Weakness in Investment Growth: Causes, Implications and Policy Responses

75 Pages Posted: 13 Mar 2017 Last revised: 3 Aug 2017

See all articles by M. Ayhan Kose

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Franziska Ohnsorge

World Bank

Lei Sandy Ye

World Bank

Ergys Islamaj

World Bank

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Date Written: March 2, 2017

Abstract

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.

Keywords: Economic Growth, Economic Theory & Research, Consumption, Industrial Economics, Fiscal & Monetary Policy

Suggested Citation

Kose, M. Ayhan and Ohnsorge, Franziska and Ye, Lei Sandy and Islamaj, Ergys, Weakness in Investment Growth: Causes, Implications and Policy Responses (March 2, 2017). World Bank Policy Research Working Paper No. 7990, Available at SSRN: https://ssrn.com/abstract=2931802

M. Ayhan Kose (Contact Author)

World Bank

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Washington, DC 20433
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Lei Sandy Ye

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ergys Islamaj

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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