DP11886 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.
