Trade integration has been very beneficial for Latin America and the Caribbean (LAC) over the past 30 years. However, multiple crisis (the financial crisis of 2008, the Covid-19 pandemic, the climate crisis, etc.) have generated uncertainty about the future of the multilateral trading system. For example, the Covid-19 pandemic highlighted the fragility of certain value chains due to the vulnerability of a system in which factories are located at the other end of the world from where these goods are consumed. All this is leading to reconfigure global value chains, which tend to shorten, becoming less global and more regional – a phenomenon known as the “nearshoring model”. This new context creates an opportunity for LAC countries, and especially for Mexico, which identify themselves as the best alternative for the relocation of value chains under the nearshoring model.

Historically, the Mexican North-Central states have benefited most from the processes of integration into global value chains. This is natural, since it is where the manufacturing export base is located due to its proximity to the United States. On the other hand, the South-South-East of the country presents historical lags that make it significantly difficult to integrate it into global value chains and, therefore, to take advantage of change in the current international context.

In this regard, it is imperative to design strategies to take advantage of the opportunity presented by the nearshoring phenomenon, taking into account the particular problems of each region. This two-speed strategy is essential to define public policy interventions that can achieve more equitable regional development.

This research project complements the work carried out by the Extension of the Research Facility on Inequalities in Mexico on the national care system and on the redistributive impact of environmental policies.
 

Find out more about the Extension in Mexico

This project aims to deepen the study of the phenomenon of relocation of global value chains to Mexico, recognising the challenges and opportunities it generates:

1. First specific objective: To present a proposal to overcome one of the most critical bottlenecks identified by the productive sector, which is electricity generation. It is suggested to close the investment gap in electricity in the short term, through investment in distributed generation with solar panels, as well as exploring sustainable and equitable options, with a particular focus on the State of Nuevo León (North of the country).
2. Second specific objective: To identify economic sectors with potential to benefit from the phenomenon of relocation of value chains and to address existing gaps in the formation of talent and human capital, emphasising social inclusion and gender equity. This will include a detailed analysis for the states of Oaxaca and Veracruz (South of the country), aiming to develop skills in emerging and traditional sectors, and prepare the workforce to take advantage of opportunities in the medium and long term.
3. Third specific objective: To develop a strategic plan for the implementation of a portfolio of solutions based on the recommendations identified in the first and second specific objectives.

• First specific objective: Scenario analysis will be used to measure the gap between demand and capacity for electricity generation. Solar distributed generation capacity scenarios will use Geographic Information Systems spatial analysis tools, while the estimates on the redirection of subsidies will be taken from official public sources.
• Second specific objective: Generated using a combination of international and national databases, economic metrics will serve to identify opportunities to boost productive diversification. A preliminary analysis will suggest industry clusters to prioritize. This will allow to select economic sectors with the potential to trigger industrial development, through interventions in the field of talent training. Talent gaps will then be identified through quantitative analysis. This cabinet analysis will be complemented with qualitative information (interviews, focus groups with key actors…).
• Third specific objective: The strategic plan will follow a mission-oriented policy approach, including a detailed action plan to be presented to the Mexican Federal Government. The plan will consist of a map of possible executing units within the federal, state and/or municipal governments, an analysis of the regulatory and institutional constraints that the plan could face, as well as strategic alternatives to overcome them.

The project resulted in 3 research papers: 

• Gaps in Human Capital and Labor Demand in Oaxaca
• Redesigning Electricity Subsidies for Distributed Generation in Mexico: A Fair Transition Model Applied to Nuevo León
• Institutional Implementation of In-Kind Subsidies for Distributed Generation: Multi-Level Governance and Policy Design in Nuevo León

In Colombia, the oil and coal mining industry is an important source of fiscal revenues, including royalties. The Sistema General de Participaciones (or General Participation System, GPS) has therefore been set up to organise the transfer of these royalties – that come from the exploitation of non-renewable natural resources – from the Ministry of Finance and Public Credit to territorial entities. These resources finance the provision of services in the sectors of education, health, drinking water and basic sanitation, general purpose and special allocations, in the different regions of Colombia. This mechanism aims at ensuring a fair distribution of income, which is essential since spatial inequalities in terms of access to services are still significant in Colombia – as shown by the multidimensional diagnosis of inequalities carried out with the support of AFD. For example, while in urban areas, the secondary education coverage rate is close to 100%, it is 50% in rural areas.

