Weakness in Investment Growth: Causes, Implications and Policy Responses

Investment growth in emerging market and developing economies has slowed sharply
since 2010. This paper presents a comprehensive analysis of the causes and
implications of this slowdown and presents a menu of policy responses to improve
investment growth. It reports four main results. First, the slowdown has been
broad‐based and most pronounced in the largest emerging markets and in commodity
exporters. Second, it reflects a range of obstacles: weak activity, negative terms‐of‐trade
shocks, declining foreign direct investment inflows, elevated private debt burdens,
heightened political risk, and adverse spillovers from major economies. Third, by slowing
capital accumulation and technological progress embedded in investment, weak
post‐crisis investment growth has contributed to sluggish growth of potential output in
recent years. Finally, although specific policy priorities depend on country
circumstances, policymakers can boost investment both directly, through public
investment, and indirectly, by encouraging private investment, including foreign direct
investment, and by undertaking measures to improve overall growth prospects and the
business climate.