribbean within the Gloria sectoral framework from 1990 to 2020. Our findings suggest that the inclusion of capital in the IO framework reveals a substantial deepening of the external constraint for developing countries. For every dollar invested, on average more than 45% leaks directly and indirectly to foreign producers through imports. Some socio-economic benefits of green investment, such as employment generation, are absorbed by the rest of the world, rather than fostering domestic job creation. Thus, as developing countries embark on their low-carbon trajectory, they will face an increased external constraint and substantial socio-economic imbalances.