The Strategy for monitoring, follow-up and control of the resources of the GPS is a public policy tool led by the Ministry of Finance and Public Credit to carry out control over the management of the resources transferred. This strategy, in implementation for almost 15 years, identifies alerts and cases of non-compliance with the goal of assuring continuity, coverage and quality in the provision of public services. This seeks to prevent and mitigate risks in the provision of social services throughout Colombia, which is essential for the construction of equity across the country, as well as to prevent territorial gaps from widening with regards to the institutional capacities of local governments and to the provision of social services for all populations, regardless of their location. 

This work is also part of AFD's dialogue with the Colombian authorities on tax reform and the reduction of spatial inequalities.

This research project seeks to generate recommendations with the purpose of analysing and strengthening the role of the GPS tool – “the Strategy” – as a mechanism for closing territorial gaps in institutional capacities to provide social services.

Two research objectives have been identified, one in the field of diagnosis, and another in the field of recommendations:

1. Identify the achievements, limitations, and challenges of the implementation of the Strategy in closing territorial gaps in the institutional capacities of territorial entities and in the provision of essential social services.
2. Provide recommendations to strengthen the Strategy in its role of institutional assistance for the closing of territorial gaps.

The project will focus on sectors that receive more resources from the GPS, present more risks in their provision and are the most relevant as essential social services: education, health, drinking water and basic sanitation, and indigenous reservations.

The research methodology will be mixed methods and will include:

• A document review at the level of the Ministry of Finance and Public Credit and the territorial entities selected as a case study;
• A secondary data analysis;
• In-depth interviews with a subsample of the selected territorial entities.

You will find below the research paper related to this project:

Assessing the Impact of the Monitoring, Follow-Up, and Control Strategy on Territorial Inequalities in Colombia (November 2025)

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With one of the highest youth unemployment rates in the world, South Africa’s planning for a just transition needs to take into account the vulnerabilities of its youth cohorts, especially those that can be qualified as “not in education, employment or training” (NEET). For example, a recent study conducted in the framework of the EU-AFD Research Facility on Inequalities revealed that the Mpumalanga province, the region with the highest exposure to the coal exit, has had a NEET youth rate of over 37% for the past decade, with almost three-quarters of them living in income-poor households.

Since 2019, the National Business Initiative (NBI) has been spearheading a multi-faceted and multi-sector partnership, which focuses on expanding and growing pathways for young people to access Installation, Repair and Maintenance (IRM) occupations. The IRM initiative is strategically aligned to various initiatives of the government to drive inclusive recovery and revitalisation of the economy, particularly in the aftermath of the Covid-19 pandemic. It has subsequently been incorporated as part of the Presidential Youth Employment Intervention (PYEI). The Initiative works on the premise that, by supporting township-based IRM entrepreneurs to strengthen and grow their businesses, and by linking them to localised market opportunities, there will be a concomitant increase in the demand for skilled labour, which could lead to the creation of employment opportunities. Therefore, it is a direct response to the youth unemployment challenge.

Collaborating closely with the NBI, the Centre of Researching Education and Labor (REAL Centre) contributed its expertise to the comprehensive analysis of the four key regions identified in Phase 1 of the IRM skills ecosystem mapping project: Atlantis (Western Cape), Mandeni (KwaZulu-Natal), Mamelodi (Gauteng), and Kathorus (Gauteng). Building upon the success of this initial phase, the REAL Centre will now expand the project's scope to the Nkangala district municipality, which is one of the three districts of Mpumalanga province.

This work is also part of AFD's dialogue with the South African authorities on the just transition and the reduction of inequalities.
 

Find out more about the Extension in South Africa
 

This research project will conduct a detailed analysis of the skills ecosystem that could feed into the various initiatives to support local authorities and communities in the Nkangala district, which concentrates the coal-fired power plants that will be closed as a result of just transition policies.

Phase 1 of the project revealed that an IRM skills ecosystem mapping project is crucial for addressing inequality by thoroughly analysing the socioeconomic and demographic profiles of diverse townships in South Africa. 

By identifying specific skill gaps and understanding the challenges faced by Small, Medium, and Micro Enterprises (SMMEs) in these areas, the study can inform targeted interventions aimed at reducing inequality in access to employment and economic opportunities. 

Furthermore, by examining the role of Technical and Vocational Education and Training (TVET) institutions and conducting a comprehensive literature review, the study ensures that proposed interventions are evidence-based and tailored to the needs of the communities studied. 

Ultimately, the study's approach of generating actionable insights in collaboration with stakeholders aims to drive meaningful impact and promote inclusive economic development in underserved regions, contributing to efforts to reduce inequality, to advance the principles of just transition and to foster a more inclusive society.

