Weakness in Investment Growth: Causes, Implications and Policy Responses

76 Pages Posted: 16 Mar 2017

See all articles by Ergys Islamaj

Ergys Islamaj

World Bank

M. Ayhan Kose

Development Prospects Group at the World Bank

Franziska Ohnsorge

World Bank

Lei Sandy Ye

World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: March 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: emerging markets, infrastructure investment, investment slowdown, policies, policy space

JEL Classification: E22, F2, F6, O1, O4

Suggested Citation

Islamaj, Ergys and Kose, M. Ayhan and Ohnsorge, Franziska and Ye, Lei Sandy, Weakness in Investment Growth: Causes, Implications and Policy Responses (March 2017). CEPR Discussion Paper No. DP11886. Available at SSRN: https://ssrn.com/abstract=2934198

Ergys Islamaj (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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

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