Building on Phase 1 of the IRM skills ecosystem mapping, researchers will apply the following method:

1. They will set the context for the Nkangala district through desktop research and a few selected key informant interviews;
2. They will collect primary data and set up fieldwork through stakeholder mapping workshops and key informant interviews to collect data;
3. They will then provide an initial narrative on the overarching local skills ecosystem from the site mapping exercise and will draw on the document review and contextual work on the Nkangala district. Drawing on Spours’ (2019) work on ecosystems, they will use three core elements: the dimensions of verticalities, horizontalities and mediation to understand and analyse the skills ecosystem Nkangala district and to guide the cross-site analysis, building on the work undertaken during Phase 1.
    

You will find below the different research papers related to this project:

• Skills ecosystem mapping of MSMEs located within the Nkangala District Municipality

The design of the Colombian pension system exacerbates income inequality and poverty after retirement age. High informality rates (over 60% of total employment, according to OECD) imply that many workers in Colombia have a low probability of qualifying to get a contributory pension. Despite the targeted support provided to the vulnerable population through pension assistance programs, this support  tends to be low compared to other countries in Latin America and the Caribbean.

The relationship between informality and inequality after retirement plays a central role in the discussion of policies affecting the labour market. One dimension that has not been explored in the public policy debate is how policies aimed to mitigate climate change (and more specifically the creation of green jobs) can affect the distribution of workers between the formal and informal sectors, and how it can have an impact income inequality after retirement.

Find out more about the Extension in Colombia

This project seeks to contribute to the public policy debate by analysing the effects that scenarios of a green economic transformation may have on income inequality after retirement, via the reallocation of workers between the formal and informal labour markets. 

The project will aim to answer following questions, in the Colombian context:

• What are the environmental properties of jobs?
• How can economic transformation towards a more sustainable economy change the composition and transitions between the formal and informal sector?
• What is the impact on inequality and fiscal viability of implementing those policy scenarios?

In addition, the project will evaluate prospective scenarios during the discussion of the pension reform in the  Colombian Congress and will develop a simulation model for the use of the Ministry of Finance and Public  Credit.

The project will be implemented in three stages:

• The research team will first characterize the environmental properties of jobs in Colombia.
• In the second stage, the team will calibrate the transition matrices between employment states and wages to introduce to the microsimulation model. In this stage, the team will propose the economic transition scenarios to simulate.
• In the final stage of the project, the team will prepare a final report with the simulation results and policy discussion.

You will find below the different research papers related to this project:

• Quantifying Green Job Potential in Colombia: A Task-Based Approach (November 2024)
• Greening Colombia’s Energy: The Future of Jobs and Pensions (August 2025)

While there is mounting evidence that the Covid-19 pandemic has increased socioeconomic inequality, there is still a need to understand the exact channels of impact and what role the policy response has played in different contexts. It is also necessary for governments to be clear about the efficiency of the type of policies they have implemented throughout this period, in terms of the redistributive and/or regressive effect both from an inequality and poverty perspective. Indeed, we know that the amount of additional social spending (excluding health) implemented during the pandemic reached almost 3% of GDP in Colombia and only 0,2% in Mexico. However, research has not yet demonstrated whether the redistributive policies introduced by the Mexican and Colombian governments in response to the Covid-19 crisis have had any positive effect on the distribution of economic and social resources in these two countries.

The project will seek to understand what has been the redistributive impact of social and fiscal policy in Mexico and Colombia, in the context of the policies implemented during the Covid-19 pandemic.

This research project will be conducted as follows: 

1. Using the framework of the Commitment to Equity (CEQ) methodology, an analysis aiming to differentiate what has been the progressivity or regressivity of the policies implemented during the Covid-19 pandemic will be conducted. This analysis will take into account the main beneficiary groups of these policies and will include a comparison between the budget amount and the efficiency of the policies identified in terms of inequality and poverty reduction.  
2. A desktop analysis of the decision-making will also be carried out to understand how the redistributive effects of the policies implemented were envisaged by the governments. 

The results of this project are presented in the following research paper: Promoting a More Progressive Approach - Evaluating the Impact of Social and Fiscal Policies in Mexico and Colombia amidst the Covid-19 Pandemic (2025)

This research paper analyzes the redistributive impact of some fiscal policies and social programmes (direct taxes and transfers) before and after the pandemic Crisis in Mexico and Colombia, following the CEQ methodology. 

Download the paper